US generics – evolution or revolution?
Having looked at European generics last month, it seems a good idea to glance across the Atlantic and see how the US market is getting on.
Clearly, major change is affecting the market or, more specifically, the major players in the market. Watson’s proposed acquisition of Andrx for US$1.9bn and Teva’s actual acquisition of IVAX are changing the face of the market and will have an impact on it for some time to come.
In the case of Teva, the motive is the same urge to grow through acquisition that has driven them for several years. On the other side of the deal, IVAX’s reasons for agreeing to the deal may well have been concern that they were running out of steam. The latest results for the combined company showed Teva’s 1st Quarter sales up 28% to US$1.67 bn, but disappointing sales from IVAX at US$ 329m. Indeed some observers are questioning whether, with performance like this, Teva has paid too much for IVAX.
Is this a case of Teva at last biting off more than it can chew? Based on prior experience, it would seem unlikely since the company has been so successful in absorbing all its previous acquisitions.
In respect of Watson, the motive seems to be a case of finally realising that being totally US dependent was a strategic liability. In April Watson bought the Mumbai-based Sekhsaria Chemicals, and plans to establish a generic product development centre there, having previously bought Dr Reddy's manufacturing plant in Goa, which it is now using to produce solid dosage generic products for the US.
Clearly, Watson felt that even this did not give it enough mass to service in the present more competitive environment and so moved to acquire Andrx, thus making it the third largest generic company in the US market in terms of prescriptions. The motivation for Andrx in agreeing to the deal must have been the major difficulties that they encountered during 2005.
Their sales for 2005 fell to US%1.042 bn compared to the US$ 1.145bn they achieved in 2004 and this reflected a trend that had prevailed in each of the 4 financial Quarters of 2005. Clearly, the company must have doubted its ability to survive alone with this sort of performance.
Perhaps there is a sign of the times here.
If a company with turnover in excess of US$1 bn feels that it is too small, then what about those that are smaller still? Does this mean that we are now due to see a period of major consolidation in the US market?
The climate has certainly become more difficult for US generic firms who are encountering ever increasing pressure on prices and ever more intense competition from existing competitors and new competitors from outside the US. In addition, the new Medicare programme for 2006 will affect the generic companies but they do not yet know to what extent.
The sale of Andrx because it no longer feels able to compete is likely to be only the first such incident with more to follow. The winners will probably be those companies that are “vertically-integrated” and control their own APIs to give them an extra competitive edge.
This is where non-US companies such as Teva, Sandoz and, of course, the Indian companies enjoy an advantage. There are precedents for a significant degree of foreign ownership in Europe where for example the top ten in the UK and the Netherlands are all foreign owned.
The question that it now seems relevant to ask is this. Is the US generic market starting on a period of evolution that will result in a smaller number of bigger domestic players? Or will it undergo a revolution through more and more domestic US companies becoming foreign owned?
Peter Wittner
May 2006
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