Teva Heads to Japan
By
Brian Orelli, Ph.D.
September 25, 2008
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Teva Pharmaceuticals' (Nasdaq: TEVA) plan to conquer the world seems to be coming along nicely. It'll make inroads into Europe with the acquisition of Barr Pharmaceuticals (NYSE: BRL), and now it's moving into Japan.
The generic-drug maker is banding together with Japanese Kowa to form Teva-Kowa Pharma -- wonder how long it took to come up with that name? The 50/50 partnership seems like a good move for both companies; Teva brings its generic-drug know-how, while Kowa contributes its knowledge of the regulatory system in Japan and a recognized brand name.
Japan is a relatively untapped generic-drug market. About 17% of prescriptions written in Japan are for generic drugs, compared to more than 50% in the U.S. The Ministry of Finance is working to increase that to 30% by 2012 to curb health-care spending, so the expanding market should help the companies reach their goal of $1 billion in sales by 2015.
Like Wal-Mart Stores (NYSE: WMT) and Costco (Nasdaq: COST), selling generic drugs is a low-margin business where bigger is almost always better. By adding another region, Teva can sell additional products it was set up to make anyway and spread out the fixed costs, like research and development, over a larger revenue stream. The resulting lower costs per pill should allow it to be more competitive against other big generic-drug companies like Mylan (NYSE: MYL) and Novartis (NYSE: NVS) and wipe the floor with smaller companies like Watson Pharmaceuticals and Dr. Reddy's Laboratories (NYSE: RDY).
While Teva's prospects look good, now may not be the best time to be jumping into its stock. Investors have priced Teva at a premium -- somewhat deserving given the aforementioned wiping of the floors -- but there are some unknowns hanging over its head. For instance, will its patents on Copaxone hold, and how effectively can it integrate Barr, a company with about a quarter the revenue of Teva?
If it can get through those unknowns and hit its goal of $20 billion in revenue by 2012, its stock will likely beat the market from here, but that's a lot of ifs, and investors looking for a value play will have to look elsewhere.
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