LONDON, UK (GlobalData), 03 April 2012 - The generic drug market has witnessed a wave of industry consolidation in recent years. In 2010, Teva Pharmaceutical Industries bought Ratiopharm, one of Germany’s leading generic drug makers for $4.9 billion. Teva also purchased Barr Pharmaceuticals in 2008 for $7.5 billion, representing its largest acquisition to date. This mega-deal activity has created a landscape which favors big players with a large geographical reach who can manufacture drugs at lower prices.
In an effort to keep up, Watson Pharmaceuticals is currently in talks to buy private Swiss generic drug maker Actavis. Watson posted $1.2 billion in global generics revenue for the fourth quarter of 2011, showing an 81% increase over the same period in 2010. The increase was driven largely by sales of generic versions of Lipitor, Pfizer’s blockbuster cholesterol fighting drug which lost patent exclusivity in November 2011. While Watson derives the majority (86%) of its sales in the United States, the company’s international revenue is primarily limited to the developed European markets. GlobalData believes Watson is looking beyond its domestic shores for new revenue opportunities, in particular looking to emerging Central and Eastern European markets. The acquisition of Actavis would present a good opportunity for Watson to expand its generic drug business into this region. Actavis generated $2.8 billion in sales during 2011, and is well-positioned within emerging Europe. Actavis has distribution facilities in Russia and develops generic oncology, central nervous system (CNS) and cardiovascular drugs which accrue sales in Hungary, Poland, and the Czech Republic – all emerging markets that Watson is targeting, but currently does not operate within.
The Actavis acquisition would be immediately accretive to 2012 earnings, thus driving Watson’s generic drug sales to roughly double, from $3.4 to $6.2 billion. This would place the company as the fourth largest generic drug maker. The acquisition would provide Watson a larger footprint and additional financial heft to compete against its larger rivals, Mylan, Teva and Novartis’ generics unit Sandoz. These three companies already have established operations in these emerging European markets, but with deeper pockets. If inked, the deal is expected to be valued at approximately $6 billion and would be Watson’s largest acquisition to date, trumping the company’s $1.7 billion acquisition of Arrow Group, which was successfully completed in 2009.
Even though Watson has steadily focused on developing its branded drug business, GlobalData believes the Actavis acquisition would allow Watson to buy rather than build its generic drug assets. The acquisition would provide Watson with Actavis’ generic drug portfolio, which includes approximately 850 marketed products – mainly injectable drugs, tablets and capsules, with another 350 generic products currently under development. Post-acquisition, portfolio synergies and pipeline extensions around specific therapy areas could fold-in seamlessly and become a differentiator of Watson if the company decides to augment its pipeline. For example, Alzheimer’s disease, and CNS disorders more broadly, are considered by GlobalData as a key therapy segment of importance to Watson.
In 2011, Watson’s sales revenue from its CNS segment was $1.5 billion; the company’s largest as a percentage of revenue. These sales were led by generic sales of Concerta, which is approved for the treatment of ADHD. If Watson were to acquire Actavis, the company would gain additional drugs in its CNS segment. In February 2012, Actavis launched donepezil in Europe and other emerging EU markets. Donepezil is a generic version of Aricept, and is prescribed for the treatment of mild to moderately severe Alzheimer’s disease. GlobalData anticipates that concerted efforts around multiple disease indications in specific therapy areas could drive revenue growth for Watson’s CNS segment in the future.
Watson’s competitor Mylan was rumored to bid on the sale of Actavis. However, Actavis has a track record of growing through acquisition, and is an assortment of disparate operations, which may have caused Mylan and others to balk at tendering an offer. While unsuccessful assimilation is always a risk with any purchase, Watson has effectively integrated both the pipeline and supply-chain of partners which it has acquired. In May 2011, the company purchased Specifar Pharmaceuticals, a Greece-based drug maker, for $562 million. As a result of the transaction, Watson enhanced its portfolio imprint in southern Europe. Specifar, which sold branded and generic drugs, also had approximately 400 marketing authorizations to out-license drugs to third parties for sale in 36 countries, predominately in Europe. Watson also acquired a number of EU approved products, including a generic tablet version of AstraZeneca’s gastrointestinal reflux drug Nexium. Finally, the company streamlined Specifar’s infrastructure resources, which include a new facility located in Athens. The plant has the capacity to distribute 3 to 5 billion drug doses, which GlobalData believes Watson will also leverage as a key delivery hub if the company decided to purchase Actavis and expand its presence to emerging European markets.
*Watson Looks for a Foothold in Emerging European Markets with Potential Actavis Purchase
This expert insight was written by GlobalData healthcare industry analyst Adam Dion. If you would like an analyst comment or to arrange an interview, please contact us on the details below.
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