INNsight articles by Peter Wittner, Interpharm Consultancy

I have touched from time to time on the issue of consolidation in the generic industry and it seems to be a topic that never really goes away, mainly because the process never stops.

The last time that I wrote about it in July 2005, the hot news was the creation by Sandoz of the world’s largest generic company through its acquisition in early 2005 of the German company Hexal together with its US partner EON. This gave Sandoz a worldwide total turnover of US$5.1 billion and it was enough to allow it to overtake Teva, the previous leader who could only post a mere US$4.8 bn for 2004.

However, it was necessary to hold the front page for breaking news. The Sandoz deal was subsequently overshadowed during the last week of June when Teva and IVAX announced Teva’s acquisition of IVAX to allow it to overtake Sandoz again to reclaim its title as world generic leader.

Well, even though the two leaders have taken a short break from buying up the rest of the generics world, others, particularly Indians, have been busy in the meantime.

At the time of the last article, I drew a number of conclusions from the rash of activity and wrote, “The third interesting point is that the Indian presence in Europe is growing and seems likely to continue to grow. If it is indeed true that Ranbaxy and Wockhardt are still looking for acquisition opportunities in Germany they are unlikely to be the only ones and they are also unlikely to be just looking at those markets alone”. This is the point where I smugly pat myself on the back and point out that I was right!

For example, Dr. Reddy’s bought the German number 4 company Betapharm, Ranbaxy ventured into Romania through Terapia and also bought the GSK’s Spanish generic subsidiary Mundogen, while at the start of October Wockhardt announced the purchase of the Irish contract manufacturer Pinewood for US$150 million.

But it was not just the Indians who were busy. Actavis also invested in Romania through the oncology specialist Sindan; Abbott’s hospital supplies firm Hospira recently acquired Mayne Pharmaceuticals, the Australian injectable generics specialist for US$2bn; while Barr eventually came out top in the bidding war with Actavis to take ownership of Pliva in Croatia. The last of these is particularly interesting as, together with Mylan’s acquisition of 50% of the Indian firm Matrix, it represents the first overseas activity for some time by American firms in the consolidation process.

As with previous acquisitions by these companies and others, there appears to be a simple rationale for the spurt of activity. It is a combination of the need for size as a survival tool plus the fact that buying market share may be expensive but it reduces the risks entailed in market entry and takes a fraction of the time of the alternative entry methods. Building a market presence up from zero in any market is possible, but it takes too long, is risky, and can also work out expensive.

Let us, though, look at another question that arises in this context – where will it all end? How long can the consolidation continue? Will it end up with just a handful of generic giants fighting each other across the world? Will all the small firms disappear?

I would draw an analogy with the world of “Big Pharma” where a similar process has been going on for years. Big sharks with big appetites have cruised the world’s markets snapping up and swallowing smaller fish in the form of competitors who have been unable to stand the pace. When I use the word “shark”, this is, of course, just an analogy intended to convey the image of a large predator at the top of the food chain and is not in any way intended to be a comment on their business practices.

By way of proof about how many old familiar names have disappeared in this way, just consider some of the big names that appear in a 1996 Manufacturers’ Index from MIMS. How about, in alphabetical order, Beecham Research, Ciba Laboratories, DuPont, May & Baker and Roussel, by way of examples? Where are they all now? They may still exist as names for a sales division of a parent company but they have no independent existence.

These companies all fell victim to their inability to compete, only in their cases the failure was one of innovation in R&D. they could not produce new blockbusters and lost the battle to survive. If Darwin’s’ theories of the survival of the fittest apply anywhere, they must certainly do so in the pharmaceutical field.

The same has been happening on the generics side of the industry with companies that cannot compete being swallowed up and the big predators growing bigger and bigger.

But there is one aspect of the analogy with “Big Pharma” that might also apply to the generics industry. After consolidation and integration, there has also been a process of divestment and fragmentation. For example, some of the big R&D companies have hived off their R&D divisions or else contracted out part of their R&D efforts. In addition, when companies can no longer be bothered to promote a product that turns over a pitiful US$1 million they divest it to smaller, start-up companies that are very happy to do so.

Could this be a picture of what will happen in the generics industry as well with the “Generic Giants” sneering at the small products and leaving them to the mice that feed off the crumbs that drop from the rich man’s table? One thing is certain in the generic industry – if there is an opportunity for someone to make a profit on something that another company is not interested in, they will do so.