4 min readIncreasing M&A Activity in the Generics Industry: What happens next?
The patent expiry of many multi-billion dollar a year blockbuster drugs is expected to boost the generics market. The next five years will see more than 70 major drugs come off-patent in the major markets within US and Europe. In 2009 for example, five major drugs lose patent protection (including Prevacid) in the US and seven drugs lose patent protection in at least one of the major countries in Europe (including Nexium, Pantozol and Cozaar).
In the past decade pharma companies have been actively exiting the generics industry. During this time we have seen many generics companies using the merger and acquisitions route to gain scale and competitive advantage. Figure 1 shows some examples of merger and acquisition deals in the generics space. The acquisition of Ivax by Teva helped create the world’s largest generic drug company. In revenue terms, generics companies are still small compared to branded pharmaceutical companies. However, it is their growth rates that are most impressive.
||Stake Acquired (%)||Year
|Lek (Croatia)||Novartis (Switzerland)||99||2002|
|RPG Aventis (France)||Ranbaxy (India)||100||2003|
|Alpharma (France)||Cadila Healthcare (India)||100||2003|
|CP Pharmaceuticals (UK)||Wockhardt (India)||100||2003|
|Hexal/Eon (Germany)||Sandoz (Switzerland)||100||2005|
|IVAX (USA)||Teva (Israel)||100||2006|
|Betapharm (Germany)||Dr. Reddy’s (India)||100||2006|
|Terapia (Romania)||Ranbaxy (India)||97||2006|
|Allen (GSK Italy)||Ranbaxy (India)||—||2006|
|Mundogen (GSK Spain)||Ranbaxy (India)||—||2006|
|Hemofarm (Serbia)||STADA (Germany)||100||2006|
Figure 1: Major M&A Deals (Frost & Sullivan)
Big Pharma Re-entering the Generics Space
A key reason for pharma companies re-entering the generics space is the number of patent expiries due within the next five years. Consolidation has also been occurring within the generics sector where competitive pressures are continuing to intensify.
Another encouraging factor for the growth of the generics industry is the policies in place from governments and healthcare institutions in many countries. There is a growing trend that favours cheaper generic drugs. Therefore M&A activity in the generics space is a key strategy, particularly for those players such as Bristol-Myers Squibb whose operations have been highly dependent on innovator products. Pfizer is also expected to lose patent exclusivity on 11 drugs by 2011, highlighting the major impact of generics.
Novartis is one of the few pharma companies that has already made a move into generics in the past. This is through acquisitions. In 2003, Novartis re-branded its 14 separate generics businesses as Sandoz, and this is now one of the largest generics pharmaceutical companies worldwide. In 2005, Sandoz acquired Hexal AG, Germany’s leading generics company and Eon Labs in the US.
Daiichi Sankyo’s strategy has been to acquire the largest generics drug maker in India. This means that it can utilise Ranbaxy’s low cost research and production facilities, thereby giving it the opportunity to capitalise on the fast-expanding generics sector in Japan.
Zentiva on the other hand is a pharmaceutical company based in Czech Republic. The company focuses on developing, manufacturing and marketing modern branded low cost pharmaceutical products. It has strong positions in Czech Republic, Slovakia and Romania and is growing rapidly in Poland, Russia and the Baltic States. This move will enable sanofi-aventis to develop strong positions in eastern European countries.
Chart 1 below shows the country market share by value and volume for the generics market in Europe. In central and eastern European countries, markets such as Croatia, Hungary, Czech Republic and Poland have the highest levels of penetration due to historical factors.
The Future for Generics Companies
Generic pharmaceutical companies are constantly looking at segments within the market with limited competition and high barriers to entry. Specialty generics are a niche market segment within generic pharmaceuticals that includes products with technologically challenging formulations and where significant regulatory support is required.
Forming partnership with drug delivery companies is a strategy that generic pharmaceutical companies employ to create a technological barrier to prevent entry of competition. This is a product differentiation strategy that enables generic pharmaceutical companies to compete in a market segment with lesser pricing pressure and complements their business strategy of operating a high margin generics business.
Further consolidation is likely to occur over the coming years as companies look to achieve economies of scale. In addition, biogenerics will become important in the future as biopharmaceuticals slowly come off patent. Generics companies will be well positioned to move forward in this area. This is something that big pharma will want a slice of, especially as generics continue to eat into their market shares.