Teva sees wide horizons in Russia

CEO Shlomo Yanai tells "Globes" about the venture with P&G, and Teva's expansion in Russia and Japan.

"The ability to sell more products through more channels in more regions means that within a few years we'll reach $4 billion in sales, compared with current sales of $1.2 billion by the two companies," Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) president and CEO Shlomo told "Globes" today on the launch of the company's joint over-the-counter drugs venture with Procter & Gamble Company NYSE: PG), PGT Healthcare.

PGT Healthcare will operate worldwide, except for North America. Teva will contribute its development and production skills and its current products line, while Procter & Gamble will contribute its brand and marketing skills. Although Teva owns 49% of the joint venture, it will recognize half of its revenue, because it will provide the production services. As part of the venture, Procter & Gamble sold its OTC plants in North Carolina and Arizona to Teva.

The announcement of the joint venture earlier this year took the markets by surprise, as the OTC drug market had never before been a core business of Teva. "The global healthcare consumer market is estimated at $200 billion," Yanai told "Globes". "The OTC segment of this market, in contrast to vitamins and nutritional supplements, is a full pharmaceutical industry, subject to regulatory approval."

Yanai points to several factors that will drive the OTC market in the coming years. "The middle class is growing rapidly, and people with greater awareness about health and quality of life want to be more involved in the purchasing, and they have buying power. This consumer class is also seeking a shopping experience. Instead of waiting for a doctor, tests, obtaining a prescription, and then waiting at a pharmacy, things are much simpler for OTC products."

Yanai adds, "Another element is government budgets. Although direct purchasing ought to be more expensive because there is no subsidizing group, such as an HMO, from an economic perspective, there are cost savings in time for consumers, doctors, and pharmacists. Government costs are also lower, so there is an incentive driving the market forward. For all these reasons, we expect the OTC market to grow.

"Until now, Teva and Procter & Gamble's OTC businesses did not create value, but were part of the sales turnover. Our link-up has the immediate potential by combining our product lines, supplemental geographical deployments, and more sales channels. For example, until now Teva has not sold to retailers, and Procter & Gamble did not sell to pharmacies."

"Globes": Which drugs are targeted for development and marketing by the joint venture?

Yanai: "There is a very large upside from the switch of prescription products to OTC products. More products will be switched in the coming years. For example, there is no reason why cholesterol-lowering statin drugs, which almost any adult can take, shouldn’t be an OTC product. Not to mention other products. This is basically the venture's good news."

The joint venture with Procter & Gamble is one more item in Teva's strategic plan to diversify and expand operations to reduces Teva's current dependence on its sole brand drug, Copaxone, and to prepare for the day after the multiple sclerosis drug. The strategy includes expanding to new markets, one of which is Russia.

Looking to Russia

Six weeks ago, Teva announced its initial $50 million investment to build a production plant in Yaroslavl. The plant is due to produce two billion tablets a year when it comes on line in 2014, and it will employ 200 people. Teva also plans to invest $300 million in production and R&D in Russia over the next few years. Russian Prime Minister Vladimir Putin was present at the plant's cornerstone laying ceremony.

Construction of the Yaroslavl plant fits in with the Russian government's program to encourage medical production and development in the country, and Teva will likely participate in the second, R&D, stage of the program. "There are tax breaks - that isn't an Israeli invention, and the breaks in most of the world are better than in Israel. Every country offers tax breaks to attract foreign investment," says Yanai, explaining the benefits for the company.

"The Russian market has great potential. It's a Great Power, an emerging market, with a population of almost 150 million, and an improving economic situation thanks to its natural resources. The market potential is in the billions."

With such potential, Teva naturally has something to strive for. Its current sales in Russia total $500 million a year, and its generic sales in the third quarter rose 27%. In contrast to other markets where Teva's growth is based on acquisitions, its growth in Russia in recent years has been organic. Seven years ago, Teva was not among Russia's top 20 pharmaceutical companies; today it's the fourth or fifth largest company in the sector. Novartis AG (NYSE:NVS; LSE: NOV; SWX: NOVZ) is no. 1.

Will Teva acquire Russian companies?

"It's very hard to answer that. Acquisitions are made when there's a strategic decision to enter a market, or if there's an extraordinary opportunity. At the moment, there are no plans to make an acquisition because we're satisfied with our organic growth in Russia, but the option is open."

Expanding in Japan

Three years after setting a Japanese joint venture with Kowa Company Ltd., Teva-Kowa Pharma, Teva bought out its partner for $150 million in September to pursue the venture alone. Two months earlier, it acquired Taiyo Pharmaceutical Industry Co. Ltd. for $934 million in cash.

Yanai concluded, "When we entered the market, we wanted the help of a local party, which understands the market. After a couple of years, we wanted to make an acquisition to make a big move in the market, which is the second largest in the world. Our partner, for its own reasons did not want to participate, so we made the acquisition alone. We wanted to buy out Kowa in the joint venture because it's hard to carry out separate operations, one with a partner and one without, and obtain the maximum synergy. The separation was amicable."

Published by Globes [online], Israel business news - www.globes-online.com - on November 3, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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