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Teva buys out Japanese JV partner

by David Holley | Published September 26, 2011 at 3:13 PM

Teva Pharmaceutical Industries Ltd. announced Monday, Sept. 26, it will pay $150 million to buy out Kowa Co. Ltd.'s half of the companies' joint venture in the Japanese generic-pharmaceutical market, part of a continuous effort by the world's largest generic drugmaker to establish itself as a market leader in Japan.

The acquisition gives Teva full ownership of Teva-Kowa Pharma Co. Ltd., a partnership that stems back to 2008. Since then Teva-Kowa has grown into the fifth-largest generic seller in Japan, Teva said, generating $200 million in 2010 net sales. The deal brings Teva's Japanese generics sales engine to an estimated $800 million.

"They're trying to build critical mass in a country that has not been very well penetrated by generic manufacturers," said Michael Waterhouse, a specialty pharmaceutical analyst with Morningstar Inc. "Teva wants to be the largest player in that market."

Jerusalem-based Teva has made substantial inroads in that effort during 2011. It announced in May it would acquire 57% of Taiyo Pharmaceutical Industry Co. Ltd. for $460 million, while also asking to acquire the rest of the company in a transaction that offered an enterprise value of $1.3 billion. The deal brings Teva a company with $530 million in 2010 sales from 550 generic drugs.

The Japanese acquisitions make sense for both offensive and defensive reasons. Teva said the Japanese pharmaceutical market is the world's second-largest at $96 billion, but its 23% generic drug usage rate is quite low compared with the 80% rate in the U.S., meaning there's plenty of room for growth in sales of the cheaper drugs. That growth is dependent on convincing Japanese consumers, who historically have been reticent to trust generic drugs because of concerns about quality, Waterhouse said, to change their minds.

While building up its presence in a market with potential sales growth makes it a logical aggressive tactic, Teva's move into Japan is also likely a move to stabilize after recent trouble it encountered. Its stock has fallen from a high of about $56 in February to about $35 per share on the Nasdaq, or about 37%.

Investors have been shaken by concerns that Teva's lead product, a brand drug for multiple sclerosis called Copaxone, may soon face stiff competition from other similar, potentially better treatments. Copaxone is a daily injectable drug that is one of the best selling and most efficacious treatments for multiple sclerosis, taking up nearly a third of MS drug sales at $2.2 billion. Copaxone accounts for about 58% of Teva's revenue. That's where Teva's problem begins. Copaxone's share of sales is likely to be cut as newly approved oral treatments, such as Novartis AG's Gilenya and Biogen Idec Inc.'s BG-12, which are easier to take than injections, hit the market.

Teva has developed its own oral treatment for MS, liquinamoid, but Teva stock suffered again in August when it released Phase 3 data on the drug that showed it did not achieve desired endpoints.

One other concern for generic drug companies such as Teva is the end of patent expirations. Big Pharma companies including Pfizer Inc. and GlaxoSmithKline plc have been fearing for years the patent expirations of drugs with blockbuster sales, which allow generic drugmakers such as Teva to sell cheaper generic versions of the drug. While those patent expirations have been numerous, they're expected to become fewer after 2013. Without projected revenue growth from additional patent expirations, Teva and other large generic drugmakers are turning to markets with growth potential, such as Japan, said Waterhouse.

"That's really what drives this industry," he said about patent expirations. "That's kind of a red flag for these companies."

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