P u r p o s e : A n a l y z e Te v a s s t r a t e g y & p r o f i t g r o w t h potential

Least Beneficial to Teva

External Analysis- General Environment

Systemic erosion of generic drug prices in U.S. due to entry of low-cost drug manufacturers from India and China Future of generics industry is uncertain due to fractured industry and volume of generic firms Generics entry rates into a new market largely driven by the structure of the market (Physician driven vs. Pharmacy driven) government regulation and perception of inferiority More global consolidation predicted among large generic companies due to low price strategy adopted by smaller players High competition among generic manufacturers; after the 180-day exclusivity period ended, 18 competitors were poised to enter with their version Aging population and rising health care costs bodes well for Pharmaceutical industry in general and generics industry in particular Generics business is currently profitable as more innovative drugs lose patent protection The Innovative drug market was expected to slow to 5-8% while Generic Industry predicted to grow worldwide at around 16% and to double to $100 billion in sales by 2010

Most Beneficial

Operating Environment
Customers
Customers: National pharmacy chains, hospitals and medical professionals Requirements: broad scope of products, inventory management, volume based discounts and pricing bundles Value: Low prices

Competitors
Competitors: Ranbaxy, Sandoz, Watson, Barr, Mylan, Dr. Reddys Competitor Strengths:
Barr R & D and patent litigation, Sandoz R&D & European focus, Ranbaxy and Dr. Reddys: low labor costs. Lack of rigorous execution in Filing ANDA applications Lack of economies of scale and Lack of broad generic portfolio.

Competitor Weakness:

Competitive strategy: higher R&D investment, Patent litigation, authorized generics and low labor costs

Opportunities and Threats

Greatest

Opportunities: Aging populations Rising health care costs Expiration of patent protection for many innovative drugs Physician-driven markets are slowly trending towards becoming pharmacy-driven markets Fragmented global generic drug market is ripe for consolidation Niche and Biosimilar medications

Threats: Entry of Low cost firms from India reduced prices of generics by 15-30% in three years. 180 day exclusivity period Increasingly Innovative companies release their own authorized generic version High R&D investment & marketing outlays for innovative drugs
Least

Present Situation Internal Analysis

More Profit

Strategy
Produce Innovative Drugs by partnering w/ research institutions
Israel / Jewish roots and community resources

Attempting to
Increase certainty of profit margins
Developed 2 innovative drugs recently Working to gain 180 day exclusivity Erecting barriers to entry due to scale

Most Important Sub-bullet Most successful

Produce R&D intensive generics

Direct correlation of profit and R&D expense

Build competitive advantages

Scale University Partnership R&D capabilities / facilities quality

Achieve 180 day exclusivity for filing patent of generics

Easily Imitable Advantages of Tevas size

Reduce competition
Price out through scale Acquisitions Produce own drug raw materials

Acquire other generic producers

More Market Share

Prop up prices by eliminating competition Expand into other areas

Compete on price using economies of scale General Generic production Drug component production R&D Intensive Generics Innovative Drug Production

Expand Market Share

Acquisitions Building relationships in Israeli way Provide volume and steady supply

Most Resources Devoted

Products

Assure Distribution supply

Spread out manufacturing Secure alternate routes during conflict Avoid conflict zones for key research, manufacturing and distribution centers
Least Important Sub-bullet Least successful

Least resources devoted

Financial Resources Internal Analysis

Advantages for innovation

Condition
Operating Income 4 times competitors
Greater $ for R&D and overall production Greater ability to research and produce new drugs Slightly lower than industry Generics have narrow margin Equity is making the shareholders money, perhaps to much given back to holders Assets working better than average competition, but not utilized to the fullest potential Low % for innovative industry Average for generics

Ability to meet demands

Strong Operations Support
Operating budget and scale Can meet any capacity demand with just one plant compared to a competitor

Competitive Advantages

Difficult to imitate scale

Gross profit margin 42% ROE 18.8%

Small portfolio of Innovative Drugs

Unsure profit margins, no competitive advantage Easy substitutes Difficult to make money with many players
Potential Weaknesses

Imitable drugs

ROA 8.2%

Low Margins On Generics

Future Growth
Capital availability for expansion
Can acquire new generic producers to improve share and market price Can raise capital for expansion and research Utilizes 180 exclusivity Strong research means first to market

Only 47% profit put into R&D

Good return attractive to investors

R&D Pipeline

Advantages for generic production

Strengths
Strongest

Weaknesses
Weaker

Size of production facilities

Low cost strategy
Price skimming 180 day exclusivity advantage Raw material sourcing Reorganize after every large acquisition Disaster planning Supplement capabilities to improve profitability (HGH) Consolidate fragmented market Gain market share while raising prices by eliminating competition

Strategy Imitability
No patents on generics Compete on price = low profit margin Limited innovative drugs Capacity pushes towards more generic production

Understanding supply chain

Limited Research Budget

Thin profit margins reduce R&D Greater risk with innovation Longer lead time on new products

Emphasis on acquisitions

Heavy Investment in US market

Changing health standards could cripple market Concentrated risk Missing opportunities for global share Avoids physician driven markets

Sell drug components to other companies

Drug portfolio
Diverse medicines = diverse risk
New innovative drug every year by 2010 Improve profit potential in all situations Generic, innovative, niche

Shift of core focus

Lack of marketing experience for new drugs
Lack of direct access or direct to consumer ads Low budget for advertising Most investment is in pension funds Risking yearly profit risks dividends for pensioners

Attracts large investment from Israel

Corporate Culture
Billion Dollar Theory Willing to take risk Relation w/ Israeli Research

Move to innovation increases risk

Less Weak

Weakest

Analysis of Environmental Trends

Competitor introduces innovative drug International exchange fluctuations Focus on innovative drugs higher margins, higher risk Patents and other legal regulations

Hi

Impact

Lo

Complacency failure to acknowledge competitiveness of industry Maintain current structure

Consolidate US generics markets through acquisitions Invest growth into R & D for innovative drugs

Lo

Hi

Probability of Growth

Focus on Consumers and Competitors

Teva Pharmaceuticals is in the Market Focus category
Customer Focus Fulfill demand for low-cost alternatives Effort to win over physician-driven markets Aging population requires more medicines Internal Focus Redesign supply chain as needed Billion Dollar Theory Strong reorganization and integration efforts after an acquisition Market Focus Advanced pipeline for bringing generic drugs to market Expanding to new territories Governments demand less expensive alternatives Work with universities to gain new ideas for undiscovered drugs Competitor Focus Realize need for market consolidation Production facilities are larger than competitors Strong department for ADA filings

Focus On Customers

LOW

HIGH

LOW

HIGH

Focus On Competitors

Customer Value Analysis

800 700

Teva
Number of Drugs Produced / Company 600

Watson Labs

500

Mylan
400

Pfizer

300

Glaxosmithkline
200

Barr

100

0 0 50 100 150 200 250 300 350 400 450 Prescriptions Filled (in thousands)

Major Competitors

Teva currently fills more prescriptions than its competitors and provides a wider range of product offerings Teva also applies its scale and to keep prices low and offer the benefit of its cost savings to the customer Teva also provides capacity to customers to ensure product availability

Key Decisions
Most Significant

What are the problems and opportunities?

Problems:

Big Pharma has increased presence in generics and has implemented aggressive tactics
Pursuing own generics Licensing 180 day exclusivity period

Big Pharma has more aggressively fought patents Companies have begun emulating TEVAs strategies and the competitive gap is closing Entrance of new types of competitors Pricing has declined 15-30% over the last 3 years in some markets TEVAs stock price has plunged 30%, which has erased billions in market capitalization Increases in overall health costs has led to greater demand for generics Large potential markets (Latin America and Asia) Growing and profitable biosimilar market Major drugs are coming off patents in coming years Insurance companies are pushing generic alternatives Countries opening up to generics (Germany, France, Japan)

Opportunities:

What should be the focus of the recommendations?

Maintain annual growth rate of 33% for last 5 years Raise stock price

Least Significant

Alternatives
Most Significant

Maintain Focus on U.S. Generics Market

Pros:

TEVA is a leader in ANDA filings TEVA very effective at acquiring and integrating existing companies
More companies vying for exclusivities Systemic erosion of prices

Cons:

Focus on Global Generics Market

Pros:
Generic penetration high (U.K., Netherlands) Generic market large (Germany, France) Rapidly growing market (Latin America, Eastern Europe, Russia, India, China) The growth of the global market is expected to speed up TEVA purchased Ivax which has strong presence in Latin America and Eastern Europe Market heavily regulated (Germany, France, Japan, Latin America, Eastern Europe, Russia, India, China) Generic penetration low (Japan) Other companies already expanding into Europe The structure of Europe is not the structure in which TEVA excels

Cons:

Least Significant

Alternatives (continued)
Most Significant

Move Up Value Chain from Low Cost Generics Into More Specialized Products (biosimilars or innovative)
Pros:
Cost to develop innovative drugs much lower than competitors Biosimilars expected to be high growth Theoretically, TEVA can produce one new innovative drug per year

Cons:
Innovative market growth expected to slow United States bogged down in regulatory impasse

Some Combination of the Three

Pros:
Diversify risk among a number of markets Maintain leadership in generics while expanding into highly profitable innovative market Take advantage of economies of scale and supply chain expertise in other markets

Cons:
Difficult allocating funds between generic and innovative projects Hard to manage generic company when you are rich

Least Significant

Recommendations
Most Significant

I will not ever take a risk so big that it will jeopardize the company. I will risk quarterly profits, but never the company -Eli Hurvitz TEVA should pursue a mix of the three alternatives:
TEVA should maintain focus on U.S. generics market by attempting to consolidate the U.S. market by strategically acquiring competitors TEVA should focus on those global markets that have a structure for which it has previously been successful TEVA should pursue the biosimilar market as well as modestly increase research and development in innovative drugs

Support for Recommendation

A mix of these three strategies will allow TEVA to diversify its risk so as not to jeopardize the company By pursuing all three alternatives, TEVA will be able to pursue those portions of the market in which it will be the most successful
For example, if TEVA were to ONLY pursue the global generics market, to reach the market growth desired by management, TEVA would probably have to pursue nearly all global generic markets On the other hand, if TEVA is pursuing market growth in all three alternatives, it can pick and chose those global generic markets that have the structure in which TEVA has previously been successful

Many experts in the industry believe it is difficult to allocate funds between generic and innovative drugs, but TEVA has successfully released two innovative drugs and has thus far been able to allocate funds profitably
Least Significant

Most Significant

Corporate Strategy
U.S. Generics Market
Maintain existing relationships TEVA is currently very successful in the U.S. market and should not risk this market share due to expansion in other areas Acquire smaller competitors to consolidate market the U.S. market is extremely fragmented; a consolidation of the market would result in increased market share and higher profit margins Continue to improve supply chain and manufacturing efficiencies TEVA is a market leader in supply chain and production efficiencies and it should maintain this area of leadership Pursue markets that have structure in which TEVA has been successful TEVA has been successful in markets where generic penetration is high and there is low regulation; TEVA should not enter dissimilar markets because of the risk of pursing an unknown strategy Maximize market potential of Ivax markets (Latin America and Eastern Europe) Latin America and Eastern are rapidly growing markets; Ivax already has a market presence in these areas and this advantage should be maximized Continue to acquire companies that have access and expertise in rapidly growing markets TEVA is very good at acquiring and integrating companies; acquisition would be an effective way of entering unknown but potentially profitable markets Use profits from generic market to modestly increase research and development for innovative drugs TEVA should modestly increase research and development expenditures to gain profits from the lucrative innovative drug market, but should not aggressively pursue this market because of high risk and because it is not an area of expertise for TEVA Continue to use existing strategy for developing innovative drugs TEVA should continue to use local scientists to develop innovative drugs because this reduces the cost of drug development significantly Use profits from generic market to pursue the biosimilar market the biosimilar market is a rapidly expanding market that TEVA should use be able to utilize its expertise in generics to obtain substantial profits

Global Generics Market

Specialized Products

Least Significant

Implementation and Evaluation

With health care costs rising, demand for generic drugs is rising
This is a great chance for Teva to expand, being sure to limit competition through strategic acquisitions Patents expiring on innovative drugs open the doors for more generics Increasing investment in R & D could provide strong profits Innovation under patent cannot be copied like Tevas other possible competitive strategies Utilizing Tevas relationships with universities should prove to be efficient Reducing competition in the US market will increase market share Costs will be reduced due to economies of scale Prices could be kept high to provide additional R & D funding Any competitors attempting to undercut could be forced out by dramatically reducing prices temporarily

Innovative drugs, biosimilars, and high-end generics offer very high profit margins

Resources gained from consolidating the US generics market can be applied to R & D for innovative drugs

Teva must balance its resources between consolidating generics markets and investing in research for innovative products.
Overinvesting in R & D will limit Tevas adaptability Overvaluing acquisitions during consolidation could negatively impact growth and limit Tevas investment in R & D The proper proportions will allow Teva unprecedented growth in an uncertain market

Increased market share is expected, and will indicate the success of consolidation Higher margins will indicate wise consolidation, as well as intelligent investment in innovations Ultimate evaluation will be based on net profit