Generics industry on fast track to consolidation

Due to the rapid growth of Asia’s aging population, coupled with the demand for low-cost health spending, consolidation is heating up in the generics industry. The drugmakers produce and sell products after patents expire, and Indian players such as Ranbaxy, Dr Reddy’s and Nicholas Piramal will be capitalising on the $100 billion-worth of branded pharmaceutical products that will go off patent by 2010.

Vertical integration into active pharmaceutical ingredients (APIs) has also become popular as competition on pricing intensifies and the comparative profitability for APIs is more sustainable. The acquisition of API targets not only provides further critical mass but, importantly, creates synergies to better position generics companies on the global playing field. M&A multiples will depend on the portfolio of the target company, and the sales multiples have been varied.

Last year, Ranbaxy acquired South Africa’s fifth largest generics player, Be-Tabs Pharmaceuticals, for $70 million. The consideration represents a multiple of 2.2 times sales and 7.7 times earnings before interest, taxation, depreciation and amortisation (Ebitda). The company also acquired Romania’s largest independent generic firm, Terapia, for $342 million.

Dr Reddy’s Laboratories acquired leading generic manufacturer, Germany’s Betapharm, for $570 million. Reddy’s then acquired Roche’s API unit in Mexico for $59 million. Ranbaxy led the way with eight takeovers last year and, according to a company source, it “will look to make at least three to four acquisitions next year because we want to hit US$2 billion by end of 2007”. Targets should be in the $250 million to $300 million range, and the company wants to concentrate on acquisitions in the generics space, such as Merck’s $5.2 billion generics unit.

The bidding process was due to begin in early March. Teva and Sandoz, the generics leaders, have both signalled interest, alongside Iceland’s Actavis, India’s Ranbaxy and Dr Reddy’s Laboratories. Merck’s generics business reported revenues of $2.35 billion in 2006. It is ranked among the top 10 global suppliers and has a range of more than 400 products across therapeutic areas. If the Merck deal goes through, it will become the third-largest generics firm in the world, up from eighth at present.

Generics players may also explore specialty pharma options, by utilising cash flows from generics sales to acquire proprietary drug development capabilities or companies that only focus on one therapeutic market. This is the strategy that Indian generic Nicholas Piramal is adopting. It is actively seeking to acquire custom technologies, drugs and manufacturers in the United States. In June last year, it announced a plan to raise $1 billion through an issue of overseas bonds or depositary receipts. Speculation was rife that it was in the race for Cambrex, a New Jersey-based drug company.

Generic drug firms around the world are facing increasing pressure to diversify their revenue base, Merriman Curhan analyst Russell McAllister says. “Competition forces them to throw new products into their portfolio constantly,” he adds “The problem is there are fewer [expiring branded] products for generics to put in their portfolios.” As a result, generic companies are also going to acquire branded pharmaceutical companies, as a means of diversifying their revenue base.

One US-based industry analyst said that small- to mid-cap speciality pharmaceutical and branded pharmaceutical firms would come to mind as targets. Ranbaxy might be interested in the dermatology field given that it has had some generics and branded products in that category. Dermatology is high margin and a relatively promotion sensitive area.

ProEthic Pharmaceuticals, the Alabama-based branded pharmaceutical firm, is seeking an exit within the next 12-18 months. With an estimated valuation of $150 million, it would be receptive to offers from Indian generics players. ProEthic also has a generics subsidiary, Midlothian Labs, which posted sales of $12 million last year. Patent expirations, an aging population and cost-constraints are the key drivers to generic market growth. But generic firms are set to face challenges, including pricing pressures and increasing competition. The wave of consolidation in the industry has been triggered by this rise in rivals, and mergermarket predicts that it is unlikely to end anytime soon.