Swallowing Eastern Europe's Drugmakers
As consolidation of the generic-drug business around the world hits warp speed, Eastern Europe is finding itself at the center of the action. So far this year, at least eight deals have been announced, including the most recent, Barr Pharmaceuticals' (BRL) $2.5 billion acquisition of Croatia's Pliva, completed on Oct. 25. "The dynamics of the industry are changing, and generics companies will have to look to new international markets to survive," says Pliva Chief Executive Zeljko Covic.
Generic-drug makers are caught in a Catch-22. Demand is soaring, but prices are falling in the U.S. and most of Western Europe. At the same time, competition from low-cost players in India and China is intensifying as these companies shift from supplying just raw materials to making the drugs themselves.
"As a result, many generics players who are well-positioned today are losing their source of cheap ingredients and gaining a new competitor in the process," says Tommy Erdei, executive director of UBS Investment Bank's Global Healthcare Group in London.
The Branded Gentry
Why head east? Economic growth and the rise of the middle class mean the region will likely spend more on health care—and generics. Demand for generic drugs in Russia, for instance, is growing between 30% and 40% a year, compared with 7% in the U.S. Another big attraction: the dominance of so-called branded generics. These copies of off-patent prescription drugs are marketed under brand names and sell for more than commodity generics.
While consumers in the region typically can't afford high-priced brand-name formulas, they are willing to pay more for the perceived higher quality associated with branded generics. "These days every generics company is looking for ways to grab margins, and emerging markets such as Eastern Europe and Russia offer some of the best opportunities for growth," says Ton Gardeniers, ABN-Amro's global head of health care.
No wonder Barr spent five months in a bidding war with Iceland's Actavis Group to acquire Pliva, Eastern Europe's largest drugmaker (see BusinessWeek.com, 9/25/06, "European Pharma M&A: Sidelong Glances"). The deal doubles Barr's sales and brings in highly skilled manufacturing at one-fifth the cost of U.S. workers
Other Fish Are Biting
Pliva also excels at what many analysts say is the next big frontier in the pharma business: biogenerics, or off-patent versions of genetically engineered biotech drugs. Moreover, the deal gives Woodcliff Lake (N.J.)-based Barr better access to Central and Eastern Europe and Russia. "This combination will redefine Barr's potential for success by significantly lowering the cost structure," Barr Chairman Bruce L. Downey said in a statement.
Barr isn't the only one to spot the region's potential. Novartis' (NVS) Sandoz, the world's second-largest generics maker by sales, bought Slovenia's Lek four years ago. Over the past two years, Actavis has been snapping up Eastern European generics makers, including Hungary's Kéri Pharma, Bulgaria's Higia, the Czech Republic's Pharma Avalanche, and Romania's Sindan.
In March, French giant Sanofi-Aventis (SNY) paid $565 million for a 25% stake in Zentiva, a Czech generics maker. Even Indian players are getting in on the action: In March, Ranbaxy spent $374 million for majority control of Terapia, Romania's largest generic company (see BusinessWeek.com, 3/14/06, "German Pharma Powerhouse Potential").
"No Sign of Slowing"
Next up: Slovenia's Krka is one possible target, although its $2 billion-plus market capitalization is likely to attract only deep-pockets players. Krka offers an attractive entrée into Eastern Europe and Russia, which account for 85% of its estimated $851 million in 2006 sales. And Krka makes more than 50% of the active ingredients used in its drugs in-house, which reduces manufacturing costs.
Another possible takeover target: Hungary's Gedeon Richter, the No. 1 generics player in Russia. With operating margins of 28% and a lucrative niche in women's health, Gedeon Richter is expected to post annual sales growth in excess of 15% through 2010, ABN-Amro estimates. Poland's biggest generics company,
Polpharma, might also be in play, and the rest of Zentiva could be up for grabs. "The consolidation shows no sign of slowing," says Gudmunda Osk Kristjansdottir, an analyst at Landsbanki in Reykjavik. "It's fast becoming a seller's market."