A shaky future for US companies?
In earlier articles, I have mentioned the wave of consolidation that has been sweeping over the world generics industry in the last few years.
Companies such as Teva and Sandoz have made major acquisitions around the world, as have several Indian companies and just recently the Icelandic company Actavis when it acquired the generics business of Alpharma. Everybody, it seems, is pursuing a strategy of growth through overseas acquisitions – except the US companies.
Looking at the US market specifically as it was at the end of 2004, the market leader Teva is Israeli. The second placed company Watson as well as Mylan and Barr are indeed all American domestic companies – but where are they on the world generic stage?
Go a little further down the ladder of leading generic companies in the US market and names like Sandoz (Swiss owned), IVAX (now Israeli owned), Alpharma (Icelandic owned) and Merck (German) appear. There are indeed still many US owned companies in the market but the overseas presence is very significant and, of course, many more companies are setting the sights on a US market entry.
Foreign ownership of the leading generic companies in any country is nothing unusual as the growing internationalisation of the generic industry means that most of the top ten companies in countries such as UK, Netherlands for example are foreign owned. This form of consolidation is what has brought about the emergence of generic “superheroes” such as Sandoz and Teva and is in effect a version of the Darwinian law of the survival of the fittest.
A major driving force behind this consolidation has been the need for rapid growth combined with the opportunity to make a relatively easy (if costly) entry into overseas markets. There are other factors that have driven the wave that have been discussed in detail in earlier articles but let us concentrate on these two particular factors and examine their relevance to the US situation.
Interestingly, it was the US generic companies themselves that were the first to adopt the strategy of expansion through acquisition in the early 1990’s as the US generic industry really started to move. The provisions of the Hatch-Waxman Act of 1984 stimulated its initial growth during the 80’s, but by the early 90’s, organic growth was not enough and so the bigger companies started to buy up the smaller companies. Mylan, Watson and Barr led the way but their focus was entirely on the domestic market with targets such as Bertek, Circa, Duramed, Hickam, Makoff, Royce, Somerset, Penederm and Schein being swallowed up.
The only exception to the US-focussed acquisition trail was IVAX, which did make acquisitions in Europe and South America, although another exception joined it recently when Perrigo bought the Israeli generic company AGIS.
Apart from this, the leading US domestic generic companies have used acquisition to fuel domestic rather than international expansion. This must raise the question of whether they have thereby left themselves rather vulnerable and so liable to succumb to market and competitive pressures.
As things stand, these companies are now completely dependent on one market – the US generic market. Since the market was valued by IMS at around US$ 18 billion this is perhaps nothing to worry about. However, the market is also proving increasingly attractive to all sorts of overseas, and thus lower-cost, manufacturers. The numbers of these competitors will inevitably rise and as they compete more vigorously on price, how will the domestic companies cope?
In addition, it is no secret that voices are being raised in the US at both public and governmental levels, asking why US drug prices are so high and calling for them to be controlled. So far, Big Pharma has managed to fight off these calls for lower prices but eventually they must succumb to the same sort of controls that have been implemented across Europe and elsewhere. When this happens, there will inevitably be knock-on consequences for the generic industry.
If the prices of the big brands fall, so will the prices at which generics can launch, thus further eroding the profitability of the domestic manufacturers. And what if other European cost control methods such as reference prices and generic substitution are introduced thereby further pushing down generic prices?
All these factors seem to suggest that the remaining independent US generic manufacturers will find the going harder and harder in the coming years. This must inevitably call into question their continuing independence.
Teva’s acquisition of IVAX has demonstrated quite clearly that size is no defence against being acquired. So it is now worth speculating about how long Mylan, Watson, Barr and other smaller US companies can remain independent and who will eventually be the suitor that seeks their hand in marriage.
Peter Wittner
January 2006
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