4 min readIncreasing M&A Activity in the Generics Industry: What happens next?

Generic pharmaceuticals are enjoying a dream run in worldwide pharmaceutical markets as strong competition to branded pharmaceuticals. The forces at work are similar across the globe – increasing healthcare costs and aging populations. If initiatives from European governments are creating one set of opportunities for generics manufacturers, developments in the overall pharmaceutical market are creating another. Here, on one hand, a number of blockbuster drugs are expected to go off patent. Even with heavy price erosion due to intense competition, this is expected to create an immense opportunity for generics manufacturers.
Frost & Sullivan estimates that the western European generics market was worth approximately $17 billion in 2006 and is expected to grow at a compound annual growth rate (CAGR) of almost 11.1 per cent from 2006 to 2013. This means it will generate revenues of $36 billion in 2013. The U.S generics market was worth around $21 billion in 2006. Overall, Frost & Sullivan forecasts revenues to grow to $41 billion in 2013 at a CAGR of 9.5 percent.

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.

Target Company
Acquiring Company
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

In the last year we have seen the acquisition of generics companies by large pharma companies. This trend will continue over the next few years. For example Daiichi Sankyo has acquired a majority stake in India’s largest pharma company (Ranbaxy Labs) and sanofi-aventis has made a major move into generics by acquiring the Czech drug maker Zentiva.

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

Generics companies are likely to face increasing pressure if the trend of mergers and acquisitions continues into the future. Some key strategies for generics companies include broadening their product lines and increasing their focus on biogenerics. Some potential strategies are shown in figure 2.

  • Acquire/collaborate with another generics company
  • Concentrate on specific niche products/areas
  • Target hard to make products e.g. patches
  • Develop a branded drug portfolio
  • Ensure a broad product line
  • Continue to cut costs in manufacturing
  • Increase focus on biogenerics
  • Form drug delivery partnerships
Figure 2: Potential Strategies for Generics Companies

A strong API backbone is a vital component of a successful growth strategy for most large generic pharmaceutical companies, usually achieved through acquisitions and backward vertical integration. Most of the API supply is drawn from low cost manufacturing locations that provide companies the leeway to compete in a highly price driven environment. Teva is an example of a company that has successfully built up a strong API backbone through a mix of organic and inorganic growth strategies that drives its multi-billion dollar generics business. Generic pharmaceutical companies looking to build a branded drug portfolio are therefore becoming a common trend. Past records suggest that generic pharmaceutical companies such as Teva, Watson and Barr have been successful in diversifying their business. The next phase of consolidation could possibly be amongst specialty pharma, generics and drug delivery companies, which would offer them a combination of strength in manufacturing, low-cost sourcing and niche positioning.

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.

Conclusions
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.

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