In the $75 billion global market for generic drugs Teva Pharmaceuticals (Nasdaq:TEVA) towers over the competition. The Israel-based company's 2007 revenues of $9.4 billion amounted to more than the total of top three U.S.-headquartered generic companies combined.

Teva beat first quarter expectations with a 52% increase in adjusted net earnings. The adjustment came from a one-time charge off related to its February 2008 acquisition of CoGenesys.

Meet The Competition
Rival Mylan (NYSE:MYL) has been struggling to digest its $6.7 billion acquisition of the generic business of Merck KGaA in late 2007, and rival Barr Pharmaceuticals (NYSE:BRL) saw its shares plummet 23.3% in one day on the heels of fumbled earnings guidance. (For more on the black art of sales predictions, read Great Expectations: Forecasting Sales Growth.)

The other major U.S. generics company, Watson Pharmaceutical (NYSE:WPI) has also had a decent run so far in 2008, helped by a strong first quarter. In my opinion, though, Teva is the one with the resources and the strategic positioning to thrive over the long haul, putting yet more distance between itself and its rivals.

Generic Product, Branded Strategy
Success in the generic drug market is not about expensive, leading-edge intellectual property turning into pharmaceutical blockbusters; that's the road to success in the patent-protected world of big pharma. Success for generics comes from getting lots of product through the pipeline into the world's highest growth markets as cost-efficiently as possible. This boils down to three things: volume, location and price.

Regarding volume, as of February 2008 Teva had 160 pending abbreviated new drug applications (ANDAs), the key pipeline metric for generics. That's about double its nearest competitor Sandoz, the generic division of pharmaceutical company Novartis AG (NYSE:NVS), and further still ahead of the U.S. trio of Mylan, Barr and Watson with 71, 70 and 60 ANDAs respectively. This includes first to file status for 49 pending "Paragraph IV" applications. These are challenges to patents of existing products with over $38 billion in current U.S. sales. In terms of currently marketed products, Teva also has a clear lead over the pack with 331, compared with 200 at Sandoz and 170 at Mylan.

Geographically, Teva earns a bit more than 50% of its sales in the U.S. with the remainder coming from its two non-U.S. divisions: Europe, containing the developed markets of Western Europe as well as EU accession countries such as Poland and the Czech Republic; and International, containing many of the world's fast-growing emerging markets. The company attributed much of the 31% sales growth in the International division to strong results in Russia and Latin America as well as its own home market of Israel, which accounts for 5% of the company's total pharmaceutical sales.

In the customer's eye generics are all about price, and for manufacturers, price is all about supply chain management. Supply chain management means getting it right in terms of demand forecasting and logistics planning, not just at the next point of distribution downstream or upstream, but along the entire complex distribution network.

Teva's 14 global manufacturing locations and its investment in best-in-class supply chain management processes and technologies put it in a good position to enjoy meaningful cost-based advantages. There are also economies of scale that come with being the industry's volume leader.

The Competition Speaks
Of course Teva's competitors are by no means standing idly by while the industry leader moves ahead. Pittsburgh-based Mylan's acquisition of Merck KGaA immediately expanded its global footprint to the markets where the German company had built an extensive presence, including a number of key markets in Europe as well as Asia and Australasia.

That acquisition nearly doubled Mylan's revenue base and may provide important cost benefits down the line; however the company is experiencing some hiccups along the way, particularly with Dey, its specialty producer of inhalations solutions, injections and sprays. This unit was responsible for a $385 million goodwill impairment charge in the first quarter, hurting Mylan's earnings guidance for the rest of the year. It's on the block for divesting.

Size matters in the generic drug market. Teva is a giant, but it's a smart giant. It has a strategy that capitalizes on cost-efficient volume growth in key world markets, including emerging hotspots like Latin America, Central and Southeastern Europe. Teva's global roots, extensive product arsenal and best-of-breed logistics position it to further tighten it's grip on this industry.

To learn how to find a healthy pharmaceutical investment in a market full of weak drugs, read Measuring The Medicine Makers.

Related Articles
  1. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  2. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  3. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  4. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  5. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  6. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  7. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  8. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  9. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  10. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!