Potential Targets Emerge as Daiichi-Ranbaxy Deal Shakes Up Rankings in Global Generic Drug Industry

The Daichii-Sankyo deal to acquire Ranbaxy Laboratories, India's largest firm by value and second-largest by market, has triggered talk of consolidation in the global generics industry. The interesting element of this transaction is the apparent marriage between a largely innovative firm and a pure-play generics company, which is expected to encourage other global pharma majors to follow suit. Reuters reports on the development, indicating several Big Pharma players such as Pfizer and Johnson& Johnson (both U.S.) as potential frontrunners in making the leap to further their own generic ambitions. On the other end of the spectrum, generic firms such as U.S. Mylan which recently bought out U.S. Merck KGaA's generics unit and India's Matrix Laboratories could provide some viable target options, along with Watson Pharmaceuticals and Barr Pharmaceuticals (both U.S.).

The level of interest in generics is spurred by factors such as the current growth in the market, which is twice as fast as the branded-drugs market. In 2007, the generics industry was pegged at US$70 billion and is expected achieve 11% growth, reaching US$94 billion by 2010 (Business Standard). The U.S. market represents a defining lead accounting for 28% of generic global sales followed by Europe and Asia. India maintains a 10% market share in this industry.

In terms of ranking, the top ten generic players are a powerful lobby, accounting for the majority of the share in the generic market. The list is essentially led by Teva, Sandoz and Mylan (see table below), who have achieved high top-line growth bolstered by a series of acquisitions. The latest deal ensures Daiichi an entrance, Ranbaxy Laboratories currently occupies ninth place. Although Barr and Watson were mentioned in the source as strong contenders for Big Pharma acquisition, Ranbaxy's sell-out to Daiichi paves the way for speculation on others such as Gedeon Richter, KrKa and Stada to consider such a move. In the overall pharma market, Daiichi has moved up to 15th place after the acquisition of Ranbaxy.

Outlook and Implications

The deal itself brings into focus two different business models that were seldom expected to merge before. Generic companies have a business model that concentrates on economies of scale, low expenditure on research and development, and tighter profit margins. The sell-out by Ranbaxy illustrates several elements that are affecting the Indian company specifically and the industry as a whole; among these are higher product costs, stringent regulations affecting manufacturing costs, and an increasingly competitive U.S. market, adding pressure on margins. But the generics market is expected to grow in double-digit figures over the next five years as opportunities from several blockbuster-drug patents near expiry.

For a pure-play generics firm, this still represents a short-to-medium term upside, and drug innovation will need to tapped into to maintain value growth in the long term. For Big Pharma, the generics platform provides an instant injection to top-line growth that is impacted by slow new drug approvals, stringent reimbursement regulations, and a perceived onslaught on blockbuster drugs. This is where the potential lies for a successful model, demonstrated by the Novartis-Sandoz deal, which has allowed Sandoz to persist as a stand-alone firm to optimise the potential in the generic drug market. Any deals further to the Ranbaxy-Daiichi pact are likely to mirror this model, and Big Pharma majors such as Pfizer that have ongoing litigations on top products are expected to take the plunge into the generics market. In fact, it can be said that the Japanese firm has moved ahead of the competition and other players would need to make their move fast as valuations are expected to go up for all target firms following the Ranbaxy acquisition.