Investors, limited window put merger pressure on generic drug makers

A merger frenzy has hit the generics sector this year with a spate of acquisitions and hostile-takeover bids making headlines and reshaping the industry.



Analysts and those who closely follow the pharmaceutical business said the rush to make deals is coming from a combination of investor pressure and a narrowing window of opportunity for generic drug makers to expand their operations.

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An increasing number of drug makers, they said, view acquisitions as the only way to keep their revenues growing as fast as investors expect. In addition, they noted that the changing nature of the industry — where medications are becoming more complex and research and development costs continue to rise — makes it less expensive for a company to acquire another supplier’s portfolio than to develop new drugs in-house.



In addition, they said current low interest rates make capital cheap and allow companies to fund their acquisitions with debt. With rates likely to go up soon, generics companies are facing a limited window of opportunity to make a deal.



Consolidation has reduced competition among generics suppliers, and many said it has become a main factor behind the rising prices that have plagued the industry over the past year. By reducing the field of competitors, generics companies are in better position to negotiate prices for drugs with pharmacy benefit managers, public and private insurers, and patients.



One of the year’s first mergers came in May when Endo Inter national agreed to acquire Par Pharmaceutical for slightly more than $8 billion. The deal, which is expected to close shortly, will add Par’s high-barrier-to-entry generics, niche brands and branded and generic aseptic injectables to Endo’s portfolio. In late September, Endo agreed to sell two generic drugs to Rising Pharmaceuticals to satisfy antitrust concerns.



However, no generics manufacturer has garnered so much attention this year from regulators and investors as Teva Pharmaceutical Industries. In March, the Jerusalem-based company agreed to pay $3.2 billion to acquire Auspex Pharmaceuticals, a La Jolla, Calif.-based company that, while it has not yet brought any products to market, is developing several drugs that focus on the central nervous system to treat such disorders as Huntington’s disease, tardive dyskinesia and Tourette syndrome.



Then in July, after its hostile takeover attempt was rebuffed by My-lan, Teva reached a deal to acquire Allergan‘s generics business for $40.5 billion.



More recently, Teva acquired the Mexican drug maker Representaciones e Investigaciones Médicas, S.A. de C.V. and Gecko Health Innovations, a company that is focused on developing software and product solutions to simplify chronic respiratory disease management.



Meanwhile, by refusing to accept Teva’s $40 billion offer, Mylan was able to continue with an unsolicited bid it made in April to acquire Perrigo. After its original $29 billion offer, Mylan has extended three consecutively higher bids, with each offer being deemed undervalued by the Perrigo management. In September, the companies brought legal action against each other.



While Wall Street’s reaction has been mixed to the proposed deal, at least one analyst recently expressed deep reservations about a Mylan-Perrigo merger.



“The more we look at the Mylan-Perrigo transaction, the less we like it,” Sanford C. Bernstein & Co.’s Ronny Gal wrote in a letter to investors in October, noting that he is “increasingly seeing challenges on the horizon for some of the Perrigo businesses, which lead us to question the [merger’s] rationale.”