Generic manufacturers riding a wave of market consolidation

Like most maturing markets, the generic industry is experiencing a groundswell of international mergers and acquisitions. "Generic manufacturers are looking increasingly attractive for acquisition and consolidation," said attorney David Balto, a partner with Robins, Kaplan, Miller, & Ciresi in Washington, D.C., and a former policy director of the Federal Trade Commission's Bureau of Competition. "We anticipate a significant increase in consolidation events in coming years. It's part of a natural course of market growth."

Representatives of the Generic Pharmaceutical Association said the consolidation trend would probably continue to accelerate. "Most of our [member] CEOs say they believe we will be seeing more consolidation within the industry," said Christine Simmon, GPhA's VP for public affairs and development.

Industry observers such as Silver also point to the fact that generic drug price stability can offer attractive revenue streams, especially as brands age and new drugs emerge. "Supply sources begin to decline as mergers occur, and a wave of consolidations in recent years is providing stability and rationality to the market," Silver said. "As the industry matures, competitors become more rational." In other words, they don't engage in irrational pricing gimmicks.

Those market advantages raise concern at FTC, which has authority to disapprove acquisitions. "FTC becomes concerned when two firms that are the only participants in a generic drug market with significant entry barriers have the ability to raise prices if they merge, or divide the market [between them] by type of customer or territory," said Balto. In 2002, then chairman Timothy Muris spelled out FTC's position on the merger of generic drug manufacturers, which he said was related to any limitations on the ability of new drugs to enter the market: "Collusion among the generic [manufacturers] can thus be a means of preventing price erosion in the short term, though it may become substantially less feasible if subsequent Abbreviated New Drug Applications [ANDAs] are approved and additional competitors enter the market."

That is a concern in light of the recent high-profile acquisition that received significant FTC attention: Novartis AG's $8.4 billion deal to acquire the German company Hexal AG and its U.S. affiliate Eon Labs Inc. The deal has received tentative FTC approval. Novartis, a Swiss drug giant with 2004 sales of $28 billion (with generic revenue from its Sandoz subsidiary of about $5.1 billion), would become the world's top generic drug company. It would supplant Israel-based TEVA Pharmaceutical Industries, with revenue of about $4.8 billion, and put Mylan Laboratories in third place, with generic revenue of about $1 billion.