Teva-Allergan Deal Underscores Generics Market Consolidation with 90% of US Buying Generic Pills from A Single Company

August 5, 2015
By Mark Terry, Breaking News Staff

At least one estimate has this year’s total of biopharma deals at $224 billion—so far. One particularly hot area is in the generics market, marked by Israel-based Teva Pharmaceutical Industries Ltd. ’s acquisition of Allergan plc ’s generic drug business for $40.5 billion in late July.

Analysts indicate that the movement in the generic market is related to distributor consolidation. Distributors buy the generic versions to sell to patients, and if merged, they have more leverage to negotiate lower prices.

In the U.S., as reported by Bloomberg Business, there are four major distributors that control generics. They are McKesson Corporation, CVS Health Corp., through a partnership with Cardinal Health, Inc. , Walgreens Boots Alliance Inc., through a relationship with AmerisourceBergen Corporation and Wal-Mart Stores Inc.

Writing in Drug Channels in Feb. 20, 2014, Adam Fein wrote, “Larger pharmacies typically buy brand-name drugs—but not generics—via a drug wholesaler rather than directly from a manufacturer. … The changing relationship between wholesalers and large pharmacies is highlighted by Walgreens’ unprecedented arrangement with AmerisourceBergen.”

AmerisourceBergen inked a 10-year deal in 2013 to be Walgreens’ primary brand-name supplier, taking over about 60 percent of brand-name drugs that had previously been distributed by Walgreens’ warehouse network. Walgreens distributed generics themselves, but AmerisourceBergen took that over.

In addition, McKesson Corporation and Rite Aid had a similar arrangement.

Fein went on to say, “Generic manufacturers need a survival strategy. For generic drugs, formulary power lies with the distribution channel, not with the payer channel. If we consider Express Scripts Inc. and Walmart, then five entities will purchase about 90 percent of generic drugs for the U.S. market.”

When the Teva-Allergan deal closes next year, it will have created the largest generic drug company in the world. The nearest competitors are Novartis AG ’s Sandoz, Inc., with $9.56 billion in annual sales and Mylan NV, with $6.52 billion in generic sales. A number of smaller companies follow, which would be obvious possibilities for mergers or acquisitions.

Investors contemplating potential deals should look at Endo International Plc , which made an unsuccessful bid for Salix Pharmaceuticals, Ltd. in March, which eventually sold to Valeant Pharmaceuticals International, Inc. . Endo then went on to acquire Par Pharmaceutical Holdings Inc. for $8.05 billion in May.

Endo’s clearly looking to do deals to get bigger,” said Jeff Jonas, a portfolio manager with Gabelli Funds to Bloomberg. He suggests they might go after Akorn, Inc. Akorn is currently embroiled in a lawsuit with Allergan Inc. over patent infringement for a generic glaucoma drug.

Other potential targets include IMPAX Laboratories, Inc. , Lannett Company, Inc. , and Sagent Pharmaceuticals, Inc., cited by BTIG analyst Tim Chiang to Bloomberg.

An ongoing drama involves Mylan NV, which made a hostile bid worth $31.2 billion for Perrigo Co., going directly to shareholders instead of accepting a proposal from Teva. Perrigo turned down the offer, protesting that the offer was inflated because of Teva’s takeover bid. Teva offered $40.1 billion to Mylan, but a Mylan-Perrigo deal could help fend that off.

Further complicating the Mylan, Perrigo, Teva deals are indications that Perrigo is one of several bidders for Roxane Laboratories, Inc., the generic drug unit of Boehringer Ingelheim.

“A combination between Perrigo and Roxane makes strategic sense,” wrote Citigroup analyst Liav Abraham, as reported by Barron’s, “and would enable Perrigo to expand its platform into generics while remaining as a standalone entity. While Perrigo’s management has previously indicated its openness to a Mylan-Perrigo combination, it has rebuffed Mylan’s offer twice, citing undervaluation (though acknowledging the strategic rationale of a potential combination with a generics player) and the inflated value of Mylan stock.”

This underlines just how much movement is going on in the generics market and what the stakes are. As Steve Brozak wrote in Forbes, if the Teva-Mylan deal goes through, “Every man, woman and child in the U.S. will eventually take a pill manufactured by the new entity if Teva is successful in its pursuit of Mylan.”