Daiichi-Ranbaxy may signal Big Pharma-generic deals

By Lewis Krauskopf

NEW YORK (Reuters) - Daiichi Sankyo Co Ltd's (4568.T) bid for control of Ranbaxy Laboratories Ltd (RANB.BO) shows that pharmaceutical companies have a major appetite for generic drugmakers despite concerns about differences in their business models.

Large pharmaceutical companies have encountered a wave of product setbacks and political uncertainty that have sent many of their stocks to multiyear lows.

Acquiring companies that specialize in manufacturing low-cost, off-patent generic medicines would allow large drug makers to diversify, and seize on international efforts by governments to promote generics to cut health-care expenses.

Only Swiss-based Novartis AG (NOVN.VX) among large brand-name drug manufacturers has fully embraced generics through its Sandoz unit, which is among the world's largest generic makers.

But the move by Japan's Daiichi for Ranbaxy, a large Indian generic manufacturer, leads some analysts to believe that other brand companies may not be far behind.

"I think it's something that Big Pharma is going to take a hard look at, and you'll see more deals like this in the future," said David Webster, president of pharmaceutical consulting company Webster Consulting Group. "Historically, there's been huge cultural aversion to it, but that's evaporating."

Large drug makers will see revenue from some of the world's most lucrative medicines plummet from 2010-2012 when patents expire and generic copies eat up market share. Brand-name companies who stand to lose out because of impending patent expirations, such as Pfizer Inc (PFE.N), could be the most likely to acquire a generic manufacturer, Webster said.

Another name mentioned is Johnson & Johnson (JNJ.N), which already is comfortable with a diversified health-care model through its substantial businesses in medical devices and diagnostics, and consumer health-care products.

Brand companies in the past have had active generic units, and a few have continued to operate units that tend to sell only versions of their own medicines that lose patent protection.

"Big Pharma companies, after a decade of exiting the generic business, may be exploring potential reentry into this space as they face pressure in their core branded portfolios," Tim Anderson, an analyst with Sanford Bernstein, said in a research note.

"The argument for (pursuing generics) is that generics would enhance branded drug companies' growth prospects across multiple geographies, and would allow them to have a complete offering to payers of both branded and generic products," Anderson said.

Beyond Daiichi, other Japanese drug makers also might follow suit to capitalize on recent efforts in their home country to make generics more widely available.

As brand companies seek to draw more sales from emerging markets, they also may need to sell more generics to compete effectively against low-cost local producers.

And the looming frontier of generic biotechnology medicines also may draw more large pharmaceutical companies. The main players in the area are currently generic manufacturers, but Pfizer said in March that such "biogenerics" are an opportunity for the company.

Interest by large pharmaceutical companies would represent a new wave of consolidation for the generic industry, where companies have gobbled each other up in recent years in an effort to become more global and gain economies of scale.

Reacting to the Daiichi-Ranbaxy tie-up, analysts at Cowen & Co said that U.S.-based generic companies Mylan Inc MYL.N and Barr Pharmaceuticals Inc BRL.N, which have both made acquisitions in recent years to boost their international presence, could be targets.

Watson Pharmaceuticals Inc (WPI.N), which is more of a pure-play U.S. company, also could be a target, the Cowen analysts said in a research note. Teva Pharmaceutical Industries Ltd (TEVA.O) is pegged as too large as a target, and Anderson said the Israel-based company would more likely be an acquirer.

The most likely scenario, according to the Cowen analysts, is that the deal puts in play other Indian generic makers, such as Dr Reddys Laboratories Ltd (REDY.BO), Cipla Ltd (CIPL.BO) and Wockhardt Ltd (WCKH.BO), which are less expensive and bring lower-cost manufacturing.

But some doubt that large pharmaceutical companies are about to go on a buying binge for generics. Michael Castor, a portfolio manager with health-care fund Sio Capital Management, said the earnings from the generic companies are too small to make a dent in the large companies' bottom lines.

"From a shareholder perspective, the generic companies are worth more as independent companies than as rounding errors in large-cap pharma companies," Castor said.

Miller Tabak analyst Les Funtleyder said the generic companies also have different business models, with lower profit margins and less focus on research, so getting into the business would represent a big strategic shift.

But Funtleyder said the generics market has been weakened by increased competition that has driven down pricing, which could drive further mergers among generic players.

"Consolidation will speed up because the only way to effectively compete long term is to do it through scale," Funtleyder said. "Generics are a commodity business, and what makes commodity businesses work? Scale."

(Editing by Gary Hill)

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