Generic superheroes
The biggest news on the generic front during the last month must surely have been the acquisition by Novartis, through its Sandoz generic subsidiary, of the German number 2 generic company, Hexal and the US company Eon Labs.
In a press release following the announcement of the purchase, Novartis chairman and CEO Daniel Vassella explained the logic of the acquisition as follows: "The acquisitions of Hexal AG and Eon Labs will significantly strengthen our geographic presence and product portfolio, our development and registration capabilities, and increase our scale to rapidly bring a broad array of generic products to patients"
All this is certainly true, but does it represent the entire rationale for the investment? Perhaps there is a little more to this than first meets the eye, at least in terms of Novartis's motives.
Examining their 2004 Annual Report, we find that Novartis commented, "Following our strategy we pursue organic growth complemented by external growth. In 2004, we participated in the ongoing consolidation of the generics industry by acquiring Sabex Holding in Canada and Durascan in Denmark".
Later on, it also observed "Sandoz has reached a No. 2 global ranking - and is closing in on its goal of generic industry leadership". Novartis has certainly made no secret of its ambitions to become the industry leader, but obviously it is too sensible an organization to buy an unsuitable partner merely to satisfy its ambitions to become Number 1. Nevertheless, it is tempting to ask if this is perhaps the real motivation behind the acquisition rather than the desire to add some products to its portfolio.
The last few years have seen the company make a string of acquisitions all of which have helped it to increase its presence in the generics domain. Companies wanting to grow in the generics field have a number of options of which the principal alternatives are:-
a) register products in as many countries as possible and set up subsidiaries to market them or
b) buy companies already active in generics in as many countries as possible.
Each of these has its advantages and compensating disadvantages. Alternative (a) is relatively inexpensive but slow; (b) is much quicker but extremely costly.
It is interesting to note that both of the "Generic Superheroes", Sandoz and Teva long ago realised that growth required expansion abroad. This is quite logical, as the population of Switzerland is 7.5 million and that of Israel 6.2 million so becoming the biggest in the local market would still have left both as pretty small fish in the worldwide generic ocean.
Contrast this with the almost total absence from the international scene of any of the major US domestic generic companies apart from IVAX. This is a surprising phenomenon given how widespread is the presence of their branded US counterparts and how powerful they are internationally. Perhaps this is an issue worth exploring at more length in a future article.
Both generic giants also realised that expansion within a relatively short time scale required not just acquisitions but, more importantly, acquisitions in other countries. Teva started first in 1986 with the US manufacturer Lemmon supplemented by other acquisitions in the US and Europe. Novartis followed a decade later by buying the network of Biochemie in Austria to supplement its American Geneva Pharmaceuticals and then adding on a variety of smaller generic manufacturers around Europe and subsequently re-branding its empire under the old "Sandoz" banner.
Returning to the Novartis Annual Report, another interesting phrase used in the report spoke of "the ongoing consolidation of the generics industry", and this point is perfectly true. The number of players is indeed decreasing because the competitive nature of generics means that from time to time some companies will give way under the pressure. Some of the weaker members of the industry will disappear in a truly Darwinian race for the survival of the fittest as the squeeze on profits from plummeting generic prices deprives them of the financial food that they need to survive.
Using the Darwinian analogy, Sandoz and Teva seem to have emerged as the most successful predators but it seems unlikely that they will want to pick off any of the weaker players. These casualties would add little to their already successful businesses and can be left to weaker generic predators. The targets are far more likely to be those that would either add value through specialised technology or by giving access to a new geographical area where they are currently weak.
It will be interesting for those sat on the generic sidelines to see if Teva will be content to be number two in the generic race or whether it will feel a need to leapfrog Sandoz by another takeover. One business area where this might occur is in Biogenerics, which is as yet an industry and indeed technology in its infancy.
Teva's results for 2004 also show that 63% of its sales came from the US, 26% from Europe and only 11% from the rest of the world including its own domestic Israeli market. This suggests that the alternative area where it might be looking for further additions to its stable is a geographic one - perhaps in Asia. It would certainly make sense for the company to have a significant presence in India or Japan.
Peter Wittner
March 2005
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