Suppliers counteract generic margin compression with targeted mergers, acquisitions
By adding complementary specialty medication offerings to their generic drug businesses, manufacturers can add instant value and counteract the margin compression that is currently occurring as a result of high generic drug utilization.
As growth prospects in the generic sector wane, Pharma will look to complex specialty products to provide some financial stability and boost earnings. New market entrants with very few competitors are ideal candidates for large generics firms. Many firms have already picked up on this trend; Bloomberg estimates that the amount spent on specialty pharmaceutical deals in the past year has totaled nearly $60 billion.
In addition, increased margin compression could be a consequence of changing generic drug sourcing practices, recent wholesaler agreements and contract arrangements between Walgreens Boots Alliance Development and AmerisourceBergen, McKesson and Celesio, and Cardinal and CVS Caremark.
“Several factors, including acquirers’ desire to offset slower organic growth and margin compression in their generic drug businesses, are driving the current deal-making,” said Jessica Gladstone, VP and senior credit officer of Moody’s. “Companies also are looking to reduce their effective tax rates and drive earnings accretion.”
One of the most recent transactions in the generic/specialty sector is Mallinckrodt’s announcement about the purchase of Questcor Pharmaceuticals for $5.6 billion, which follows their Cadence Pharmaceuticals acquisition last February. Other notable transactions include Mylan’s purchase of Agila, Actavis’ deals for Warner Chilcott and Forest Labs, Valeant’s buy of Bausch & Lomb, Perrigo’s purchase of Elan, Endo Pharma’s acquisition of Paladin Labs, and Par Pharma’s play for JHP.
Another influence driving acquisitions is the reduction of effective tax rates, according to the Moody’s report, “Rising M&A Among Generic Drug Makers Increases Uncertainty for Creditors”. It states that pharmaceutical manufacturers acquire foreign companies in order to be “redomiciled” into lower tax jurisdictions. Such tax inversions as these are especially attractive to generic pharmaceutical manufacturers because “these companies have limited opportunities to place intellectual property assets in off-shore tax jurisdictions.” In short, overseas acquisitions can expedite the inversion process, saving companies money much more quickly.
“There is a land grab occurring in the specialty pharmaceutical space,” Michael Zbinovec, senior director of corporate finance for Fitch Ratings, told Drug Store News. In addition to attempting to lower tax burdens and increase shareholder profitability, drug makers are expanding their geographic presence by acquiring assets in new territories, he noted. “Companies are purchasing new medicines to bolster their current drug portfolios and offer a more comprehensive product offering to third-party payers.”
Many of the challenges associated with the adoption of this type of acquisition strategy are primarily related to deal execution, as integration activities will be significant, added Jacob Bostwick, director of Fitch Ratings. “Another potential problem could be patent cliffs (i.e., Teva’s Copaxone) — though for now, for specialty drugs, these are more appropriately called patent ‘slopes,’” Bostwick said. “Having significant exposure to relatively steady top-line and cash-flow producing generics businesses should help offset the risk from patent expiries over time.”
Overall, it will be favorable for generics firms to add specialty drug companies, Bostwick concluded. “Diversifying their business models away from increasingly commoditized generic drugs and adding presence in the fast-growing and much higher-margin specialty drug space should aid margins, cash flows and growth prospects,” he said. “Opportunities to leverage specialty R&D for the development of biosimilars in the medium-to-longer term also are compelling.”
Discovering the beauty within
Walgreens is on a mission to go big in beauty. With a robust army of 26,000 beauty advisers, in-store Look Boutiques and the Boots No7 line rolling out to more stores, Walgreens is well on its way. Now that effort has shifted into high gear as the retailer debuted in March an exclusive beauty publication called Discover Beauty Within.
Lebhar-Friedman Publishing, in collaboration with Walgreens, launched the quarterly magazine — marking the first exclusive beauty publication for the mass retailer. Discover Beauty Within debuted at all Walgreens (except Puerto Rico) and Duane Reade stores at the end of March.
To celebrate the launch of the beauty publication, Walgreens executives, beauty suppliers, bloggers and fashion media gathered at the posh The Fourth in New York City on April 3 for a VIP reception. Also in attendance was Gabrielle Reece, former Women’s Beach Volleyball League star and fitness icon. Reece is featured in the debut issue of Discover Beauty Within.
During the reception, DSN sat down with Shannon Curtin, group VP of beauty and personal care at Walgreens, to talk about why Walgreens is getting into the magazine business and how Discover Beauty Within fits into Walgreens’ larger beauty vision.
To check out photos from the reception, click here.
Having fun … and kicking ass doing it
“Why do we always have to be so damn serious; why can’t we have a little fun once in a while?”
That’s what Roger Friedman, the owner of our company, has been asking me a lot lately. And he’s right. People who have fun doing what they do for a living tend to be more engaged in their work, and it shows up in the results of the operation. These companies tend to lead their competitors in areas like employee retention, customer loyalty and profitability.
Take a company like The Container Store. For me, a 45-year-old male, who enjoys lowbrow comedy, his bulldog and lifting heavy weights, a trip to The Container Store is like doing penance for my sins.
But for my fiancée — who, by the time you read this, will officially have become Mrs. Eder — a visit to The Container Store is like going to Disneyland. For the record, I hate Disneyland, too. She loves The Container Store, which I find somewhat concerning because she says she loves me, too.
The Container Store is solving problems everybody has — namely, where to put all our stuff, so that we can organize it neatly and efficiently, therefore allowing us to go out and get more stuff. Forget about baseball and apple pie; the never-ending acquisition and accumulation of more stuff is the great American pastime. Its store associates — trained experts in the fine art of harnessing steel and plastic to facilitate the putting away of any and all stuff — enable us to live the dream.
“What makes it so great?” noted Fortune magazine of The Container Store, which ranked No. 28 in the 2014 edition of its annual 100 Best Companies to Work For rankings — the second-highest retailer on the list after Wegmans. “When this storage retailer geared up for its IPO last year, it reserved an unprecedented percentage of shares (14% of the total offered) for employees to purchase. A quarter of them did — and they watched in wonder as the share price doubled on the first day of trading, from $18 to $36.”
Part of it is compensation and benefits, no doubt; part of it is the values and the culture of the company. Part of it is an investment in training and systems.
But I believe there is a simpler reason The Container Store associates are so good at what they do. Call them a bunch of storage geeks, but they enjoy what they do and they seem to love being at work. It shows up in employee engagement; it shows up in customer loyalty; and it shows up in growth. As of its most recent earnings report in January, third-quarter sales were up 7.3% overall, up more than 10% in the retail stores. And last year, it added 7.9% new jobs.
They’re kicking ass and having fun doing it.
Roger’s right. Why the hell do we have to be so damn serious all the time?
Rob Eder is the editor in chief of The Drug Store News Group, publishers of Drug Store News and DSN Collaborative Care magazines. You can contact him at [email protected].