Mr Generic, Shlomo Yanai es... el "Rey"

By Mina Kimes, writer-reporter

Last Updated: August 5, 2009: 12:35 PM ET (Fortune Magazine) --

No one knows what the CEOs of the biggest drug companies dream about, but their nightmares probably look a little like this:

Perched on a hill in Jerusalem, there is a factory that makes more than 8 billion pills a year. Its rooms contain giant metal vats of powder and tablet-making machines. Pipes run through the floors, spewing out pills that fall, like colored raindrops, into plastic crates. Workers pour them into bottles, which are slapped with unrecognizable labels. Their names don't matter: These generic drugs are inexpensive copies of blockbuster pills, and Teva Pharmaceutical Industries, the owner of the factory and 37 others like it, is swallowing Big Pharma's market share.

Israel's Teva (pronounced teh-vuh) is the world's biggest generic-drug maker. By making knockoffs faster and in bigger quantities than the competition, the company now accounts for 22% of all generic prescriptions written in the U.S. Teva's worldwide revenues are on track to grow 27% this year, to $14 billion, and investors have taken note. In the past year its stock has risen 13% at a time when the S&P 500 dropped by 25%. Locals are outspoken about their pride in Teva (TEVA); many call it "Israel's stock." A $20,000 investment in the company in 1990 would be worth $1.6 million today.

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Over the longer term, analysts expect the company to boost profits by 14% annually for the next five years, compared with flat earnings at the five biggest pharmaceutical companies. Because of its growth potential, Teva's market capitalization has ballooned to $45 billion -- bigger than that of Bristol-Myers Squibb (BMY, Fortune 500) or Eli Lilly (LLY, Fortune 500).

Yet as the company grows, it might be hard to match its previous track record. "One of the biggest concerns on Wall Street is, When does Teva become the Pfizer of generics?" asks Ken Cacciatore, an analyst at Cowen & Co. "When does it become too big to grow?"

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Big Pharma also has its sights on the heart of Teva's business: the traditional generic market. After decades of calling companies like Teva second-class citizens, branded-drug makers want to join the race. Pfizer (PFE, Fortune 500) said recently that it would expand its portfolio of generics. GlaxoSmithKline (GSK) in June announced a partnership with Indian generic company Dr. Reddy's (RDY) to sell cheap drugs in emerging markets.

Yanai says branded-drug makers have tried to do this before and ended up selling their generics divisions. He isn't convinced that they can thrive in an industry with lean margins and cutthroat legal tactics. "With all due respect, you can't take a Persian cat and educate it to become a street cat," he says. "It's not just about making generic drugs -- you need to be lean and agile. And if one day someone tells you to get off the stove, get rid of your fat, go to the streets ..." He trails off. "You can imagine the likelihood of success."

Yanai has a lot of chutzpah -- but he could be right. After Pfizer announced its plan to go generic, Goldman Sachs analyst Jami Rubin had a question for the drugmaker: "Are you trying to be another Teva?"

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