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.
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 mergers and acquisitions 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.
