Will mergers and acquisitions heat up in 2008?

August 6, 2007

This article for the generics II supplement examines mergers and acquisitions as well as which brand patents are expiring.

Compared with the hectic pace of the past couple of years, the generic industry slowed down on merger and acquisition (M&A) activity in 2007.

Last year was big for M&As among the generic giants, and a lot of blockbuster brand names came off patent. The U.S. generic pharmaceutical market experienced double-digit growth between 2001 and 2004, due primarily to revenues from the patent expirations of blockbuster drugs.

Despite the slowdown in M&A activity this year and lack of blockbuster patent expirations, the generic market remains strong. According to IMS Health, the total generic market in this country went from 49% of all prescriptions sold in 2000 to 64% at the end of the first quarter of 2007-representing 20% of all dollars spent on drugs. It went from 60% to 63% in the past two years alone.

Mylan move

The biggest consolidation deal in the industry this year so far was in May when generic manufacturer Mylan Laboratories, Canonsburg, Pa., won out over significant competition to purchase Merck KGaA, Germany, paying $6.7 billion. "That was a big deal, a big move for Mylan," said Steever. The purchase makes it the fourth-largest generic company in the world, moving up from sixth. Last year, the company paid $736 million to acquire a 71.5% interest in India's Matrix Laboratories.

The three biggest generic manufacturers are Teva Pharmaceutical Industries (Israel), Novartis' Sandoz unit (Switzerland), and Barr Pharmaceuticals (United States).

The Mylan-Merck deal is similar to other huge mergers of recent years. In 2005, Teva bought Miami-based Ivax Corp. for $7.4 billion. In 2006, Barr, based in Woodcliff Lake, N.J., absorbed the Croatian biogeneric company Pliva for $2.5 billion. And in 2006, Watson Pharmaceuticals, based in Corona, Calif., bought Andrx, based in Davie, Fla., for $1.9 billion.

Merck KGaA is a chemical and pharmaceutical company based in Darmstadt, Germany. It is a separate company from Merck & Co., based in Whitehouse Station, N.J. The companies split nearly a century ago as a result of anti-German sentiment during World War I. Its generic pharmaceutical unit has more than 400 products, with 2006 revenues of $2.45 billion.

The Mylan-Merck KGaA merger created a company with a combined revenue of $4.2 billion. "The deal extends Mylan's reach, making it a significant global player," said Steever. "There's no doubt that the deal secures Mylan's position, but it did raise some stockholder concerns about whether the company overpaid because of the steep competition and whether the company is overextended since the Matrix purchase." Mylan stock dropped 13% just days after the deal.

That kind of fluctuation represents some hard truths about the generic industry, said Thwaite and others. "It is a tough industry because the profit margins are so tight," Thwaite said.

Tight profit margins are, in fact, a driving force behind consolidations, allowing companies to cut costs and improve profits. Competition also requires nearly constant attempts to overturn drug patents-and those attempts are a legal minefield.