Generic consolidations create global powerhouses
The name of the game in the generic drug industry is consolidation.
“It leverages your strengths: Your ability to be first to market, your legal team and your ability to manufacture,” said Jason Napodano, senior biotech analyst with Zacks Equity Research.
“Generics is a quantity business, it’s not high-end, so if you can be the first generic drug to market, or can bring out an authorized generic, you can make some money for six months.”
“[Consolidation] is driven by drug companies wanting to expand their portfolio so they can negotiate better in terms of pricing with distributors,” said Barath Shankar, research analyst with Frost & Sullivan. “More products in their portfolio means they’re more likely to get stocked and have a better [drug] supply so [they] are of more interest to distributors.”
The biggest consolidation this year has been Mylan’s $6.7 billion purchase of the generic business of Merck KGaA in May to create a vertically- and horizontally-integrated player.
Teva’s generics sales double that of next-biggest player
|Sales of unbranded generics by leading corporations||U.S. sales in millions||% share||% change|
|Barr Labs (including Pliva)||907||3.3||8|
Had it been formed earlier, the combined company would have had revenues of approximately $4.2 billion, EBITDA of approximately $1 billion and approximately 10,000 employees in 2006, making it the world’s third-largest generic company (after Teva and Sandoz) and a significant player in the top five global generics markets.
As anticipated by analysts, the merger brings with it a diversified portfolio. “The combination with Merck generics will significantly extend our range of therapeutic categories and dosage forms, and bring us a number of new, differentiated products and successful franchises,” said Robert Coury, Mylan’s vice chairman and chief executive officer.
Along with the consolidation of drug companies, there is also more vertical consolidation, Shankar pointed out, so that pharmaceutical companies can source active pharmaceutical ingredients within their own companies, another tactic that helps reduce prices.
This is indeed the case for the new Mylan-Merck combo. Last year Mylan purchased a 71.5 percent stake in Matrix Laboratories, the world’s second-largest API manufacturer. “Together, Mylan and Merck generics will benefit from significant savings driven by Matrix’s low-cost, high-quality API capacity and the benefits of manufacturing high product volumes for multiple markets around the world,” Coury added.
Mylan also gains some geographical depth with the acquisition. Mylan’s presence to-date has been almost solely in the United States. It now is combined with Merck’s business, of which about 42 percent comes from Western Europe, 33 percent from North America, a further 23 percent from Asia, Africa and Australia combined, and 23 percent from Latin America.
“Mylan had very limited reach in Europe, but Merck has established relationships there so this helps give [Mylan] more access,” Shankar said.
Other activity in the consolidation field includes Teva’s $7.4 billion acquisition of Ivax at the beginning of 2006, forming the world’s largest generics company. Again, the benefit of this merger, according to analysts, was that they barely overlapped, geographically.
Also last year, Sandoz acquired two companies: Hexal in June and Eon Labs in August.
Sandoz is the generic arm of Novartis, and it has Omnitrope, the only product approved as a ‘follow-on’ drug (as opposed to a biogeneric) in the United States. Omnitrope was the first approved biosimilar in Europe, Australia and other countries as a human growth hormone. Last year Sandoz signed exclusive collaboration with Momenta Pharmaceuticals to focus on developing complex generics and follow-on biotechnology drugs.
Barr acquired Croatian company Pliva in 2006, and it’s expected that the company will be strong in developing insulin and human growth hormone. Pliva is developing G-CSF (granulocyte-colony stimulating factor) and has received European approval for generic erythropoietin.
Teva’s generics sales double that of next-biggest player
|Prescriptions of unbranded generics by leading corporations||U.S. sales in millions||% share||% change|
|Teva (including Ivax)||408||20.3||17|
|Barr Labs (including Pliva)||102||5.1||13|
Barr reported net earnings growth for fiscal 2006 of 56.5 percent year-on-year, to reach $336.5 million. This compares with net earnings of $215 million in fiscal 2005.
Generic sales for the Wood-cliff Lake, N.J.-based company for fiscal 2006 were $839 million, a 12 percent increase over fiscal 2005, when generics generated revenues of $751 million. The company currently markets 75 generic products in approximately 100 dosage forms and strengths. Its strongest product lines are in oral contraceptives and warfarin sodium. Last year it also launched an authorized generic version of contraceptive Seasonale (levonorgestrel/ethinyl estradiol).
The future could bring more consolidations involving Indian and Chinese generics players, Shanker said. “Indian companies are aggressively increasing their footprint, and China has a number of FDA-approved plants, but we won’t see much from them [China] for some years. Indian companies are looking to expand their business at the global level so are acquiring companies all over the world.”
The advantage to American drug companies of consolidating with the Indian players is the far lower cost of production in India, pointed out Napodano.
One of these companies is Wockhardt, which already has biologic drugs on the Indian market, but the company is expected to partner with drug companies in Europe and the United States. when a pathway is created for the approval of biogenerics.
The company’s portfolio includes ondansetron Injection, cefotaxime Injection and clarithromycin tablets.
Another is Ranbaxy, whose plans involve growing organically, through new product launches, and inorganically, through acquisitions of companies and/or products.
“Ranbaxy is actively seeking acquisition opportunities in the U.S., Europe and the emerging markets,” said spokesman James Meehan. “We will look at target companies based on the value and the synergies that can be unlocked from such an agreement.”
In the last two years, Ranbaxy has purchased nine companies, the largest being a $324-million acquisition of Romania’s Terapia.
Grocer sings new tune in community involvement
Meijer is taking another step in community relations, to the tune of promoting and selling CDs of local musicians.
The Michigan-based 176-unit grocery chain launched the Outside the Mainstream promotion in February with a solo CD from Josh Davis, a singer from Lansing, Mich., whose Fool Rooster CD was recognized by Performing Songwriter magazine for its lyric.
Each month, the chain is featuring a new performer in its circulars, which are sent weekly to 7 million households in Ohio, Michigan, Illinois, Indiana and Kentucky, according to company vice president of public affairs Stacie Behler. Meijer purchases 1,000 of the artist’s CDs and offers them for sale in all the chain’s stores for $7.49.
“The goal of the program is to bring some of the talent that we find in our own backyards to a wider audience than they can normally reach by themselves,” Behler said. “And by supporting this with a low price and a feature in our circular, hopefully it will lead people to gamble on the purchase of music that is worthy of discovery.”
Meijer, according to Behler, is trying to create regional loyalty to its stores by promoting local talent.
CDs chosen for promotion, according to the chain, must have a UPC and be professionally duplicated. Submitted CDs are sorted according to state and chosen on the basis of whatever state will be featured that month and how different the music is from the previous month.
Featured in April is Michigan-based Potato Moon with its CD “The Life of The Lonely Jones.”
CVS wins Caremark battles
WOONSOCKET, R.I. —The battle for Caremark Rx has finally come to an end. And, to the dismay of Express Scripts, CVS has emerged the winner, creating a $75 billion pharmacy benefit management powerhouse that is likely to serve as a benchmark for additional mergers within the industry.
“CVS/Caremark will offer end-to-end services, from plan design to prescription fulfillment, as well as the opportunity to improve clinical outcomes, which will result in better control over health care costs for employers and plan providers,” stated Tom Ryan, president and chief executive officer of CVS/Caremark, late last month when the deal closed. “The company will improve the delivery of pharmacy services and health care decision-making, enabling consumers to benefit from unparalleled access, greater convenience and more choice.”
With the close of the transaction—ultimately valued at $27 billion—CVS/Caremark has moved into a strong, competitive position. The combined company will be No. 1 in pharmacy sales, PBM-managed lives, specialty pharmacy sales and retail-based health clinics. It will be No. 2 in mail services.
That adds up to a lot of extra leverage for the retail health care juggernaut with suppliers, as well as insurers and payers.
In terms of synergies, CVS expects to realize between $800 million to $1 billion in revenue synergies in 2008, and significantly more thereafter. The company expects about $500 million in cost savings, largely related to better purchasing.
“We would like to note that every deal that both CVS and Caremark have done historically has yielded synergies significantly in excess of original guidance,” stated Citigroup analyst Deborah Weinswig in a recent research note. “We believe this deal will be no exception.”
Charles Boorady, also of Citigroup, believes that if the company achieves cost savings from the drug-procurement process, it likely will come from a combination of the following: manufacturers accepting the lower price or offering greater rebates, the wholesalers and distributors accepting lower prices and manufacturers bypassing the wholesalers and selling directly to the combined CVS/Caremark entity.
While many industry observers view the merger as a boon for the companies, it undoubtedly will have major implications on the industry, in general, as vertical integration is a new paradigm that—if successful—could clear the way for more mergers moving forward, with Medco and Express Scripts likely being the next targets.
“The fragmentation in the past may be the reason why vertical integration did not work, but the sheer scale of the CVS/Caremark company may be able to make it work,” Boorady said. “The only test will be whether customers buy into the concept or the concerns over the perceived channel conflict will outweigh it.”
Either way, Boorady sees it as a win-win for rival PBMs. “I see Medco and Express Scripts winning either way. If this integration works, they are likely to be the ones that are acquired next. If it doesn’t work then they could stand to gain customers that prefer a standalone [PBM] instead of a vertically integrated model.”
Another issue such a deal brings to the forefront is network restriction. If customers are willing to restrict the retail pharmacy so that employees can get their prescriptions filled at a single chain, or just a few chains in the market, then it will make the synergy from a vertical integration more obvious, according to Boorady.
However, this has been a concern for several years and has yet to materialize.
“I think most employers have concluded, and will continue to conclude, that the sheer hassle factor that you are putting on your employees by making them go to a CVS instead of a Walgreens, or vice versa, isn’t really worth what little savings you can get relative to other things you can do that present less of a hassle to the employee but can save a lot more money,” Boorady said.
However, prior to the deal, CVS Pharmacare controlled a provider network of more than 56,000 retail pharmacies. Meanwhile, Caremark’s network numbered more than 60,000 retail pharmacies, so it is unlikely that the combined company, post-merger, would suddenly pull back the size of its network—particularly, if the end goal is to remain attractive to insurers and payers and competitive with stand-alone PBMs.
According to William Blair & Co. analyst Mark Miller, the combined company is facing its first big test as it expects an announcement on the large Federal Employee Program contract—currently up for negotiation—as early as May. Three years ago, Caremark won this contract from Medco and it is likely that the two PBMs, among others, will bid for this business aggressively.
“While there are many moving parts to these types of negotiations, this will be the first big test for the new CVS/Caremark, and may provide some incremental perspective on the current state of the competitive environment,” Miller stated in a research note.
In related news, CVS/Caremark has announced the members of the company’s board of directors. As previously disclosed, the 14-member board was evenly split among designees from CVS and Caremark.
Former Caremark chairman and chief executive officer Mac Crawford has been elected chairman of the board of the combined company. Ryan will continue to serve as president and chief executive officer.
The following individuals named to the board from CVS are:
Ryan, president and chief executive officer of CVS/Caremark Corp.
David W. Dorman, senior advisor and partner, Warburg Pincus LLC.
Marian L. Heard, president and chief executive officer, Oxen Hill Partners.
William H. Joyce, chairman and chief executive officer, Nalco Co.
Terrence Murray, former chairman and chief executive officer, FleetBoston Financial Corp.
Sheli Z. Rosenberg, former vice chairman, president and chief executive officer, Equity Group Investments LLC.
Richard J. Swift, former chairman, president and chief executive officer, Foster Wheeler Ltd.
The following individuals named to the board from Caremark are:
Mac Crawford, chairman of CVS/Caremark Corp.
Edwin M. Banks, founder, Washington Corner Capital Management LLC.
C. David Brown II, chairman, Broad and Cassel.
Kristen E. Gibney Williams, former executive of Caremark’s Prescription Benefits Management division.
Roger L. Headrick, managing general partner, HMCH Ventures; president and chief executive officer, ProtaTek International
Jean-Pierre Millon, former president and chief executive officer, PCS Health Systems
C.A. Lance Piccolo, chief executive officer of HealthPic Consultants