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.”
Value of branded drug patent expiries at all-time high
As 2015 draws to a close, the year is on track to be one in which the value of the branded drugs losing their patent protection approaches an all-time high.
The dozens of drugs that will have lost their patent protection this year are estimated to have global sales of $44 billion a year — the highest total since $53 billion worth of medications went off patent in 2012.
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Domestically, IMS Health data showed that 2015 patent expiries account for $27.7 billion in annual sales.
While the loss of patent protection ordinarily means the market is being flooded with a slew of new generics, that has not been the case as several of the biggest expiries this year have involved biotech drugs, and so far only a single biosimilar medication — Novartis’ Zarxio, a biosimilar version of Amgen Neupogen that hit the market in early September — has been given Food and Drug Administration approval.
In a report released earlier this year, the market analysis firm EvaluatePharma estimated that only $16 billion in global sales will actually be lost to patent expiration in 2015.
Still, some of the drugs that already have seen their patents expire and a handful that went off patent in 2014 were among the best-selling medications in the United States and worldwide, and are providing generic alternatives to millions of patients whose options were previously limited solely to brand-name drugs.
For instance, AstraZeneca’s Nexium (esomeprazole), which lost its patent protection late last year, accounts for more than $5 billion in annual sales, making it attractive to generics manufacturers. In January, the Teva Pharmaceuticals USA subsidiary Ivax Pharmaceuticals was the first generic supplier to get FDA approval for its version of the drug. Subsequently, Mylan Pharmaceuticals entered the market, and Dr. Reddy’s Labs is reported to begin marketing an esomeprazole product by the end of the year.
Several generic versions of other blockbuster drugs also have been approved over the past few months. Actavis’ Alzheimer’s medication, Namenda, lost its patent protection in April. Since then, seven generic suppliers have received approval for their versions of the drug.
In a report issued earlier this year, IMS Health noted that the launch of these generics and a handful of others — that include versions of Bristol-Myers Squibb and Otsuka America Pharmaceuticals’ antipsychotic Abilify and Pfizer’s antibiotic Zyvox — would likely limit the growth in drug spending as the year wore on.
Over the next few years, IMS said the impact of patent expiries will be less severe, but will continue to affect drugs with billions of dollars in annual sales. Next year, the company said, medications with annual sales of $18.9 billion would go off patent; 2017 will see $11.1 billion worth of drugs lose their patent protection; and products with annual sales of $20.7 billion will go off patent in 2018.
Price hikes, restrictions threaten generics’ status
Once viewed as the best 35 bargain in the healthcare system, generic drugs may be on the verge of losing that status.
Rapidly rising prices for many generics, regulations that could restrict patients’ access to these medications, a Food and Drug Administration backlog in getting new drugs approved and market consolidation that is reducing competition are all making some wonder how much longer generics will continue to be affordable.
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“Compared to the funds spent on doctors and hospitals, prescription drug therapy is 0cheap,” National Center for Policy Analysis senior fellow Devon Herrick wrote in a report issued in October that examines why generics prices have continued to skyrocket over the past few years. “However, the prices of many generic drugs have increased significantly recently — often for no apparent reason.”
According to IMS Health, generics account for 88% of all prescriptions filled in the United States, but make up only 28% of the nation’s drug spending. The report noted that spending on generics increased 5.3% over the past year, and the total number of prescriptions filled with generics went up 3.2%.
Proponents of these medications argued that while some generics have seen sharp price increases, the drugs continue to be at the heart of the nation’s effort to rein in healthcare spending.
“Generic medicines are a critical part of systemwide efforts to hold down healthcare costs,” Generic Pharmaceutical Association president and CEO Chip Davis said in the wake of public outcry after drug maker Turing Pharmaceuticals raised the price of its Daraprim (pyrimethamine), a drug that is used by only about 2,000 people worldwide, by 5,000% in a single day.
The price hike — which saw the price of Daraprim go from $13.50 a tablet to $750 per pill — is indicative of what NCPA’s Herrick and others see as a result of the FDA being overwhelmed with new drug applications. Currently, he said, the agency has a backlog of 4,000 generic drug applications.
Too often, Herrick noted, the slow process of getting a new generic approved results in one company being the sole supplier of that drug, creating a de facto monopoly and leaving the company free to charge whatever it wants for its medication.
Critics of the FDA said that another of the agency’s policies also is contributing to the recent price hikes.
Many of the thousands of generic drugs that predate the FDA’s approval process required under the 1938 Food, Drug and Cosmetics Act were grandfathered but never officially approved, they noted. The agency is asking that these drugs now undergo the same rigorous clinical studies as newer medications.
Companies that do the tests will receive licenses that can temporarily give them monopoly-pricing power as most rivals are eased or kicked off the market.
“The process of forcing old generic drugs off the market invariably results in higher prices for the newly approved versions compared with their generic versions — something the FDA acknowledges,” Herrick said in his report.
Meanwhile, raw material shortages and production problems that have caused some suppliers’ facilities to fall out of compliance with good manufacturing practices have led to drug shortages and driven up prices on some generics. For instance, in 2013 a shortage of the raw materials used to make the antibiotic doxycycline led some manufacturers to stop producing it. With fewer suppliers offering the product, the cost of doxycycline has soared during the past two years.
The dramatic rise in generics prices has caught the attention of federal regulators and members of Congress. Sen. Bernie Sanders (I-Vt.) and Rep. Elijah Cummings (D-Md.) held hearings last fall on generic price increases. At those hearings, the lawmakers cited doxycycline as a prime example of the price inflation that is impacting generic drug costs. In the six months between October 2013 and April 2014, they said, the price of a bottle of doxycycline went from $20 to $1,849.
Meanwhile, a federal grand jury in Philadelphia has reportedly begun looking into what is driving the rapid escalation in the price of generics. According to the Philadelphia Inquirer, two generic drugmakers — Lannett and Allergan (formerly Actavis) — have acknowledged receiving subpoenas to testify before the panel.