Teva's reported bid for ratiopharm, one of Germany's premier generics companies, could hardly be a surprise for anyone following the Israeli company's recent rip-roaring endorsement of opportunities in that troubled market.
Teva believes its can grow its European revenues at a compound annual growth rate of 18.6 percent between 2009 and 2015 - well above the biopharma industry's average in that region of 4 percent (6 percent, when excluding Germany). Given the size of the gap, Teva will have to take market share--and the way it knows how to do that best is through M&A.
"We'll have our fair share of that," said Gerard van Odijk, president and CEO of Teva Pharmaceuticals Europe, referring to M&A activities in an interview several days after the company's rosy investor forum on Jan. 7.
Although ratiopharm has been on top of people's minds, he would not comment except to note "there is a list of potential opportunities in the European market...where we are big in share, we will grow organically and maybe make some small acquisitions, so that we grow a little faster than the market." The bigger acquisitions are more likely to come in under penetrated markets where Teva has less market share.
Germany certainly fits the latter category. Teva's bullish outlook on that tumultuous market is especially intriguing. The country is by far the largest generics market in Europe (roughly $5 billion in annual sales), but government efforts to cut health care costs, in part by revamping reimbursement regulations, has set in motion a price war and brutal shakeout among suppliers. Teva doesn't publicly break down its individual country sales, but says it is the fifth-largest generics company in Germany, and aims to be number one.
Overall, the generics market in Germany will fall 3 percent between 2009 and 2015, but Teva's own sales are growing and will continue to do so, van Odijk told analysts at the Jan. 7 forum. These kinds of numbers don't make Teva "nervous...It makes us very anxious to go after it," he continued. "We believe we can make it." In short, Teva is betting that its volume increases can make up for the market's declining prices--a position that is possible only if it has a leading market share.
"Teva's bullishness on Germany is interesting," says David Maris, an analyst with CLSA Capital Partners. "They are looking at barriers to entry, not the growth...people say they are crazy, but they say 'We need to be there and so let's find a way.' "
Teva has to be first in every market it is in because that is the best way to maximize value, says van Odijk. At a minimum, it has to be in the top 3 because that "allows you to sit at the table with major customers and put your best foot forward--everyone on the buyers' side wants quality and continuity at a cheap price," which means working with large players, he says.
Tenders Contracting Has Destabilized the German Market
One of the most jolting new structural changes in Germany has been implementation of a tender process in which the country's quasi-public insurers solicit bids from manufacturers to be the preferred suppliers of certain generic drugs.
In some cases, the insurers awarded contracts for particular compounds to several suppliers, but increasingly they are selecting one exclusive supplier, locking everyone else out of a market for the length of the contract, which run on average about two years, says Martin Brunninger, an analyst at Bryan Garnier in London. Teva competitors - including Dr. Reddy's Betapharm division; Stada, another independent domestic supplier, and Novartis' generics arm, Sandoz - are also struggling for market share.
The tender part of the market has lost 60 percent to 70 percent of its value, but tenders represent only a portion of the current German market, while private payer opportunities and niche products remain attractive, says van Odijk. The German market has "the highest amount of different SKUs -a lot of Germany-only products--and, very often, these have only one supplier," he said, adding that other non-tender opportunities exist in branded generics (once a dominant part of the German market), remaining areas where doctors' preferences still have influence on prescription of certain products, and consumer goods."
And Teva, through its 2008 and 2005 acquisitions of Barr Pharmaceuticals and Ivax, has some leading pain, respiratory, and neurology drugs, which it sells only in Germany. One patent-protected pain drug, Katadolons, which came with the Barr acquisition, could have potential on the broader, international market, he said.
Non compliance with tenders also presents an opportunity. "If you look at AOK (the largest German insurer and a bellwether for the others), only 55 percent of products that should be distributed to patients through tenders are, for all sorts of reasons," van Odijk said; patients choose to pay for the remaining 45 percent with private insurance or out of pocket. Compliance rates are certain to rise, as the government closes loopholes, but even then 25 percent of the market is likely to remain outside of contracts and priced higher, he added. Private-label goods, another opportunity, represent about 10 percent of the market, as well.
No way exists to gauge if anyone is making much money on contracts. Pricing in Germany continues to decline, but tender prices are not publicly recorded, making assessments difficult, van Odijk said. Overall, prices for some products are "falling off a cliff, while others are holding up nicely," he said. Still, he noted, despite the problems, "prices in Germany are relatively high compared to the US or UK."
One hint may come from Dr. Reddy's, which owns Betapharm, the fourth-largest generics manufacturer in Germany. Because of the domestic market's gradual shift to tenders, Dr. Reddy's took a write down of close to €100 million in the third quarter of the fiscal year ending March 31, 2010, resulting in a €112 million loss. Extraneous factors were also at work, including the $580 million price tag Dr. Reddy's paid when it bought the company in 2006 and inefficient production arrangements. If nothing else, however, the numbers indicate that the current German market allows no room for error--and put a chill through US-based suppliers as they work to stem some of the proposals that have floated through the murky waters of health care reform in this country.
-Wendy Diller (w.diller@elsevier.com)
This article is reprinted from "The Pink Sheet" DAILY –Jan 22, 2010
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