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 Impax Laboratories Inc, Perrigo Company Plc and Alvogen Inc have
been talking to advisers about strategic options for their generics
businesses, ranging from acquisitions to increase scale to an
outright sale of the units, people familiar with the matter said
this week. The persons declined to speak for attribution because the
discussions are private.
Meanwhile, Mallinckrodt Plc, one of the largest producers of the
generic opioid painkiller oxycodone, has been exploring a sale of
its specialty generics unit, Reuters has previously reported.
On an earnings call in May, the chief executive of Impax, which
makes a generic version of the EpiPen allergy injection, said it was
looking at deals.
“We will look, of course, look for asset acquisitions on the generic
side,” Paul Bisaro told analysts. “Given our size, we’re going to
have to be creative.”
Impax, Alvogen and Vertice did not immediately respond to requests
for comment. Mallinckrodt and Perrigo declined to comment.
Generic drugs, which are less expensive versions of brand-name
pharmaceuticals, have become a key front in U.S. officials’ efforts
to cut the cost of prescription drugs. U.S. consumers spend more
than twice as much on drugs per capita compared with other
industrialized countries, according to a 2016 report by the Journal
of the American Medical Association.
To bring down prices, the U.S. Food and Drug Administration (FDA)
has committed to eliminating the backlog of drug applications
awaiting its approval. This could mean nearly 4,000 new medicines
will come onto the market over the next several years, based on FDA
estimates of drugs awaiting approval.
Even before a potential flood of new products, small and mid-sized
drug makers were under pressure as consolidation among generic drug
distributors has made it less profitable for them to sell their
drugs.
Sales of generics by Impax and Perrigo dropped by 21 percent and 12
percent, respectively, in the first quarter of 2017 compared with a
year earlier. Analysts expect continued sales declines for the rest
of the year.
A merger or a sale to a rival could alleviate some of the pressure
through cost-cutting, reduced competition and new markets and
products. It could also help companies negotiate better terms with
drug distributors, such as Cardinal Health Inc <CAH.N>, McKesson
Corp <MCK.N> and Amerisource Bergen, which control about 90 percent
of all revenue from drug distribution.
GETTING CREATIVE
Mylan and Teva, the two largest players in the generics market by
revenue, helped slow the pace of decline in their generics business
last year via acquisitions. Prices dropped in the mid-single digits
for both companies in 2016, according to their results, compared to
over 20 percent for smaller peers such as Impax.
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But that scale has come at a cost. Teva’s $40 billion acquisition of
Allergan Plc's generic drug unit in 2016, the biggest generics deal
so far, has left it with a debt load of around $35 billion. Mylan
NV's $7.2 billion purchase of Meda Pharmaceuticals has put its ratio
of debt to earnings before interest, taxes, depreciation and
amortization around 3.7, well above its target of 3.
Mylan and Teva did not immediately respond to requests for comment.
Meanwhile, private equity firms are generally hesitant to place a
big bet on a sector where sales are dropping so sharply, the people
familiar with the matter said.
That means the companies most intent on M&A need to get creative.
“The problem is the obvious consolidators are too levered to do
anything,” said Randall Stanicky, an analyst at RBC. “What we could
see instead are some mergers of equals or other transactions that
could be a little bit less typical in their structure.”
Perrigo, for example, has considered spinning off its generics
business and merging into another generic drug maker, such as Impax
Labs, the sources said, adding that it is not currently holding any
talks with potential deal partners.
Alvogen has assessed similar strategies, the people said, including
a reverse merger for its U.S. generics business. A reverse merger
involves a private company buying a public group to bypass the need
to list on an exchange.
Another option is to seek out less obvious buyers, particularly from
overseas.
Indian drug makers, such as Lupin Ltd and Sun Pharmaceutical
Industries Ltd, could be among the biggest beneficiaries of the U.S.
generic drug makers shakeup. Their extensive pipelines of new drugs
awaiting FDA approval and healthy balance sheets could position them
to comfortably acquire struggling U.S. peers, one of the people
said. He declined to be named because he is not authorized to talk
to the media.
Lupin and Sun Pharma did not immediately respond to requests for
comment.
Other potential buyers are Chinese firms looking for ways to move
capital outside of the country, the people added.
Chinese conglomerate Sanpower Group Co Ltd [SPGCL.UL] recently
acquired Valeant Pharmaceuticals International Inc’s Dendreon
business for around $819.9 million, far more than the $300 million
Valeant paid when it bought it out of bankruptcy in 2015.
(Editing by Matthew Lewis)
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