Recent convention in deals involving Japanese companies have seen the traditionally conservative businesses forming alliances with western companies to prop up falling drug sales and fight off generic competition. Today, Israeli company, Teva Pharmaceutical Industries, reversed that trend with the unveiling of a partnership with private generic company Kowa.
Teva’s 50/50 joint venture, due to start in early 2009, is ambitiously targeting sales of $1bn by 2015 and comes as the country is settling into the healthcare reforms instituted by the government to cut its burgeoning healthcare bill.
The key priority has been reducing the annual price of drugs, which has seen the government introduce biennial cuts in branded drug pricing. More importantly, it has resulted in a pledge to increase the percentage of generic sales by prescription volume from the current 17%-18% to 30% by 2012. This would account for approximately 10% of the whole market.
Where there is a will there is a way
To help in this task and get round the suspicion of generic drugs, since April doctors in Japan have had to actively request branded drugs, or generics are automatically doled out. Pharmacists are also being encouraged to stock copy-cat drugs and promote their use by patients through a system of payments for generic stock levels and generic prescription sales.
With such political will to grow the market, it is unsurprising that Teva, the world’s biggest generic drugmaker, is stepping up its presence. The group will be looking to leverage its expertise in research and development, marketing and manufacturing to benefit from this policy.
Its move could worry the current two biggest incumbents in the market, Nichi-Iko and Sawai Pharmaceuticals, who between them have respectively a 9% and 10% share of the market, according to Credit Suisse. So far they have been the biggest beneficiaries of the government changes, with a majority of generic orders going to the two companies.
But the fact that the two biggest players only account for 19% of the market highlights just how fragmented the sector is. Even if the number of companies is stretched to incorporate the top four generic players, including Mylan Seiyaku and private company Taiyo Yakuhin, their 2007 combined sales of ¥130bn represents only 30% of the entire market, leaving another 70 companies account for the remaining share.
With its alliance with Kowa, Teva could be looking to kick start further consolidation, thereby establishing a significance presence in the sixth biggest generic market in the world.
But Teva is not alone in its ambitions to grab a slice of what is a very attractive sector. In 2007 Lupin acquired Kyowa Pharmaceuticals and Mylan managed to get a foothold in the market with a Japanese subsidiary when it bought Merck KGaA’s generics business. Ranbaxy also has collaboration agreements with Nippon Chemiphar and recently became the first foreign company to have a generic approved by the Japanese regulators.
Sandoz and Torrent, like Teva, have also established subsidiaries in the country. As such, Teva’s rivals are likely to be watching its move with interest and could make similar overtures to local companies.
Bigger is better
Alongside the fear of increased competition, what could also drive consolidation both among Japanese generic groups and through other cross border deals are the benefits of scale.
Being bigger often equates to significant cost savings through lower costs of goods, lower sales and marketing expenses, and importantly lower raw material costs through bulk buying. Headcount reductions can also be achieved by eliminating duplication among sales teams.
Additionally, according to Goldman Sachs, the government is piling on the pressure to make generic companies supply all available doses and formulations of the drugs they produce and to sell them for at least five years. This could be a hard ask for some of the smaller players, who only have a few products in their portfolios.
So while Teva might be one of the first to bring scale to the Japanese generic market, it is unlikely to be the last.