At the end of last week, Japanese pharmaceutical company Takeda launched Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) flagship product for treatment of multiple sclerosis, Copaxone, in the Japanese market. Takeda and Teva signed a cooperation agreement two years ago for development and marketing of the drug in Japan, a potential market of several hundred million dollars. The arrival of the drug on the Japanese market is welcome news for Teva, which has not had much luck there in recent years, mainly in its generic business.
Teva began sizeable operations in the Japanese market in 2008, when it founded a joint venture with local company Kowa in the generic sector. Expectations at the time were high, given a supporting environment of government incentives to encourage penetration of generic products and an aging population that consumes more drugs. One year later, the venture acquired Taisho, a Japanese company, in a deal amounting to tens of millions of dollars, and Taiyo, Japan's third largest generic company, was acquired in 2011 for $1 billion.
The Kowa venture was liquidated in 2012, and Teva acquired its partner's share. All of Teva's business in Japan was consolidated in a single company - Teva Saeiaku. At the end of 2014, Teva had 1,100 employees in Japan.
Revenue fell despite the acquisitions
Teva is dissatisfied with its current business in Japan. The reports show an ongoing decline in revenue. Fluctuations in the exchange range rate are also affecting Teva's revenue in Japan, but are not the sole reason for the decline. In 2014, for example, Teva's revenue in Japan fell 10% in comparison with 2013 (or 3% in terms of the local currency). Teva does not report its sales volume in Japan, which is listed in its report in the "rest of the world" category, together with countries like Canada and Russia. In 2014, Teva's sales to the rest of the world totaled $2.3 billion.
In 2015, Teva reported a steep drop in revenue in Japan each quarter, amounting to 4-9% in comparison with the corresponding quarter in 2014, net of exchange rate changes. One of the causes for the decrease was initiatives by the Japanese regulator to push prices down, but Teva's report also cited what was referred to as operational issues and Teva's focus on more profitable segments. The decline in Teva's revenue from one quarter to the next contrasts with the expectation for continued growth in the Japanese generic market as a whole as a result of government incentives aimed at boosting generic penetration, which make Teva's weakness in Japan even more stark and questionable.
Most health expenses in Japan are funded by the government through extremely comprehensive insurance plans. The Japanese government has taken several steps in recent years as part of a reform aimed at reducing costs, among other things by increasing generic penetration (the prices of generic drugs in Japan are 50%-60% of the prices of ethical drugs).
Power to the pharmacist
As of the end of 2014, according to figures published by Teva in its reports, the Japanese generic market accounted for 40% of the Japanese pharmaceutical market in terms of volume and 10% in terms of market value. The Japanese generic market is currently undergoing a process of switching from branded generic drugs, in which the doctor chooses which drug to prescribe for the patient, to a market in which pharmacists are more able to give alternative generic drugs to a patient. In its expanded reports for 2014, Teva stated that it was taking action to create strategic partnerships with Japanese retailers in order to safeguard its distribution channels there.
The company's weakness in Japan has not escaped the attention of Teva's management. Two weeks ago, the UBS investment bank published a review in which it interviewed the CEOs of several pharmaceutical companies about their goals, successes, and mistakes. Teva CEO Erez Vigodman did not attempt to conceal his company's problems in Japan. In answer to a question about where the company would focus in mergers and acquisitions, Vigodman said, "We are also interested in increasing penetration in key growth markets, like Brazil, China, Mexico, and Japan."
"Japan is a priority," Vigodman told UBS. "We need to fix the business. The platform that we acquired is not good enough. The pace of integration was not good enough, and our execution was not good enough. We need the ability to drive the top line in a profitable way. The market is growing fast. We invested too much effort to fix the foundation instead of an external focus, so we are not capturing our share yet." Asked what Teva's biggest mistake this year was, he said that Teva had not made major errors, but "We could have moved faster to fix Japan and build our biosimilars portfolio (generics for biological drugs, S. H.-V.). You will see progress on both fronts soon," Vigodman promised UBS.
Published by Globes [online], Israel business news - www.globes-online.com - on November 29, 2015
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