ISRAEL 
HIGH-TECH & INVESTMENT REPORT

from the December 2003 issue


Israel's Pharma will Never be the Same


The Israeli high-tech sector and its entrepreneurs have often been criticized for their apparent inability to nurture global size firms. Why can't Israel produce a Nokia? Why do the country's entrepreneurs sell out their companies long before their potential is reached? The most popular explanation was that Israelis were inexperienced in international marketing. They missed this experience and could not create multi-national concerns. Perhaps closer to the truth was an inbred sense of impatience. The same impatience that makes great technologists play against forming business empires. Nevertheless, CheckPoint and Comverse did become multinationals. Gil Shwed, the founder of CheckPoint , continued to manage the company from Israel. He had accurately anticipated the growth of the internet and that computer security would become a major issue.

Early in November Israeli drug maker Teva Pharmaceuticals (Nasdaq: TEVA) announced the acquisition of generic drug maker Sicor (Nasdaq: SCRI). The deal values Sicor at $3.4 billion. We questioned the investment broker firm of Merrill Lynch and it responded that it continues to maintain its positive view of Sicor and projects a 12% growth in profits for 2004. Teva is an outgrowth of Israel's rapid development. Until the early 1980s the country's pharmaceutical industry was a hodgepodge of small companies that had been founded in response to Israel's inability to obtain all of her pharmaceutical needs from overseas. Eli Hurvitz, a former kibbutznik (farmer) assumed its leadership and set a course for Teva to become a generic drug company, Jointly with the American Grace Co. they broke new ground and moved into the generic drug field. Today Teva, is the largest generic company in the world. Moreover, Hurvitz wanted Teva to make a "blockbuster" drug. When the opportunity presented itself Hurvitz gambled and licensed Weizmann Institutes fundamental scientific know. He gambled heavily on acquiring the know-how, built a $30 million plant, well ahead of being sure that the pharmaceutical trade-named Copaxone, could be produced or would reduce the relapse rate in patients with relapsing-remitting multiple sclerosis and also encourage the release of a factor that helps protect the brain from axonal loss. Teva's Copaxone has become Israel's first home grown "blockbuster". The company recently said that worldwide sales of the branded therapy used in the treatment of multiple sclerosis climbed 25 percent in the latest quarter, to $180 million. Teva's growth is far from over. Teva will invest $3 million in Gamida-Cell, which has developed a technology to treat blood diseases such as leukemia and lymphoma. Gamida-Cell's technology increases stem cell reproduction while limiting mutations. It also has invested to form Bioline Therapeutics, a biopharmaceutical drug development company. A third investment, in ProNeuron makes it clear that Teva aims to become an important player in the biotechnology field.

Teva Acquires Sicor for $3.4b
Israeli drug maker Teva Pharmaceuticals (Nasdaq: TEVA) announced the acquisition of generic drug maker Sicor (Nasdaq: SCRI). The deal, which included $16.50 in cash plus 0.1906 Teva shares, values Sicor at $3.4 billion, or $27.50 per share. With the explosion of generic drugs, Sicor's generic injectable drug business will complement Teva's generic oral dose franchise nicely. The acquisition strengthens Teva's position, most importantly in North America, where the company generated 63% of its sales in the third quarter. SICOR, at the time of the announcement had a market capitalization $3.2 b. Its shares were up 70% year to date. The shares are rated as a buy at Merrill Lynch. The acquisition originated in Teva's desire to begin production of generics of biotech medicines. Back in March, Jeff Fischer of the Motley Fool penned a three-part series on the potential of generic drug companies. Following a discussion of Mylan Labs (NYSE: MYL), he highlighted three companies to consider, including Sicor. At the time, he felt that Sicor was attractive at about 20 times free cash flow, or $17.30 per share.

Teva CEO Israel Makov said the Sicor purchase contributes major growth engines to the Israeli company.

Sicor is one of the strongest companies in the U.S. hospital sector, giving Teva an immediate presence in a market it has eyed for some time.

Sicor will constitute a base for Teva's global operations in injectables via its Irvine, California and Mexico manufacturing sites. Teva operates in this market via Pharmachemie Netherlands and a Hungarian subsidiary. Low production costs in Mexico will allow Teva to expand its product line in Europe (where it has suffered from low profit margins) and increase its product line in the U.S.(where profit margins are bigger).

Makov puts the European injectables market at 300 million euro annually, projecting it will grow to 700 million euro by 2006.

Another reason for the Sicor acquisition is the company's Mexican operation. Teva entered that market recently, establishing a subsidiary to distribute its multiple sclerosis drug there and later to distribute Teva generics in Mexico and Latin America.

Sicor is already involved in that market and 15 percent of sales originate there; the acquisition becomes a shortcut for Teva's Mexican penetration process.

Another growth engine would be Sicor's active pharmaceutical ingredient (API) manufacturing operations. Sicor makes 25 ingredients for medications it markets and 36 APIs for other drugs. Sicor's operations in this area are complementary to Teva's as they include the manufacture of cancer drugs and anti-inflammatory steroids based on synthetic derivatives of natural hormones.

Makov said buying the U.S. company will strengthen Teva's leading status in the API market. Makov noted Teva's interest in Sicor's biogenerics, generic versions of drugs originating from live cells an not through chemical synthesis

Teva's Q3 Profit Jumps 63%
Teva earned $156.6 million, or 53 cents per share, up from $96.3 million, or 36 cents per share, in the 2002 third quarter. Teva had been expected to earn 49 cents per share, according to the average estimate of analysts polled by Reuters Research.

Teva said third-quarter revenue climbed 29 percent to $812.6 million, boosted by sales of the company's generic version of Augmentin, the antibiotic produced originally by GlaxoSmithKline.


Reprinted from the Israel High-Tech & Investment Report December 2003

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