More than a year after being put up for sale, German generics firm ratiopharm is now said to have three serious suitors: generics giant Teva, Iceland's Actavis and Pfizer.
Prices touted for the company, part of the late industrialist Adolph Merckle's empire, top $4 billion (about €3 billion), or just under two times the company's €1.6 billion 2009 sales. Various reports suggest Pfizer CEO Jeffrey Kindler visited the company's Ulm headquarters March 5, with Teva having made its final bid presentation a few days before, and Actavis a day or two later. Ratiopharm is Germany's second-largest generics firm, behind Novartis' Hexal.
At first glance, it's hard to see why ratiopharm has attracted so much interest. The German generics market has come under serious pricing pressure since the government introduced rebate tender contracts between manufacturers and the country's health insurance funds in 2007 (1 'The Pink Sheet' DAILY, Aug. 3, 2009).
"We expect [large insurance groups] to demand higher rebates in future, and for Germany's aggressive pricing policy to continue for the foreseeable future," said Martin Brunninger, an analyst at European investment bank Bryan Garnier. As a result, he forecasts the German commodity generics market to shrink at a double-digit rate over the next few years.
A pessimistic outlook for the drug market as a whole seemed justified March 10, when Health Minister Philipp Roesler announced plans to force down prices for innovative drugs too, potentially ending Germany's status as the last European bastion of free upfront branded drug pricing (2 'The Pink Sheet' DAILY, March 10, 2010).
Beyond Germany: Eastern Europe, Biosimilars
So why the "continued, growing" interest from potential buyers of ratiopharm, as described by the company in a March 12 press release announcing 2009 results? Although profits were up on the previous year, sales were down, perhaps in part because ratiopharm lost out on the last round of tender contracts. It has since clawed itself back into the game, however, with a handful of deals with key insurers that come into force this year.
While Germany remains a major generics market despite the pricing pressures, a potential deal, at least for Pfizer, "would be nothing to do with Germany, but everything to do with emerging markets," opined David Maris, a generics analyst at CLSA in New York. Pfizer would likely wish to get its hands on the several hundred products that it would need for a sufficiently broad presence in large markets such as China, India and Latin America, products it could sell in these markets as branded generics.
Ratiopharm's significant presence in Europe's own (Eastern) emerging markets, plus Russia - which together account for about 40 percent of the business - would also be a boon. So would its biosimilar capabilities, housed in the BioGeneriX subsidiary. "These [elements] are probably bigger value-drivers than Germany for Pfizer" and the other interested parties, speculated Brunninger.
Ratiopharm in the mid-1990s established subsidiaries in Austria, the Czech Republic and Hungary. Today the group is present in 18 European countries, including Estonia, Lithuania, Ukraine, Poland, Slovakia, Russia, and seven outside of Europe. Now, more than half of ratiopharm's business comes from outside Germany.
The company established BioGeneriX in 2000, building a biologics manufacturing facility in Ulm six years later. It now boasts two marketed products: Ratiograstim (generic filgrastim), approved by EMA in September 2008, and epoetin, granted a positive EMA opinion a year later.
Maris also adds global production capacity and an expanded international footprint to the list of attributes that ratiopharm will bring its buyer. "Both Teva and Pfizer can produce large-scale generics, but in future some of the largest drugs going off-patent are extremely high-volume products," he observed, including Pfizer's Lipitor (atorvastatin).
"Tying up factories [uniquely] in North America doesn't make sense, especially given the post-six-month pricing declines," he said. Ratiopharm has production sites in Germany and Canada, and recently inaugurated its third, in India, four years after establishing an R&D center there.
Pfizer Generics: Building from a Small Base
Pfizer's existing generics business, rooted in the U.S.-based Greenstone operation, is still small. So small that the company doesn't break out sales, which fall within its Established Products Business Unit, created in 2008. Headed by David Simmons, the business unit's worldwide annual revenues were $7.6 billion in 2009, up 2 percent year-on-year.
In media interviews over the past 12 months, Simmons has said Pfizer's plan is to grow what has historically been a shrinking or stagnant business through portfolio expansion, including, significantly, into emerging markets; product enhancements; in-licensing; and competition in more specialist segments of generics, such as sterile injectables. The timetable was to get to growth by 2011 or 2012, but, judging by 2009 results, he seems to have achieved that goal early (3 'The Pink Sheet' DAILY, March 19, 2009).
Thus far, most of the expansion of Pfizer's generics business has come via multi-product licensing deals. An interest in ratiopharm suggests Pfizer would like more in-house assets and infrastructure onto which it can build, while potentially reducing costs in its existing business through synergies. Preserving jobs and operations at ratiopharm, a family-owned company, may be key to the winning bid.
Teva Is In Germany But Not As Frontrunner
Unlike Pfizer, Teva already has a foothold in Germany via previous acquisitions (including Barr in 2008 and Ivax in 2005) and has established leadership positions in pain, respiratory and hospital oncology, including some drugs that it sells only in Germany. But Teva's not in the top three in Germany, as it is in other European markets.
Hence the group wants to expand further, not the least because the remaining branded generic opportunity in Germany is worth up to $3 billion, according to Teva Pharmaceuticals Europe CEO Gerard van Odijk. In a January interview, van Odijk also pointed out that generic pricing in Germany remains above that in the U.S. or the UK, despite the current downward pressure.
Thus, while growth in Germany is slowing, the market's still large and profitable, for all but the commodity-only generics players, Maris pointed out. "It's a bit like the U.S. Not as attractive as a few years ago," but still an important place to be.
Such factors may also explain the interest from privately owned Actavis, which has a top-10 presence in Germany. It too is committed to strategic acquisitions.
Despite the current challenges, Germany still is the second-largest generics market after the U.S, according to IMS. The tender process may have captured an estimated two-thirds of generic products, but there also remains a good chunk of patent-expired branded originals not subject to tender. These, according to Bryan Garnier's Brunninger, are growing at almost 17 percent (in value terms) compared with just 5.1 percent for the generic segment.
Brunninger speculates that this faster growth may be due to doctors' frustration with having to switch patients from one generic to another as rebate contracts change hands, sometimes as often as every quarter. Some might choose to keep patients on the branded originals in order to prevent confusion.
Drug firms also may be doing their bit to promote the branded originals through bundling deals, in particular with consumer products.
Thus, ratiopharm's OTC business could offer another attraction. It would provide a range of OTC products, including ratiopharm-branded paracetamol and cetirizine, that can be leveraged across wider geographies. Consumer products also offer the opportunity for closer relationships with retailers.
Ratiopharm's eventual acquirer is likely to emerge in the coming weeks, with several observers handicapping Pfizer as the likely winner. If so, this deal would provide a significant boon to its generic product portfolio and plans to expand the Established Products division internationally.
But even though Germany isn't likely the only or main point of interest for ratiopharm's last-round bidders, opportunities to buy into the German generics market don't come up often, particularly ones that include the hard-to-enter biosimilars segment and a footprint in Eastern Europe. If ratiopharm does fetch anything close to the €3 billion being talked about, the deal would be among the largest generics takeovers since Teva bought Barr in 2008. While multiples can vary widely, the sales multiple appears roughly in line with similar deals, including Cephalon's 2010 purchase of another Merckle-owned company, Mepha, for 1.5 times sales, or GSK's 2009 purchase of emerging market branded generics from Bristol-Myers Squibb for 2 times sales.
- Melanie Senior (m.senior@elsevier.com )
This article also appeared in "The Pink Sheet" March 15, 2010.
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