This article appeared in the August edition ofthe XIP newsletter INNsight

The consolidation continues

The start of the year saw the creation by Sandoz of the world’s largest generic company through its acquisition of the German Hexal together with its US partner EON. Combining the 2004 sales figures of all the parties gives a worldwide total of US$5.1 billion. This was enough to allow it to overtake the previous leader Teva who could only post a mere US$4.8 for 2004.

News emerged at the end of June that the final authorisation has been received for this deal to go ahead. The US Federal Trade Commission has cleared Novartis' proposed acquisition of Eon Labs, on the condition that the Swiss giant divests three of its generic products to a competitor. The European authorities also imposed conditions on their ratification of the deal by asking Sandoz to sell off certain pharmaceutical products in Poland, Denmark and Germany but Sandoz agreed so that the deal is now set to go ahead.

But hold the front page for breaking news! This deal has now been overshadowed during the last week of June when Teva and IVAX announced that Teva would be acquiring IVAX and would thereby overtake Sandoz again to reclaim its title as world generic leader.

Following the Sandoz announcement at the start of the year, rumours had begun to surface in May and June that Teva was also sniffing around a German generic acquisition. The name mentioned in this context was Stada, which recorded sales of €338m, putting it in third place amongst the German generic companies and a long way behind the second placed Hexal which had a 2004 turnover of €997m. So either the rumours were wrong or Teva cleverly managed to divert everyone’s attention in the wrong direction!

And so the consolidation race continues. It is not just the industry leaders, though, who are playing this game. In June the Indian company Matrix Laboratories announced its intention to spend €217m on buying a 22 per cent stake in the Belgian generic firm Docpharma in what seems to be the largest overseas acquisition so far by a member of the Indian pharmaceutical industry.

In the same vein and at around the same time another Indian company, Torrent, joined the acquisition trail by buying the German generic company Heumann, According to figures from the local industry body, Heumann Pharma Generics, had a turnover of €53m in 2004, and was ranked number fifteen in the German generics market. Torrent is thereby continuing the trend for Indian companies to buy market share in Europe rather than setting up from scratch.

These transactions have been preceded by other Indian acquisitions. For example Wockhardt acquired the UK generic drugs manufacturer CP Pharmaceuticals for £11m to add to Wallis that it already owned; Zydus Cadila acquired the formulation business of Alpharma of France for €5.5m, and the Indian leader Ranbaxy spent $70m to continue its acquisition activities in Europe by buying the French generic firm RPG Aventis.

According to rumours, it will not stop there; Ranbaxy and Wockhardt, are both reported to be looking for acquisition opportunities in Germany. And significantly, at the time of the Sandoz bid for Hexal, the head of Novartis Daniel Vasella said that the group would continue to focus on branded drugs, but did not entirely rule out further acquisitions in generics. He was reported as saying "You should not overdo things…" but added”, if a jewel does become available, we would remain open”.

A few interesting points emerge from this rash of activity. The first is one that is logical, although perhaps easily overlooked in any analysis. For each generic company that has been bought, there also had to be a seller. Torrent’s purchase of Heumann needed Pfizer to be ready to sell the company and so did Merck’s investment in NM Pharma of Sweden, while Pfizer were similarly keen to sell their Italian generic subsidiary Dorom to Teva, all of these occurring in 2004.

Why has Pfizer done this? The answer seems to be that the company has taken a strategic decision not to become involved in generics and in fact its earlier involvement was in effect “second hand”. The generic companies that it did own were actually previously part of Pharmacia when Pfizer acquired it.

The second interesting point is that the German generic market seems to remain attractive despite the pricing pressures induced by the “Aut Idem” regulation and despite the increasing consolidation, which also seems to be a consequence of the “Aut Idem” rule. The local trade association DGV (Deutscher GenerikaVerband) illustrated this in a recent position paper by showing that the top three generic producers in Germany (of which one is the Sandoz-Hexal combination) had a combined market share of 56.9% in early 2005. They contrasted this with the market share of the top three in 2001, prior to the introduction of “Aut Idem”, which amounted to 33.6%.

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. Building a market presence up from zero in any market takes too long and is too risky and expensive. Buying market share is also expensive but reduces the risks of market entry and takes a fraction of the time of the alternative entry methods.

If you have any comments or questions on this article,

please feel free to contact me

peter@interpharm-consultancy.co.uk

www.interpharm-consultancy.co.uk

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