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Generic Drugmakers Are Making Their Names Known

6 May 2013 in Trading Ideas

One of the biggest deals in the healthcare industry this year may involve two companies you’ve probably never heard of.

According to multiple media reports, drugmaker Valeant Pharmaceuticals is in talks to purchase rival Actavis for as much as $13 billion.1 News of the discussions drove Actavis shares 6% higher since first being reported last week.

Actavis also happens to comprise 21% of the Drug-Patent Cliffs motif, and news of the potential merger has helped the portfolio of generic drug stocks climb 5.3% in the past month. It’s up 12.6% so far in 2013, and has risen 16.4% in the past 12 months.

drug patent cliffs motifOf course, the impact of generic drug companies has been easy to spot in recent weeks, most notably in the earnings reports of affected Big Pharma firms.

Witness:

• Pfizer’s shares tanked this week after the company’s quarterly report, which included revenue results coming in below Wall Street’s expectations.2 The company is attempting to find a new blockbuster drug after losing exclusive rights to make its Lipitor anti-cholesterol pill. Now, the company is said to be even considering splitting itself into two separate companies, a brand-name drug maker and a manufacturer of generic drugs.

• British drugmaker AstraZeneca said last week that its quarterly revenue slipped 13% from a year earlier, in part because of new competition from generics.3 The company is slashing jobs and focusing its research on a return to growth as patents on drugs that account for more than 40% of its sales expire by the end of next year.

• Novartis saw its quarterly profit jump 7% in its most recent quarter, after generic drugmaker Ranbaxy Labs failed to come to market with a generic version of Novartis’ big-selling Diovan hypertension drug.4

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Generic drugmakers also recently received a big boost from an Indian Supreme Court ruling that will continue to allow the sale of a copycat version of Novartis’ Gleevec leukemia drug – and paves the way for other generic firms.5

As Edward Wyatt recently reported in the New York Times, the competitive stakes are huge. According to IMS, brand-name drugs accounted for only 18% of prescriptions written by US doctors in 2011, but represented 73% of consumer spending.6 The Federal Trade Commission has said that when a generic drug comes to market, it costs about 15% as much as the original drug, causing the brand-name drugmaker to immediately lose 90% of market share.

With that sort of disruptive power, a Valeant-Actavis combination could become a greater force to be reckoned with.

1Gillian Tan, Dana Cimilluca and Sharon Terlep, “Valeant Pharmaceuticals in Talks to Buy Actavis,” WSJ.com, April 9, 2013.

2Drew Armstrong, “Pfizer Lowers 2013 Forecast After Sales Miss Estimates,” Bloomberg.com, April 30, 2013, http://www.bloomberg.com/news/2013-04-30/pfizer-lowers-2013-forecast-after-sales-miss-analyst-estimates.html.

3Allison Connolly, “AstraZeneca First-Quarter Sales Fell 13% on Generics,” Bloomberg.com, April 25, 2013, http://www.bloomberg.com/news/2013-04-25/astrazeneca-first-quarter-profit-fell-25-on-generics.html, (accessed April 30, 2013).

4Eva von Schaper, “Novartis Profit Rise 7% on Lack of Generic Diovan,” Bloomberg.com, April 24, 2013, http://www.bloomberg.com/news/2013-04-24/novartis-profit-rises-7-on-lack-of-generic-diovan.html, (accessed April 30, 2013).

5Gardiner Harris and Katie Thomas, “Low-Cost Drugs in Poor Nations Get a Lift in Indian Court,” nytimes.com, April 1, 2013, http://www.nytimes.com/2013/04/02/business/global/top-court-in-india-rejects-novartis-drug-patent.html?pagewanted=all, (accessed April 30, 2013).

6Edward Wyatt, “Justices to Look at Deals by Generic and Branded Drug Makers,” nytimes.com, March 24, 2013, http://www.nytimes.com/2013/03/25/business/generic-brand-name-drug-case-goes-to-supreme-court.html?pagewanted=all, (accessed April 30, 2013).

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