Generic consolidations create global powerhouses

The name of the game in the generic drug industry is consolidation.

“It leverages your strengths: Your ability to be first to market, your legal team and your ability to manufacture,” said Jason Napodano, senior biotech analyst with Zacks Equity Research.

“Generics is a quantity business, it’s not high-end, so if you can be the first generic drug to market, or can bring out an authorized generic, you can make some money for six months.”

“[Consolidation] is driven by drug companies wanting to expand their portfolio so they can negotiate better in terms of pricing with distributors,” said Barath Shankar, research analyst with Frost & Sullivan. “More products in their portfolio means they’re more likely to get stocked and have a better [drug] supply so [they] are of more interest to distributors.”

The biggest consolidation this year has been Mylan’s $6.7 billion purchase of the generic business of Merck KGaA in May to create a vertically- and horizontally-integrated player.

Teva’s generics sales double that of next-biggest player2006*Does not reflect Mylan’s recent acquisition of Merck’s generics divisionSource: IMS Health, National Sales Perspective, Dec. 2006
 
Sales of unbranded generics by leading corporationsU.S. sales in millions% share% change
U.S. industry$27,41010.0%22.4%
Teva5,55120.337
Sandoz (Novartis)2,6349.6–2
Mylan*2,1457.87
Watson1,8326.711
Greenstone (Pfizer)1,5855.8120
Apotex1,5215.5163
Par1,2094.414
Barr Labs (including Pliva)9073.38
Boehringer Ingelheim9063.333
Hospira6532.47
Top 1018,94269.127.3

Had it been formed earlier, the combined company would have had revenues of approximately $4.2 billion, EBITDA of approximately $1 billion and approximately 10,000 employees in 2006, making it the world’s third-largest generic company (after Teva and Sandoz) and a significant player in the top five global generics markets.

As anticipated by analysts, the merger brings with it a diversified portfolio. “The combination with Merck generics will significantly extend our range of therapeutic categories and dosage forms, and bring us a number of new, differentiated products and successful franchises,” said Robert Coury, Mylan’s vice chairman and chief executive officer.

Along with the consolidation of drug companies, there is also more vertical consolidation, Shankar pointed out, so that pharmaceutical companies can source active pharmaceutical ingredients within their own companies, another tactic that helps reduce prices.

This is indeed the case for the new Mylan-Merck combo. Last year Mylan purchased a 71.5 percent stake in Matrix Laboratories, the world’s second-largest API manufacturer. “Together, Mylan and Merck generics will benefit from significant savings driven by Matrix’s low-cost, high-quality API capacity and the benefits of manufacturing high product volumes for multiple markets around the world,” Coury added.

Mylan also gains some geographical depth with the acquisition. Mylan’s presence to-date has been almost solely in the United States. It now is combined with Merck’s business, of which about 42 percent comes from Western Europe, 33 percent from North America, a further 23 percent from Asia, Africa and Australia combined, and 23 percent from Latin America.

“Mylan had very limited reach in Europe, but Merck has established relationships there so this helps give [Mylan] more access,” Shankar said.

Other activity in the consolidation field includes Teva’s $7.4 billion acquisition of Ivax at the beginning of 2006, forming the world’s largest generics company. Again, the benefit of this merger, according to analysts, was that they barely overlapped, geographically.

Also last year, Sandoz acquired two companies: Hexal in June and Eon Labs in August.

Sandoz is the generic arm of Novartis, and it has Omnitrope, the only product approved as a ‘follow-on’ drug (as opposed to a biogeneric) in the United States. Omnitrope was the first approved biosimilar in Europe, Australia and other countries as a human growth hormone. Last year Sandoz signed exclusive collaboration with Momenta Pharmaceuticals to focus on developing complex generics and follow-on biotechnology drugs.

Barr acquired Croatian company Pliva in 2006, and it’s expected that the company will be strong in developing insulin and human growth hormone. Pliva is developing G-CSF (granulocyte-colony stimulating factor) and has received European approval for generic erythropoietin.

Teva’s generics sales double that of next-biggest player2006* Does not reflect Mylan’s recent acquisition of Merck’s generics divisionSource: IMS Health, National Sales Perspective, Dec. 2006
 
Prescriptions of unbranded generics by leading corporationsU.S. sales in millions% share% change
U.S. industry2,00654.1%12.8%
Teva (including Ivax)40820.317
Mylan*24412.111
Sandoz (Novartis)1999.95
Watson1758.74
Mallinckrodt1075.315
Barr Labs (including Pliva)1025.113
Actavis824.10
Qualitest673.3–4
Par673.3–2
Greenstone (Pfizer)582.968
Top 1065375.010.6

Barr reported net earnings growth for fiscal 2006 of 56.5 percent year-on-year, to reach $336.5 million. This compares with net earnings of $215 million in fiscal 2005.

Generic sales for the Wood-cliff Lake, N.J.-based company for fiscal 2006 were $839 million, a 12 percent increase over fiscal 2005, when generics generated revenues of $751 million. The company currently markets 75 generic products in approximately 100 dosage forms and strengths. Its strongest product lines are in oral contraceptives and warfarin sodium. Last year it also launched an authorized generic version of contraceptive Seasonale (levonorgestrel/ethinyl estradiol).

The future could bring more consolidations involving Indian and Chinese generics players, Shanker said. “Indian companies are aggressively increasing their footprint, and China has a number of FDA-approved plants, but we won’t see much from them [China] for some years. Indian companies are looking to expand their business at the global level so are acquiring companies all over the world.”

The advantage to American drug companies of consolidating with the Indian players is the far lower cost of production in India, pointed out Napodano.

One of these companies is Wockhardt, which already has biologic drugs on the Indian market, but the company is expected to partner with drug companies in Europe and the United States. when a pathway is created for the approval of biogenerics.

The company’s portfolio includes ondansetron Injection, cefotaxime Injection and clarithromycin tablets.

Another is Ranbaxy, whose plans involve growing organically, through new product launches, and inorganically, through acquisitions of companies and/or products.

“Ranbaxy is actively seeking acquisition opportunities in the U.S., Europe and the emerging markets,” said spokesman James Meehan. “We will look at target companies based on the value and the synergies that can be unlocked from such an agreement.”

In the last two years, Ranbaxy has purchased nine companies, the largest being a $324-million acquisition of Romania’s Terapia.

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