personal_noteS – Page 20

Teva (4): Acquisition

Understanding Teva’s genes

[an excerpt from Knowledge@Wharton: Changing the Prescription for Israel’s Teva]

The (generic drug) industry began to consolidate during the 1960s and 1970s, and Teva emerged as the largest and most dynamic firm in the sector, thanks primarily to Eli Hurvitz, who served as CEO from 1976 to 2002 and as chairman from 2002 to 2010.

Opportunity knocked on Teva’s door when the U.S. Congress passed the Hatch-Waxman Act in 1984. The legislation created incentives for generic drug companies to challenge other firms’ patents, even before they expired, with the goal of reducing the cost of drugs in the U.S. Hurvitz positioned Teva to use Hatch-Waxman as its springboard to becoming a major player in the generics sector.

“Teva succeeded in its strategy,” says Steven Tepper, an Israeli analyst who has been following Teva for many years. “It not only worked really hard at getting its production costs down, it also developed considerable expertise in the legal aspects of the generic drugs business — how to be the first to file for generic versions of patented drugs [the law awarded a period of exclusivity to the first generic version, during which time profit margins would be higher], and how to manage the testing and licensing process. Later, Teva became adept at acquiring other companies and integrating them into the group.”

The strategy worked so well that today, Teva is the largest generic drug company in the world. Achieving this designation was a conscious decision on the part of Teva’s leadership: It was achieved via a series of large acquisitions over a five-year period, beginning with IVAX, an American rival bought for US$7.4 billion in January 2006; Barr (also in the U.S.) for US$7.46 billion in December 2008; German company Ratiopharm in March 2010 for US$5 billion, and Cephalon in May 2011 for US$6.8 billion.

“Levin was instrumental in bringing Michael Hayden to Teva as head of R&D, and together they formulated a corporate strategy for Teva that distinguished it from its competitors and also explains why Teva had to acquire either Mylan or Allergan,”

“Levin and Hayden sought to marry Teva’s proven capabilities in the efficient production of generic drugs with the company’s in-house R&D capabilities, themselves enhanced by a series of acquisitions. The goal is to turn generic drugs into specialty products, for instance by giving them a special formulation or method of application — something that doesn’t change the essence of the drug, but de-commoditizes it and allows for a higher price, higher margins and hence greater profitability.”

– Steven Tepper, pharma and biomed analyst at Migdal Capital Markets and regarded as a top Israeli analyst in this sector

The environment for Teva in 2015

[Knowledge@Wharton: Why Teva Paid $40.5 Billion for Allergan’s Generic Business]

- The number of ‘ethical’ or proprietary drugs coming off patents in the next few years is going to be much smaller than has been the case over the past decade or so
- The drug producers are facing a rapid process of concentration among their main buyers — especially in the critical U.S. market, where there are now three dominant companies. This, in turn, is forcing the manufacturers to consolidate their ranks, so as to better match the greater bargaining clout of their customers. The entire pharma industry is caught up in a whirlwind of enormous deals. Data from Thomson Reuters shows that as of July 23 — prior to Teva’s Allergan acquisition — M&A deals in the health care industry so far this year totaled almost $400 billion and were up some 80% over the equivalent period of 2014
- With Copaxone’s patents going to expire, Teva needs to find supports to drive the growth or to make-up the hole – manage the “patent cliff” and the stock price

There were three acquisition targets: Sandoz (Novartis), Mylan and Actavis (Allergan).

First proposal: Mylan

On April 21, 2015, Teva proposed to acquire mylan for $82.00 per share in cash and stock. ($40 billion acquisition, 50 percent cash and 50 percent stock)

Just two weeks before, Mylan made an offer to acquire Perrigo with a 25% premium, which failed later in November.

A timeline compiled by Reuters.

April 8, 2015: Mylan offers to buy Perrigo for about $29 billion in cash and stock in a move that some analysts suggested was an effort to help fend off a $40 billion acquisition by larger rival Teva Pharmaceuticals Industries

April 24, 2015: Mylan goes hostile with a sweetened bid of $60 plus 2.2 Mylan shares, valuing Perrigo at $31 billion; Perrigo rejects offer

April 27, 2015: Mylan rejects Teva’s offer

April 29, 2015: Perrigo rejects Mylan’s second raised bid of $75 and 2.3 Mylan shares for every Perrigo share, or $34.1 billion

April 29, 2015: Teva sends letter to Mylan’s Board

July 23, 2015: Dutch foundation linked to Mylan adopts poison pill in efforts to block takeover by Teva, citing potential job losses

July 27, 2015: Teva drops its hostile pursuit of Mylan, decides to buy Allergan Plc’s generic business in a deal worth $40.5 billion

Aug. 13, 2015: Mylan lowers the percentage of Perrigo shares it needs to control the company to just over 50 percent from its original plan of 80 percent

Sept. 14, 2015: Mylan launches a tender offer in a move to lure Perrigo investors to support its take-over efforts

Sept. 17, 2015: Perrigo recommends shareholders to reject Mylan’s tender offer, which was set to expire on Nov. 13, saying it substantially undervalued the company

Oct. 22, 2015: Perrigo announces its plans to lay off 6 percent of its global workforce and buy back shares worth $2 billion

Nov. 13, 2015: Mylan fails $26 billion bid in tender offer as it was unable to secure at least half of Perrigo’s shares

After Mylan’s acquisition of Perrigo failed, Mylan shares were up about 10 percent at $47.39 in premarket trading, while Perrigo’s were down 9.3 percent at $141.99.

Teva said its offer should be more attractive to Mylan shareholders than the proposed purchase of Perrigo, representing a 48 percent premium to the company’s share price before speculation of a deal surfaced on March 10. When Teva made the proposal, Mylan shares were up 8.9 percent at $74.12 in afternoon Nasdaq trading, while Teva rose 2.0 percent to $64.55 on the New York Stock Exchange. Perrigo fell 2.2 percent to $193.79. (Reuters)

Plan B: Allergen

On July 27, 2015, Teva made an offer to buy Allergan’s generics unit with $33.75 billion in cash and Teva shares valued at $6.75 billion (close to 10% stake in Teva).

pro forma revenues of approximately $26 billion and combined EBITDA of approximately $9.5 billion anticipated in 2016.
No shareholder vote required at Teva or Allergan
Mylan shares fell nearly 14% to $57.03 Monday, while Perrigo gained 3.8% to $193.67.
For Allergan, the Teva deal provides it with cash to pay down debt and allows the company to focus more on lucrative brand-name drugs.

[WSJ: Teva to Buy Allergan Generics for $40.5 Billion]

Teva Presentation of Actavis Acquisition

Question: how to finance the deal…

According to Teva’s Q2 2015 result, at June 30, 2015

- cash and investments: $2.8 billion.
- short-term debt: $3.0 billion
- senior notes and loans: $9.5 billion

Teva Pharmaceutical (2): Reliance on Copaxone

How important is Copaxone to Teva

Revenue 1/5

Copaxone = 21.3% of Teva total revenue in 2013…

Copaxone reached its global peak sales of $4.3 billion in 2013
In 2013 Teva, with total revenue over $20 billion, had a generic drug business close to $10 billion and specialty drug sales of $8.4 billion (Copaxone accounted for more than half of the specialty drug business)

Profitability 1/2

…while made 50.8% of Teva’s total profitability in 2013

Copaxone contributed a segment profitability (gross margin – S&M – R&D) of $3.3 billion, with a very healthy margin of 76%
Other specialty drugs and generic business had a margin of 32% and 17% respectively
Teva’s total profitability (gross margin – S&M – R&D) was $6.4 billion in 2013

Two “bad” (for Teva) developments in 2013

Biogen’s Tecfidera approved by FDA, which would become the leading MS drug in 2017

The United States Food and Drug Administration (FDA) announced on March 27, 2013 that it has approved Tecfidera™ (dimethyl fumarate or DMF, formerly known as BG-12) as a first-line therapy for the long-term treatment of relapsing forms of multiple sclerosis (MS).
Tecfidera is administered in pill form orally (by mouth) and is the third oral DMT approved for MS. The approved dosage is 240 mg to be taken two-times daily.
FDA approved labeling

court ruling made first generic launch 15 months earlier than expected

In July 2013, the Court of Appeals for the Federal Circuit reversed an earlier district court decision backing the Teva Copaxone patent estate through September 1, 2015
The appellate court struck down some of Teva’s composition patents that were protected until that date, with the effect of allowing a launch as early as May 24, 2014

Teva Pharmaceutical (1): MS and Copaxone

Copaxone is one of the leading drugs for multiple sclerosis (MS).

What is MS?

Multiple sclerosis (MS) is a chronic inflammatory demyelinating disease of the central nervous system affecting more than 2 million individuals globally and approximately 400 000 in the United States. [paper]

多发性硬化症（multiple sclerosis，MS）是一种中枢神经系统脱髓鞘疾病，病程中常有缓解复发的神经系统损害症状。多发于青壮年，多数患者是20～40岁的女性。[药事纵横]

在中枢神经纤维外面有一层髓鞘，起着保障神经电信号的正确传导的作用。MS患者的免疫系统会异常地攻击髓鞘，引起炎症，使巨噬细胞“吃掉”髓鞘，中枢神经纤维传导信号的速度和准确度就会受到影响，开始出现神经系统受损的症状。常见的症状有视力下降、复视、肢体感觉障碍、肢体运动障碍、共济失调、膀胱或直肠功能障碍等。[药事纵横]

MS 通常分为四类，其中复发缓解型多发性硬化症 relapsing-remitting MS (RRMS) 占比约 85%。[药事纵横]

Relapsing forms of MS include clinically isolated syndrome (CIS; a first demyelinating episode), relapsing-remitting MS (RRMS), secondary-progressive MS, and progressive-relapsing MS. The symptoms of MS can be highly variable, both in severity and duration, but may include visual disturbances, bladder/bowel dysfunction, weakness, impaired balance, vertigo, numbness, tingling, pain, and cognitive dysfunction. [paper]

Source: Multiple Sclerosis Association of America

Among the available drugs for MS, Copaxone has been the best-selling drug for years until 2017. In 2017 H1, Copaxone sales = $2.296 billion while Tecfidera by Biogen had a total revenue of $2.069 billion. [药事纵横]

During 2017 H1, Copaxone sales declined rapidly and made Tecfidera the best-selling drug for MS in 2017.

Available drugs and classification

The past decade has seen a dramatic change in the US MS-treatment landscape. While no cure for MS is currently available, treatment options exist to reduce the frequency of relapses, manage symptoms, and slow disease progression. Many US Food and Drug Administration (FDA)–approved disease-modifying therapies (DMTs) are currently available in the US market for patients with relapsing forms of MS, including interferon beta-1b (Betaseron®4, Extavia®), interferon beta-1a (Avonex®6 and Rebif®), glatiramer acetate (Copaxone8), natalizumab (Tysabri®), fingolimod (Gilenya®), teriflunomide (Aubagio®), dimethyl fumarate (Tecfidera®), alemtuzumab (Lemtrada®), peginterferon beta-1a (Plegridy®), and daclizumab (Zinbryta™). In general, the currently available medications primarily target the mechanisms that underlie inflammation. Early and ongoing treatment helps to minimize early inflammation, reduce damage in nerve fibers (axons), and reduce loss of brain tissue. The anti-inflammatory effects of these agents are largely believed to result from the inhibition of T-lymphocyte proliferation, from a shift of the cytokine response from an inflammatory response to an anti-inflammatory profile, and/or from a reduction in the migration of inflammatory cells across the blood–brain barrier. More recently, ocrelizumab (Ocrevus™) became the first and only DMT approved for the treatment of primary progressive and relapsing forms of MS. Although the precise mechanism by which ocrelizumab exerts its therapeutic effects in MS is unknown, it is presumed to involve the depletion of pre-B and mature B lymphocytes. [paper]

Copaxone History

Glatiramer acetate, also known as copolymer-1, is a heterogeneous mixture of peptides comprising 4 amino acids and is similar to myelin basic protein. Copolymer-1 was first discovered in the late 1960s during research to produce an antigen capable of inducing experimental autoimmune encephalomyelitis (EAE), an animal model of MS. [paper]

Following its discovery and the accumulation of preclinical data supporting its use as a therapeutic agent in MS, the clinical evaluation of GA was initiated in the late 1970s. Intensive clinical research has since been conducted on GA to establish its efficacy and safety as a DMT for MS, resulting in its initial approval for RRMS in 1996 and for clinically isolated syndrome (CIS) in 2009, followed by a subsequent label change to the current indication of relapsing forms of MS along with approval of a higher dose and less frequently administered version of GA in 2014. [paper]

Source: Two decades of glatiramer acetate: From initial discovery to the current development of generics

Iran (2): US Pulled Out in 2018 and Now

On May 8, 2018, the United States withdrew from the Joint Comprehensive Plan of Action.

Why

“We cannot prevent an Iranian bomb under the decaying and rotten structure of the current agreement…” “Therefore, I am announcing today that the United States will withdraw from the Iran nuclear deal.”

– Remarks by President Trump on the Joint Comprehensive Plan of Action on May 8, 2018

[Vox] The problem, though, is that the deal wasn’t “rotten”: The best evidence we have suggests Iran was actually complying with the deal. Iran has dismantled a huge portion of its nuclear program and given international inspectors wide latitude to make sure it isn’t cheating; the country is significantly further from a nuclear weapon than it was when the deal came into force.

The rationale:

The first one is that the deal isn’t entirely permanent; the restrictions on Iran’s nuclear program start to relax about 10 years after the deal was signed (though the agreement not to build a nuclear weapon is permanent).

The second is that the deal didn’t cover other problematic things Iran was doing, including ballistic missile development and its support for violent militias around the Middle East (like Hezbollah in Lebanon).

One year after

On 5/8 2019, one year after US President Donald Trump announced his country’s pullout from the Iran nuclear deal, Tehran says it is no longer committed to parts of the agreement. [aljazeera.com]

On 6/13, two tankers were attacked in the Gulf of Oman, a month after four other ships were struck in the region. Tehran has denied any involvement and described them as a false flag operation.

On 6/17, Tehran has sped up the countdown to its breach of the nuclear deal with the announcement that it will exceed its uranium stockpile limit in the next 10 days. The country’s atomic agency also said Tehran might also start the process of enriching uranium up to 20% from 7 July. Kamalvandi, the spokesperson for Iran’s Atomic Energy Organization (AEOI), said Iran needed 5% enrichment for its nuclear power plant in the southern Iranian port of Bushehr and 20% enrichment for a Tehran research reactor.

Iran also announced water supplies at the Arak water reactor would exceed a 130-tonne limit within the next two and a half months if the country did not find a client to buy heavy water byproducts.

On 6/20, a US military surveillance drone has been shot down by Iranian forces while flying over the Strait of Hormuz, one of the world’s most vital shipping routes.

Iran’s Islamic Revolution Guards Corps (IRGC) said the aircraft had violated Iranian airspace, and that the incident sent a “clear message to America”.

But the US military insisted the drone had been over international waters at the time, and condemned what it called an “unprovoked attack” by the IRGC.

After President Donald Trump’s last-minute pullback from military retaliation, the American focus has shifted to diplomacy and an effort to build international support for Trump’s approach.

Iran (1): the 2015 Deal

A deal, Joint Comprehensive Plan of Action (JCPOA), was reached in 2015 between Iran and P5+1 (US, UK, France, China, Russia and Germany).

The deal came after years of tension over Iran’s alleged efforts to develop a nuclear weapon. Iran insisted that its nuclear programme was entirely peaceful, but the international community did not believe that. [BBC]

A deal summary by Belfer Center for Science and International Affairs, Harvard Kennedy School

Uranium Enrichment

Uranium is required to produce nuclear power and create nuclear weapons. However, the naturally-occurring form of the element does not have a sufficient level of a common fissile isotope U-235 to set off a nuclear reaction.

The amount of U-235 in uranium must be increased through a process of enrichment.

Uranium enriched to between 3 and 4 percent can be used for nuclear power plant fuel, but it must be enriched to around 90 percent for use in weapons.

Iran previously reached a near 20% level enrichment before the deal.

When uranium is mined it typically has about 140 atoms of U-238 for every atom of U-235. Refining it to a purity of 3.67% means using centrifuges to remove 114 unwanted atoms of U-238 for every atom of U-235. Boosting its purity to 20% means removing 22 more unwanted atoms of U-238 per atom of U-235, while going from there to weapons-grade material means removing just four more per atom of U-235. [TheGuardian]

Cap: Stockpile of Low-enriched Uranium

JCPOA set a limit of 3.67 percent enrichment and a stockpile limit of 300kg (660lbs) for 15 years (until 2031).

The United States said in 2015 the deal reduced Iran’s stockpile of enriched uranium by 98 percent, to less than the amount needed for one weapon from enough for about 10. [france24]

Limit: Enrichment capability

Iran had two facilities – Natanz and Fordo – where uranium hexafluoride gas was fed into centrifuges to separate out the most fissile isotope, U-235.

Much of Natanz is deep underground and Fordow is buried inside a mountain, which is widely believed to protect them from aerial bombardment.

The deal allows Iran to continue enrichment at Natanz but with constraints. It turns Fordow into a “nuclear, physics and technology centre” where centrifuges are used for purposes other than enrichment, like producing stable isotopes.

First-generation centrifuges installed in Iran is capped at 6,104, reduced from 19,138.

Plutonium Track

Spent fuel from a heavy-water reactor contains plutonium suitable for a nuclear bomb.

Iran had been building a heavy-water nuclear facility near the town of Arak.

Under the JCPOA, the core of that reactor has been removed and filled with concrete to make it unusable

The reactor is being redesigned so as to “minimise the production of plutonium and not to produce weapon-grade plutonium in normal operation”

Iran will not be permitted to build additional heavy-water reactors or accumulate any excess heavy water until 2031.

Aging Population and % of Healthcare GDP

Here to compare the % of population ages 65 and older and healthcare expenditure as a % of GDP.

United States

1960: 9.1%

2017: 15.4%

The number of Americans ages 65 and older is projected to more than double from 46 million today to over 98 million by 2060, and the 65-and-older age group’s share of the total population will rise to nearly 24 percent from 15 percent.

– prb.org

Healthcare expenditure rose from 5% of GDP in 1960 to 17.9% in 2017.

China

1960: 3.7%

2013: 9%

2017: 10.6%

By 2050, 330 million Chinese will be over age 65.

The population ages 60+ will reach its highest in 2050: nearly 35%, at 487 million

预计到2025年，我国60岁及以上老年人口数将达到3亿，占总人口的五分之一；到2033年将突破4亿，占总人口的四分之一左右；而到2050年前后将达到4.87亿，约占总人口的三分之一，老年人口数量和占总人口比例双双达到峰值。

Healthcare expenditure mainly ranges from 4% to 5% from 2000 to 2016, rising constantly in recent years. Considering the rapid growth in its GDP, the healthcare expenditure in China is growing fast.

The percentage of GDP is expected to rise to more than 26% for elders’ caring related costs. [2015-2050年，我国用于老年人养老、医疗、照料等方面的费用占GDP的比例将从7.33％升至26.24％]

Just by comparing China to US, China’s healthcare expenditure percentage is a little lagging behind (~10% 65+ population for 7% healthcare GDP). But the opportunity is large as Chinese demographic is changing rapidly. With the historical “one child policy”, China’s working population will experience a “squeeze”.

Shared Bikes In China (5)

So how many shared bikes are needed?

Beijing is the city in focus.

In April 2017, Beijing (北京市交通委) published a guideline (draft for consultation) to regulate shared bikes. [A usage survey conducted at that time in Beijing]

Beijing had around 700k shared bikes by April 2017, and more than 1.6 million by September 2017. (numbers are for registered bikes, not including non-registered)

The number of shared bikes reached its largest in September 2017 (2.35 million; then new deployments were suspended). Other cities also set the cap (Shanghai 1.5 million, Guangzhou 0.9 million, Nanjing 0.45 million).

The number declined to 1.91 million by August 2018, which was the second hard limit set by City of Beijing. (mobike 0.699, ofo 0.907, other 7 companies 0.3)

It was expected that the cap would continue to decline. From January to May 2019, only 1.2 million of the 1.91 million bikes are used at least once.

Other cities have downsized the number of shared bikes as well: main area in Chengdu 1.8 million -> 0.75 million; Shenzhen 0.89 -> 0.6 million

Beijing has a population of more than 21 million: so on average every shared bike will cover 11 people. (using 1.91 million here)

Shared Bikes In China (4)

After Series E…

By and large, the financing activities paused (as described in part 2) in the bike-sharing space. And the $3 billion valuation for both mobike and ofo was not attractive. Capital markets were developing way ahead of the business.

What is more, the economic model was still in the “testing stage” (to put it nicely).

M&A?

The most obvious way to end the war and to make the industry profitable was a merger between ofo and mobike.

The investors were familiar with the merger between Didi and Kuaidi in 2015, with Tencent-backed Didi’s name surviving.

Similar talks must have been held for several times, especially in the summer of 2017. But before a merger, there would probably be a winner.

Investors from both sides probably have been talked about this privately for long. In June 2017, a discussion between Xiaohu Zhu (GSR Ventures), ofo’s backer from Series A, and Pony Ma (Tencent), mobike’s lead investors for Series D&E, was leaked and posted on the internet.

They were trying to claim ofo and mobike as the No.1 bike-sharing company respectively.

Discussion between GSR and Tencent leaders | Source: tech.sina.com.cn

Meanwhile, both CEOs were saying a merger was not possible (6/29).

The first public comments from investors on the merger might be in September 2017 when Xiaohu Zhu said a merger is the way to profitability.

ofo CEO vs. Investors

Didi (with veto power) sent a team to ofo in July 2017, including an executive vice president.

In September 2017, ofo launched its mini-program on WeChat (said to be directed by Didi’s team), which made Ant Financial shocked and angry. (Ant Financial’s Alipay and WeChat’s WePay are the duopoly in mobile payment)

It was said that Ant Financial asked ofo to close its mini-program, then Ant Financial would provide additional financing.

Didi’s team lost their access at ofo in November 2017. And ofo’s mini-program became not available anymore.

At the end of 2017, ofo CEO had the last conversation with Xiaohu Zhu (GSR Ventures) about the merger. One month after the last attempt, Xiaohu Zhu sold his position to Ali, together with his veto power.

At the beginning of 2018…

several things became clear:

- Youon merged with Hellobike, with the help from Ant Financial; with further financing of $350 million from Ant Financial, it would be a solid No.3 player in the space
- Alibaba got the power it wanted in ofo (to counter Didi/Tencent)
- To some extent, mobike and ofo are offering an alternative to Didi’s ride-hailing services, especially short-distance rides; they also wanted to march into the broader ride-sharing space
- Didi acquired bluegogo and planned to operate an independent department for shared bikes

Then…

Alibaba led a Series F of $866 million for ofo in March 2018.

Meituan acquired mobike for $2.7 billion in April 2018.

Alibaba led a round of nearly $700 million for Hellobike in April 2018.

In fact, Alibaba has bought out Didi’s controlling position from ofo and made Hellobike its main force in bike-sharing.

The duopoly fueled by capital was again overpowered by capital.