P&G, Teva Form Venture to Market OTC Drugs

P&G, Teva Form Venture to Market OTC Drugs

Procter & Gamble Co. and Teva Pharmaceutical Industries Ltd. plan to form a joint venture that combines their over-the-counter drug businesses outside North America, as both companies seek to expand their consumer health-care businesses.

The venture merges P&G brands like Vicks, Metamucil and Pepto-Bismol, with Teva's over-the-counter pain medicines, cold/cough drugs and digestive treatments. Sales of those products totaled more than $1 billion in the markets included in the joint venture, and the two companies said they envision sales of up to $4 billion by the mid to later part of the decade.

The plan also brings together P&G's brand and retail strength with Teva's pharmacy, distribution, and manufacturing presence. It is designed to tap into the needs of an aging population, along with a coming wave of patent expirations across the branded pharmaceutical business.

Teva is the world's largest generic drug maker but hasn't focused on private-label branded products in the past. P&G has wanted to expand its health-care presence overseas. About 75% of the consumer products company's personal health business comes from the U.S.

The partnership will transfer several U.S. manufacturing operations to Israel-based Teva, which will supply all the new venture's markets and P&G's North American over-the-counter business. P&G will own 51% of the new venture and Teva 49%.

"It is a new business model, taking the best of two market leaders to create a new leader in consumer health care," P&G Chief Executive Bob McDonald said in an interview.

Mr. McDonald estimates the total over-the counter market is about $200 billion a year in sales.

The deal is expected to close in the fall, following required regulatory clearance. Mr. McDonald said he doesn't expect any antitrust issues because the market is so fragmented. The two companies have no intention of spinning off the venture into a separate company.

The companies highlighted the opportunity for the partnership in switching prescription drugs to become over-the-counter brands, something that P&G did with stomach-acid drug Prilosec years ago. Mr. McDonald declined to comment on specific drug targets for that strategy but said "we obviously know the drugs that are coming off of patent."

The venture's portfolio will include more than 1,500 pharmaceutical products from Teva's portfolio that could potentially be switched to over-the-counter and made into new brands. The companies said governments, in an attempt to lower their health-care spending, may provide over-the-counter access to more prescription drugs because it transfers the costs directly to the user.

Although P&G's existing brands in North America are excluded, any new businesses created in North America would be part of the joint venture. Mr. McDonald said the venture didn't include P&G's North American over-the-counter operations because that portfolio is "pretty well-developed" and doesn't have the "growth obstacles" that are seen overseas.

"We really do believe that this is an accelerant for us in all markets," Mr. McDonald said. He expects the venture to add $500 million to $600 million in sales for P&G in its first year of operations and will be neutral to net income.

Shlomo Yanai, Teva's president and chief executive, said it should add about 50% to last year's $650 million in sales from over-the-counter products for 2012. Part of those gains will come from Teva's manufacturing of the products that it will then sell back to the venture.

Morgan Stanley analyst David Risinger said the deal was positive for Teva because branded over-the-counter drugs are more attractive than generics, "particularly in emerging markets like Brazil and India with high economic growth and consumers who look favorably upon American brands."

The companies have signed a master agreement and are completing negotiations on a series of service agreements. Upon closing, P&G will transfer certain over-the-counter operations in North Carolina and Arizona to Teva.

The venture will be based in Geneva, Switzerland, and led by P&G's Briain Debuitleir as CEO. He will report to a board of directors overseeing the operation. Markus Xander from P&G will serve as chief financial officer, and Teva's Eli Shani will be chief operating officer.

Mr. Yanai declined to provide details on the profit margins for the business but said it generally ranged from 20% to 30% depending on the brand and market leadership.

Mr. McDonald and Mr. Yanai said there won't be any major costs to forming the partnership.

Teva Chief Financial Officer Eyal Desheh said the gains from the partnership are separate from the acquisitions needed to make its 2015 revenue goal of $31 billion.

"This will enable us to focus on our core business of generic and branded prescription products," he said.

Written by Thomas Gryta http://online.wsj.com/article/SB10001424052748704425804576220410099729714.html