NEW YORK (Reuters) - Generic drug makers are turning to M&A to shield themselves against a concerted effort by U.S. regulators to crack down on steep drug prices.
Impax Laboratories Inc IPXL.O, Perrigo Company Plc (PRGO.N) 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 (MNK.N), 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.
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.
But that scale has come at a cost. Teva’s $40 billion acquisition of Allergan Plc’s (AGN.N) 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 (MYL.O) $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 (LUPN.NS) and Sun Pharmaceutical Industries Ltd (SUN.NS), 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