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Generic Drug Industry’s Contraction is Impacting Stock Prices

22 April 2015 in Trading Ideas

The recent surge of merger activity in the pharmaceutical sector suggests that big drugmakers continue to crave as much of the generic market as they can get.

That includes those firms that are already large players there – as the New York Times reported earlier this month, generic drug company Mylan made an unsolicited offer to acquire Perrigo for about $29 billion in a deal that would expand its product offerings.1

An eventual agreement would mark the latest mega-merger in an industry that has been undergoing a furious round of consolidation, with health care deals this year already at record levels even before this offer was made.

In a perfect example of this hyper-consolidation, the Times reported on Tuesday that Teva Pharmaceutical has offered to buy Mylan for $40 billion in a deal that would make a combined company with $30 billion in revenue.2

The pharmaceutical takeover spree has been sparked by companies looking for new products and pipelines to offset a fall in sales.

Bloomberg said that Teva is no exception: The company’s top-selling drug, Copaxone, will compete with generic copies this year, and its executives have been vocal about their appetite for acquisitions. Novartis’s Sandoz unit recently won approval to make a generic version of the multiple sclerosis treatment.

Mylan has also sought approval to market generic Copaxone, though its version hasn’t been approved yet.

Generic drugmakers themselves have also wanted to diversify their portfolios as revenues for their product lines have slowed in recent years, Michael Faerm, an analyst for Wells Fargo, told the Times. Fewer brand-name drugs have been losing patent protection, and competition from new players — especially manufacturers in India — has grown more intense.

“So the garden-variety generics in many cases — that opportunity is not what it once was,” Faerm said. “In order to keep growing, they need to look elsewhere.”

Some companies, like Teva and Actavis, have sought to expand into brand-name drugs, while others, including Mylan, have focused on harder-to-make generic drugs like respiratory products and extended-release medications. That’s one reason Perrigo, with its portfolio of dermatologic creams and over-the-counter drugs, looks attractive to Mylan, he said.

Ultimately, the focus comes from the seismic shift in healthcare spending by consumers. The share of generics out of all the prescriptions filled in the US increased from 18% in 1984 to nearly 80% now, according to an article earlier this month on Forbes.com.3

This decade has seen branded drugs worth billions of dollars in sales lose patents. In 2012 alone, Forbes.com said, the sales value of drugs coming off patent was $33 billion and another $47.5 billion in sales will come under threat of patent expiry this year.

As Forbes.com put it, that’s just what the doctor has ordered for the US health care system. In the 10-year period between 2003 and 2012, generic drugs generated $1.2 trillion in savings to the US health care system.

Post-industry consolidation, however, fewer generic manufacturers are applying to the FDA for permission to produce those drugs. With substantially fewer manufacturers producing a particular generic drug (in some cases only 2 or 3 makers), generic prices have also begun rising.

As the market and prices have expanded, so have the stock prices of generic drug companies. Over the past 12 months, the Drug-Patent Cliffs motif has gained 51.2%. Over that same period, the S&P 500 has increased 14.5%.

In the past month, the motif has risen 3.7%; the S&P 500 is off 0.2%.

 

1David Gelles, “Mylan Offers to Acquire Perrigo for $29 Billion,” nytimes.com, April 8, 2015, http://www.nytimes.com/2015/04/09/business/dealbook/mylan-offers-to-acquire-perrigo-for-29-billion.html?_r=2, (accessed April 20, 2015).

2Ed Hammond, Manuel Baigorri and David Wainer, “Teva Is Said To Weigh Mylan Bid to Create Generic-Drug Giant,” Bloomberg News, April 17, 2015 (accessed April 20,2015).

3Trefis Team, “Why Are Generic Drug Prices Shooting Up?,” forbes.com, Feb. 27, 2015, http://www.forbes.com/sites/greatspeculations/2015/02/27/why-are-generic-drug-prices-shooting-up/, (accessed April 20, 2015).

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