Teva Pharmaceutical: Cornering Japan's Generics Market

| About: Teva Pharmaceutical (TEVA)

By Michael Fitzhugh

Teva Pharmaceutical (NASDAQ:TEVA) is chasing the top slot in Japan's growing generic drugs market with a $460 million deal to acquire a majority stake in the country's third-largest generics player, Taiyo Pharmaceutical.

Israel's Teva will own 57 percent of Taiyo when the deal is complete and is extending an offer to shareholders to acquire the remaining 43 percent of the private company as well. The deal values Taiyo at $1.3 billion overall. If it is completed by the third quarter of 2011 as expected, it will help Teva hit its goal of reaching $1 billion in Japanese sales by 2015, ahead of schedule, the company says.

Japan is the second largest pharmaceutical market in the world, valued at $96 billion in 2010 and could prove to be a strong, if challenging, market for generic drugmakers in the future. They currently enjoy just a sliver of the annual market, with as estimated $6 billion in sales during 2010.

Japan's aging population and rising healthcare costs have pushed its government to incentivize use of generic medicines, the uptake of which have been slow in a market that holds branded products in high regard. Nonetheless, in pursuit of healthcare cost-savings, the Japanese government has made a commitment to rapidly increase generics penetration in the country, from its current rate of 23 percent to 30 percent by 2012.

"I believe that somewhere around 30 percent is something you can call a critical mass," Teva CEO Shlomo Yanai said during a conference call with investors. "Once the market achieves this number, you are going to see acceleration in the pace of generic penetration. This has been our experience from other markets in the world and therefore I think that the Japanese market, in a few years, is going to reach the level of the European generics market, like Germany, which is over 60 percent, like the U.K., and so on."

Yanai sees the opportunities for generics in Japan as being driven by a wave of patent expirations in the coming years, including $17 billion worth of branded drugs going off patent over the next three to five years.

Acquiring Taiyo's broad portfolio, established distribution channels, and manufacturing infrastructure could position Teva as a strong competitor to Japan's current top generics companies, Sawai and Nichi-Iko, once that shift happens.

Taiyo has one of the most comprehensive generic product portfolios in the Japanese market with more than 550 generic drugs in a variety of therapeutic areas and dosage forms. It has a strong presence in all of Japan's major distribution channels, including hospitals. The company offers two manufacturing facilities, a strong R&D team, and local regulatory expertise as well, says Teva.

Teva has run a joint venture in Japan since 2009 when it established Teva-Kowa Pharma with Kowa Company and announced its goal of hitting $1 billion in Japanese sales by 2015. Yanai says Teva is discussing future opportunities with its partner and sees great potential for synergies with its plans for Taiyo.

"There is a lot of room here for doing a better and more efficient program to increase the profitability and that's part of the potential upside we see," says Yanai.