DanS.

Wasn't sure if this was a health issue or an economics issue...


Jul 24th 2008 | NEW YORK
From The Economist print edition

Liberalisation and the quest for scale are pushing generic-drugs firms to merge
Illustration by David Simonds


“THE mighty Israeli Pacman gobbles down another one.” That is how analysts at Credit Suisse, an investment bank, greeted news of the latest takeover bid by Teva, an Israeli firm that is already the world’s largest generic-drugs manufacturer. The offer, for Barr, an American rival, is valued at more than $7 billion. Success would speed Teva towards its ambitious goal, announced earlier this year, of doubling its revenues by 2012, to $20 billion.

The bid for Barr is the latest in a string of deals upending the generics business. On July 23rd GlaxoSmithKline, a British pharmaceutical giant, said it would enter the generics market through a joint venture with Aspen, a South African firm. In June Japan’s Daiichi Sankyo bought Ranbaxy, India’s biggest generics firm, for $4.6 billion. Barr and Mylan, another big American generics firm, have been busy acquiring smaller firms. Actavis, a once-obscure Icelandic generics outfit, has swallowed over two dozen rivals in the past decade to become a global force. And France’s Sanofi-Aventis, a traditional pharmaceutical firm, is now attempting to win full control of Zentiva, a Czech generics firm in which it has a minority stake.

Shlomo Yanai, the boss of Teva, is convinced that there are more deals to come, although he says his firm does not plan any. Robert Wessman, the boss of Actavis, expects Mylan to be a target soon. Robert Coury, Mylan’s vice-chairman, rejects that notion, but he nevertheless agrees that further consolidation is inevitable. Survival for generics firms, he insists, now depends on “scale, scale, scale, scale, scale!”

This slightly paranoid fervour seems odd at first, given the apparent health of the generics industry. It enjoyed $72 billion in sales last year, and is growing faster than the conventional drugs business (see chart). IMS Health, an industry research firm, reckons that $130 billion of prescription pills will go off patent by 2012, creating a huge opening for generics. But that good news is tempered by two big trends: liberalisation and commoditisation.

There have long been two very different kinds of generics markets: genuinely competitive ones, like those found in America, Britain, the Netherlands and Scandinavia, and coddled ones, like those of Japan, the rest of continental Europe and much of the developing world. The competitive markets are now becoming “hyper-competitive”, in the words of Mylan’s Mr Coury. Generics make up nearly two-thirds of the American drugs market by volume, but only 13% by value. Customers, ranging from pharmacy chains to middlemen known as “pharmacy benefits managers”, are rapidly consolidating and so gaining greater power over prices.



Competition is also spreading to places that used to protect domestic firms from foreign rivals, allowing them to preserve much higher margins. Concerns about the soaring cost of health care have prompted a change of heart in Germany, for example, once one of the world’s most closed (and expensive) markets for generics. The European Commission is encouraging other European governments to follow suit.

Japan, an even bigger prize, is also opening up. Viren Mehta, an industry expert who advised Daiichi Sankyo on its acquisition of Ranbaxy, observes that the country’s health-care system pays local pharmaceutical firms some $30 billion a year for drugs that are no longer protected by patent, and would cost $3 billion in America. But the Japanese government has decided to cut its bills by making life easier for foreign competitors.

Cut-throat competition, in turn, is prompting generics firms to expand, to achieve economies of scale. One way is to join forces with their traditional enemies, the big pharmaceutical firms. The combination of Daiichi Sankyo and Ranbaxy will benefit not only from the latter’s cheap manufacturing capacity, but also from a bigger customer base, according to Malvinder Singh, Ranbaxy’s boss. Novartis, a Swiss pharmaceutical giant, is following a similar model with Sandoz, its in-house generics arm.

Many think such hybrids are unwieldy, given the starkly different cultures of scrappy generics firms and lumbering pharmaceutical giants. So most generics firms will probably look to merge with peers. They will also integrate vertically, says Kevin Scotchter of HSBC, an investment bank, by adding research arms or divisions to conduct clinical trials. Actavis, for example, spends about €150m ($236m) a year on research and development, in an effort to differentiate its wares from those of its rivals. But that, in turn, adds a further incentive to grow, to help defray such big overheads.

Generics firms, in other words, are becoming more like traditional pharmaceutical firms, although they tend to pursue tweaks to their existing products, rather than entirely new blockbuster drugs. But even research and development is becoming something of a commodity these days. Ronny Gal of Sanford Bernstein, a financial research firm, observes that even though it requires a lot of computing power and know-how to improve a drug, the necessary skills and equipment are becoming quite widespread. The copycats, after all, can also be copied.

There is one growth opportunity that will require even greater technical sophistication and deeper pockets: “biosimilars”. Instead of replicating pills based on chemistry, these mimic newer biotechnology drugs. The new generics giants have the heft to invest in such products—and are doing so. Within a decade, they hope, the market for biosimilars could be as big as the entire generics trade today

cheapseats

Right now, today, is the time to write representatives in state and federal government, demanding Terri Schaivo-swift decriminalization of marijuana and hemp.

We are obliged as a matter of justice to either decriminalize marijuana or reinstate Prohibition of alcohol. But right now, is the face-saving excuse they have presumably been waiting for. It is economic folly when we can least afford it not to let farmers profit from a full of harvest of hemp on soggy land that is useless for corn this year.

It's called improvising. It's called minimizing losses. It's called commerce. It's called capitalizing on opportunity...in a word, Capitalism.

Pssst, George & Co., it's your chance to be remembered for something visionary instead of something vainglorious.

the almighty dollar copyright Implausible endeAVORS TM llc

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