Teva Aims at Baby Formula Market

Foray into the market threatens dominance of Materna, Similac.

Teva Israel has been working on an arrangement with Nutricia, Europe's foremost maker of baby formulas under the brand name Numico, for marketing its products in Israel within the next year. Nutricia, founded 100 years ago in Holland and a subsidiary of France's Danone group since 2007, has lately expanded into developing, producing and marketing more advanced products for infants, as well as adults suffering sensitivities, allergies or other medical conditions.

Shlomo Yanai.
Dan Keinan

Teva's foray into this market threatens the dominance of two products in the Israeli market: Materna, with a 56% share, and Similac, with 42%. The total market accounts for annual sales of NIS 550 million. Similac is a product of the giant American pharmaceutical company Abbott Laboratories and is distributed locally by ProMedico. Materna is a "home-grown" product based in Israel's centrally-located Kibbutz Maabarot.

The Israeli food conglomerate Osem Investments succeeded in a growth strategy of gobbling up a series of kibbutz-based industries over the years. In December 2009, Osem and its parent company, Nestle, paid Kibbutz Maabarot NIS 269 million for 51% of Materna's fixed assets and goodwill. In addition to its 56% share in the formula market, Materna enjoyed a 67% market share in baby cereals last year. Its EBITDA profit for the year was NIS 62 million, giving it a 20.3% margin on sales. In contrast, Osem's EBITDA margin for the same year was just 16.4%.

Considering its potential to rationalize Materna's marketing and distribution through its economies of scales in these areas, and the high profitability and concentration of the baby formula market, the deal looked like a good bargain for Osem. The company took on the risk that this market anomaly wouldn't persist for long, and that another strong marketing company would look at taking a big chunk out of market share. Teva could be the company to achieve this.

Teva Israel, the local marketing arm of Teva Pharmaceuticals, has sales turnover of $500 million a year. It specializes in marketing prescription and non-prescription drugs, medical instruments and equipment, and distribution and logistics services through its SLE subsidiary. SLE is the largest distribution company in Israel for drugs, vitamins, food additives and consumer goods.

Another likely entrant to the Israeli formula market is Perrigo, which earlier this year acquired PBM, a private label manufacturer and the largest producer of infant milk substitutes in the United States. Perrigo has been hinting that it intends to expand PBM operations into new markets, including Israel.

In other Teva news, setbacks for generics

The week started out badly for Teva in the courts. On Monday, the U.S. District Court of New Jersey decided that the patent covering the drug Abilify, developed by Japanese company Otsuka and distributed in the United States by Bristol-Myers Squibb, will remain in force until April 2015. Sales of the drug, used to treat schizophrenia, amounted to $2 billion in the United States over the last 12 months. The decision was a blow to Teva and to other companies challenging the patent, including Sandoz, the generic unit of Novartis, and the Canadian company Apotex.

Then on Tuesday, the U.S. District Court of Delaware ruled that Eli Lilly's patent for Alimta will remain valid until July 2016. Alimta, used for treating certain forms of lung cancer, rang up sales of $950 million over the last 12 months in the US. Its third quarter sales in 2010 totaled $245 million, a 14% increase over the third quarter the previous year, making up 6.6% of Eli Lilly's total sales revenues in 2009.

If that wasn't enough, production was set to start at Teva's Irvine, California, plant on a generic substitute for Eli Lilly's Gemzar, a treatment for pancreatic cancer, when the patent expired on November 15. Teva received conditional approval to market its generic product upon expiration of the patent, except for the 2-gram dose version launched by Hospira. Total sales for the drug over the past year were $775 million, of which an estimated 20% were for the dosage approved for Hospira. Teva was supposed to enjoy six months of market exclusivity for all other dosages.

Because of problems at the plant, however, the U.S. Food and Drug Administration, revoked its final approval for Teva to produce the drug at its Irvine facilities, and made its approval conditional once more. The company now has an extension until the end of 2011 to get approval for producing the drug at another of its factories. If Teva misses the new deadline it might lose its lucrative exclusivity in this market.

Good news for allergy sufferers

At the annual scientific meeting this week in Phoenix of the American College of Allergy, Asthma & Immunology, Teva presented the findings from its third and last stage of trials for Qnaze HFA, a nasal spray to treat seasonal allergies. Teva showed the treatment to be effective while as safe as placebos.

Steroid nasal sprays are usually used as initial treatment for runny noses brought on by allergies. These products are currently available only as liquid spray. All dry spray formulations have been taken off the shelves following an FDA decision that the CFC gas they contain harms the ozone layer. Qnaze is based on a dry spray formulation that is considered environmentally friendly.