Seeking Opportunities in Generic Drugs

Although the wave of US patent expiries in the innovator-drug market potentially bodes well for the generic-drug market, competitive pressures are tempering the outlook. Already high penetration of generic drugs in many larger markets, including the United States, along with negative to flat growth in those markets, is increasing the likelihood of further consolidation overall and the need for generic-drug companies to develop strategies to take advantage of opportunities in smaller, but higher-growth markets in Latin America and the Asia-Pacific region.

Market numbers
The global generics market is valued at $150 billion, which includes off-patent products, branded generics, and similars (i.e., such as in Latin America), according to Mike Chace-Ortiz, senior director of product strategy of the generics and active pharmaceutical ingredient intelligence unit at Thomson Reuters Healthcare and Science. Chace-Ortiz spoke at an educational program on the generic-drug industry, which was organized by the Drug, Chemical, and Associated Technologies Association (DCAT) during DCAT Week in mid-March. The United States and Canada are collectively the largest markets for generic drugs, accounting for $60 billion, followed by Western Europe at $29 billion. China and Latin America, each account for $14 billion, Eastern Europe, including Russia, represents $10 billion, Japan $3 billion, and the rest of the world $20 billion.

Chace-Ortiz points out that many of the established markets for generic drugs are saturated and as a result, are experiencing slow growth. Seventy-five percent of global generic sales are found in 14 markets, all of which already have generic-drug market penetration in excess of 70% on a volume basis. For example, the US generic-drug market is valued at approximately $63 billion, and generic drugs represent approximately 71.5% of the US drug market on a volume basis. China’s generic-drug market is valued at $14.6 billion and has a 70% market penetration of generic drugs, and India’s generic-drug market is valued at $9.2 billion with a 99.8% penetration of generic drugs. As a result, “there is flat or negative growth in virtually all highly genericized markets,” said Chace-Ortiz. Markets with negative or flat growth include the US (–1.5%), Russia (–13.0%), Brazil (–4.9%), and India (0%). A few countries with highly genericized pharmaceutical markets still have positive growth in generic drugs, most notably, China with growth of 19.5%. But overall, growth is more favorable in “smaller, challenging countries,” where although the markets are smaller on a value basis, they offer higher growth rates because of lower generic-drug market penetration, said Chace-Ortiz.

Markets fitting that description include Canada (generic-drug sales of $4.6 billion, 51% market penetration of generic drugs, and 5.0% annual growth) and Japan (generic-drug sales of $3.1 billion, 17.2% market penetration of generic drugs, and 5.0% annual growth). Chace-Ortiz also pointed to favorable fundamentals in the following markets: Venezuela (generic-drug sales of $470 million, 25% market penetration of generic drugs, and 21.0% annual growth); South Korea generic-drug sales of $1.6 billion, 30% market penetration of generic drugs, and 13% annual growth); and South Africa (generic-drug sales of $801 million, 62% market penetration of generic drugs, and 12.7% annual growth). Other markets include: Greece (generic-drug sales of $1 billion, 17% market penetration of generic drugs, and 9.3% annual growth); New Zealand (generic-drug sales of $244 million, 51% market penetration of generic drugs, and 7.0% annual growth); Ireland (generic-drug sales of $273 million, 19% market penetration of generic drugs, and 6.0% annual growth); and Israel (generic-drug sales of $311 million, 52% market penetration of generic drugs, and 5.0% annual growth).

Consolidation
How these growth opportunities will align with mergers and acquisitions (M&A) is an important consideration in assessing the direction of the generic- drug market. Consolidation has been a key factor in the generic-drug industry during the past 10 years, a trend that is likely to continue. Chace-Ortiz pointed out that since 1999, 60% of the top 25 companies have been acquired. Since 1997, 418 M&A deals totaling $78 billion have occurred among the top 200 generic-drug companies. This consolidation has occurred across all sectors in the generic-drug industry. The top 10 companies made 154 deals that accounted for approximately $59 billion of M&A activity, said Chace-Ortiz. Firms ranked eleventh to twentieth in revenues made 64 deals that accounted for approximately $11 billion. Although representing a smaller piece of M&A on a value basis, smaller companies also were active in deal-making. Firms with sales giving them rankings of between the top 21 and 100 companies made 105 deals with a total value of $9.4 billion.

The presence of foreign companies in pharmaceutical markets is also important. Chace-Ortiz pointed out that the average foreign ownership among the top 40 geographic markets for generic drugs is 63%. Moreover, half of the world’s generic-drug sales come from the top 50 companies. This confluence of factors—an already consolidated field among the large players, the larger players seeking mid-sized acquisitions, and growth opportunities in smaller geographic markets, will shape the direction of M&A activity in the generic-drug market.

“Industry consolidation is likely to continue at the same pace,” said Chace-Ortiz. “There is also a rich vein of M&A candidates with sales of $500 million to $750 million,” he said. “Acquisitions will be focused on high-growth markets,” he said, pointing to Latin America, the emerging markets in the Asia-Pacific region (i.e., Vietnam, Thailand, Philippines, and Indonesia), and Japan, depending if that market develops. “M&A will be used to buy into the next-tier emerging, growth-oriented markets,” he said. At the same time, he also foresees the possibility of local consolidation to protect domestic companies against foreign acquisitions in countries such as India, Japan, South Korea, and China.