This article appeared in the January 2009 edition of the INNsight newsletter

Roll up, roll up; companies for sale

Two of the leading generic companies have come up for sale at the same time – Actavis and Ratiopharm. A good start to the New Year for the M&A specialists who will advise and guide the sales but a sad reflection of how the recession is beginning to hit even the generic industry.

The circumstances behind the sale of Ratiopharm are very sad since they are connected to the suicide of the owner Adolf Merckle following heavy losses on the stock market. Actavis’s circumstances are not as tragic, but the company’s owners have indicated their readiness to sell following financial difficulties.

The Big Question now is – who will buy them? Big Pharma or another generic company?

Novator, the private equity firm that owns Actavis, lost a great deal of money when Iceland's financial system collapsed last fall and some observers suggested that it would have to sell Actavis. A price of € 8bn, extrapolated from 2007 turnover of US$2.5bn, has been mentioned by the financial Times which will require a buyer with deep pockets.

Actavis has other problems at the moment. It is in dispute with the FDA over alleged deviations from Good Manufacturing Practice standards at its New Jersey factory. In addition, it is possibly facing a raft of lawsuits from patients who claim that they were injured by oversize Digitek (digoxin) tablets in the US. The combination of factors could well make potential buyers cautious about rushing forward with their chequebooks to buy the company.

Returning to the question of who might buy them, and looking particularly at Actavis, we saw a couple of acquisitions last year that might have set a precedent of sorts. The Japanese Daiichi-Sankyo bought Ranbaxy and Sanofi-Aventis bought Zentiva allowing them both to diversify into generics. So it looks like there is an increased interest on the Big Pharma side in acquiring a generic subsidiary even though E. Merck took a conscious decision to head in the opposite direction by selling off its generic subsidiary.

Seen in this light, big names in Big Pharma such as Pfizer and GSK begin to appear as possibilities. Pfizer already has its Greenstone subsidiary in the US, but limited generic involvement elsewhere in the world. GSK, after announcing early in 2008 that generics were not an option for it subsequently reached an accord with the South African Aspen to obtain generics for its developing country markets. So both are possible suitors and both have deep pockets. Merck recently announced an interest in generic biologicals so adding less exotic generics through buying Actavis might be something that appeals to it.

The FT article also mentioned that “Two generics companies are interested in a merger with Actavis.” It is unlikely that the world number one Teva would be a possible buyer as it is still busy digesting Barr, but Sandoz might be through its Novartis parent. We can rule out Mylan, which does not seem to have had much success in absorbing its Generics (UK) subsidiary bought from E. Merck. Apart from them, the US Watson is almost identical in size to Actavis and might find it difficult to digest although it might manage the merger that the FT wrote about.

Turning to Ratiopharm, the list of potential candidates and suitors should be similar, but the company itself is perhaps less attractive from the perspective of its limited international spread. In 2007, Ratiopharm had sales of €1.8 bn of which €819m (=45.5%) came from Germany. The rest came from its activities in other EU countries and Russia with no presence in the US or developing world.

Teva has been mentioned as a possible candidate, but, in my opinion, this is unlikely because, as I pointed out in connection with Actavis, it is still busy digesting Barr. The CEO of Teva’s North American operations confirmed this at a recent Goldman Sachs conference “I don't think that we'll be running out to make a big acquisition anytime soon,….There's lots of things that we'll continue to look at but right now first and foremost on our mind is going to be integrating Barr” he was quoted as saying by Reuters.

Sandoz seems less likely still because Ratiopharm’s business would duplicate much of its own existing Sandoz / Hexal / Lek business in Europe.

Creditors of the Merckle group that is Ratiopharm’s parent have demanded that Merckle also sell the wholesaler Phoenix. Perhaps a package of Ratiopharm + Phoenix might appeal to a Big Pharma company that is looking to spread itself and reduce its dependence on a faltering NCE pipeline. The looming threat of an Obama administration in the US that might start thinking about pharmaceutical price controls in the last free pricing market could well make such a package a very attractive proposition for a worried Big Pharma company..

If you have any comments or questions,

Please feel free to contact me

peter@interpharm-consultancy.co.uk