Teva’s Just the Start as More Generic Drugmakers Poised to Merge

The $40.5 billion merger that’s transforming the generics industry is the biggest yet in a series of deals by drugmakers adjusting to a market that has fewer buyers.

Teva Pharmaceutical Industries Ltd.’s deal for Allergan Plc’s generic business is partly a response to consolidation taking place among distributors, which purchase the lower-priced copycat drugs for eventual sale to patients. To gain negotiating leverage with those buyers, more generic makers may have to combine.

Four major buyers control most of generic purchasing in the U.S.: McKesson Corp.; CVS Health Corp. through its partnership with Cardinal Health Inc.; Walgreens Boots Alliance Inc. through its arrangement with AmerisourceBergen Corp.; and Wal-Mart Stores Inc.

McKesson bought Celesio AG for about $5 billion in 2014 to get more clout in drug distribution, and CVS and Walgreens struck their partnerships the previous year.

“The consolidation among the buyer groups in our most important market, which is the U.S.,” helped persuade Allergan to sell its generic division, Chief Executive Officer Brent Saunders said in an interview. The size of Teva’s offer, in cash and stock, also played a role, he said.

Regulatory Scrutiny

There are other reasons generic makers may want to get together. U.S. regulators are more heavily scrutinizing the industry’s manufacturing safety, increasing costs. And fewer big-name drugs are coming off patents, limiting growth opportunities.

Deals in the generic-drug business are part of a general acquisition frenzy that’s sweeping the health-care industry, from pharmaceuticals to insurance to hospitals. Drugmaker Shire Plc was the latest to enter the fray, announcing an unsolicited $30 billion offer Tuesday for Baxalta Inc., a developer of treatments for rare diseases.

The Teva-Allergan deal, expected to close early next year if regulators approve it, creates far and away the biggest generic drugmaker. Novartis AG’s Sandoz unit, with $9.56 billion in annual sales, and Mylan NV, with $6.52 billion in generic revenue, are the industry’s other major competitors, followed by a slew of smaller companies.

Among that latter group are some obvious dealmakers. Endo International Plc has made no secret of its ambitions, making an unsuccessful bid for Salix Pharmaceuticals Ltd. in March and agreeing to buy Par Pharmaceutical Holdings Inc. in May for $8.05 billion.

“Endo’s clearly looking to do deals to get bigger,” Gabelli Funds portfolio manager Jeff Jonas said. He cited Akorn Inc., a $5.3 billion maker of eye drugs and injectables, as a potential target. Gabelli holds shares of both Endo and Akorn.

Potential Targets

Other potential targets in the generics industry include Impax Laboratories Inc., Lannett Co. and Sagent Pharmaceuticals Inc., said Tim Chiang, an analyst at BTIG.

The bigger companies are also likely to continue bulking up. Mylan is in the process of trying to acquire Perrigo Co., a maker of over-the-counter and generic drugs, in a hostile takeover for about $33 billion. Teva is looking at opportunities to “execute against our priorities in the generic space,” CEO Erez Vigodman said on the same day his company announced the Allergan deal.

More mergers could lead to higher generic-drug prices, a trend that’s already getting attention in Washington and among consumer groups. The National Community Pharmacists Association surveyed about 700 members and found earlier this year that virtually all pharmacists have experienced a “large upswing” in the cost of buying generic drugs in the prior six months. About 80 percent of respondents experienced price spikes at least 26 times -- equivalent to once a week.

Still, Teva’s Allergan deal is likely to win approval from U.S. regulators, who may force some divestitures, according to Jennifer Rie, an analyst at Bloomberg Intelligence.

“We have a giant Teva and we have a Sandoz and Mylan, those are your big three now -- it’s not even the big four anymore,” Evercore ISI analyst Umer Raffat said. “There might be an interest in having another large, large player emerge.”