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This article appeared in the May 2007 edition of INNSight
Merck Generics – the consolidation continues (again!)
Such is the speed of events in the generic industry that events overtook me as I was writing this article. It was my original intention to look at the main contenders for the hand of Merck Generics in marriage and then make some vague prediction about who might win.
However, Mylan rather sneakily raced to the church with the bride over the weekend and won the race. The advantage of this of course, is that it relieves me of the responsibility of making any confident predictions that then fall flat on their face as I turn out to be completely wrong!
My thinking at the start was sparked by an article in the Times on 9th May, according to which the leading contender to acquire the generic arm of Merck was a private equity group based in London. The private equity group, Greater Pacific Capital, had joined with the Indian company Torrent Pharmaceuticals in its bid. Teva, fresh from digesting IVAX, and the US company Mylan, still digesting Matrix of India and its Belgian subsidiary Docpharma were mentioned as the alternative bidders.
Torrent
Those of you who are able to keep up with the flood of company purchases and moves in the generic consolidation process may recall that Torrent bought the German generic company Heumann in 2005 for a relatively small sum rumoured to be US$9 million.
To my mind, this raised the question of how easily its management team could handle the process of acquisition and integration of a whale the size of Merck. I am ignoring the financial side here because the Private Equity group would deal with that, so I was looking more at the practical, commercial and managerial issues. Events, of course, turned this thought into a matter of pure speculation
Teva
Questions similarly arose over Teva. Could it really try to digest another giant so soon after IVAX without bursting in the process? There is no doubt that Teva could do it under normal circumstance, but these are not normal circumstances so soon after the purchase of IVAX.
In the event, Teva pulled out citing as its grounds “Teva's long-held practice is to only pursue transactions that fit our long-term strategy of delivering profitable growth and enhancing our global leadership position while meeting our stringent financial criteria. While Merck's generics business would have been a strategic fit for Teva, the terms of this opportunity did not fully meet our investment criteria”.
Put another way, Teva decided that the price was too high for what it would have been getting. This probably makes sense on the basis that the company has enormous experience of acquisitions and probably knows better than anyone else what a potential acquisition is really worth.
Another issue that possibly did not play a role in its decision is the question of how the European regulatory authorities would have viewed the result if Teva had been successful. As the dominant company by far in the UK market with revenues already exceeding £200 million Sterling, an attempt to add Merck’s UK generic arm to its stable might have been seen as a step too far.
My guess, though, is that this was not really a consideration for Merck. To quote an old Beatles’ song “I want money, that’s what I want”. Merck had built up an enormous debt with its purchase of Serono having agreed a price of US$13.7 billion and so was looking for the best possible price for its generic unit.
Mylan
Mylan was prepared to pay the highest price and so won the race. Did it overpay?
Let’s look at the implications. Mylan has only limited experience of acquisitions and an article in the Indian newspaper Business Standard in May, suggested that Mylan’s partial acquisition (71.36%) of Matrix was not without its problems. It reported that since Mylan acquired its stake in Matrix Laboratories last year, the shares of Matrix have slid from Rupees 295(=US7.24) in November 2006 to a low of Rupees 150(US$ 3.68) in March 2007.
The fall is attributed to losses in Matrix’s European operations, but one must question the fact that Mylan did not foresee and make allowance for this before agreeing the purchase price. This similarly must cast some doubt on Mylan’s ability to handle an acquisition of this size.
There is no doubt that, strategically, buying Merck Generics is an excellent move for Mylan. The purchase reduces its dependence on a single market, which is being increasingly invaded by low cost manufacturers and immediately gives it a strong position in Europe. The move also pushes Mylan into the ranks of the leading world players while still leaving it a long way behind Teva (US$8.4 bn) and Sandoz (US$6.2bn) as the combined turnovers will amount to around US$4 billion
However, if Mylan was having problems with digesting Matrix, how will it manage the far bigger Merck? Mylan has little experience of international business and many US companies have stumbled in past by failing to understand different business cultures and trying instead to impose its own culture on foreign subsidiaries.
In addition, it acknowledges that the combined company will not be profitable until the third year. The price that Mylan is paying works out as being over five times its own sales that amounted to US$1.26 bn in the year ended March 2007.
Will the result be that Mylan sits down to dine at a magnificent banquet but then dies of overeating and indigestion at the end? To avoid this, the company might well decide to sell off one or two of the Merck operations to ease the integration process, particularly in the manufacturing area as it tries to integrate Matrix and Merck Generics into its own set-up.
If you have any questions or comments
on this article, please do contact me.
peter@interpharm-consultancy.co.uk
www.interpharm-consultancy.co.uk
