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Teva buys part of Allergan for $40b. What future for generics?

To the surprise of many, Teva has moved quickly to snap up Allergan’s generics business for around $34 billion in cash and $7 billion in shares.

The deal has already been approved by the boards of both companies, and will not require any shareholder vote to take place. The transaction is expected to be finalized early next year, after anti-trust clearance is received from regulators in the E.U. and U.S.

Last week’s announcement follows months of intense speculation over Teva’s intentions regarding rival generics company Mylan, but the Israeli giant’s unsolicited advances were rebuffed, and that deal will now not go through:

“Allergan’s business is more high-end. It’s a more interesting business … a profitable business and it’s well managed” said industry analyst Gilad Alper of Excellence Nessuah.

The deal cements Teva’s position among the top pharmaceutical companies, and the world’s largest maker of generic drugs, with a commercial presence across 100 markets, including “a top three leadership position in over 40 markets”.

Generics: a growing market for big pharma

While generics can be priced at as low as a fifth of their branded counterparts, this isn’t always the case. Scarce competition and manufacturing shortages have led to rising prices for some compounds, and the market is buoyant.

The global market for generics is expected to rise from its 2013 valuation of $168 billion to as much as $283 billion by 2018, growing at 11% annually.

As the BRICs and other emerging markets spend more on Rx drugs, interest in branded generics or “established pharmaceuticals” is especially high.

This is often due to long-established trust and brand loyalty, in an environment where generic substitutions are not as well regulated. In India for example, branded generics make up more than 70% of the market.

Teva is not the only major player to show interest in the market for generic medicines. Other recent acquisitions include Pfizer’s $17 billion splurge on Hospira, the world’s leading provider of injectable drugs and infusion technologies, and Endo’s more modest $8 billion purchase of Par Pharmaceuticals.

Value messaging and market access

The economic value of generics might seem obvious, but market adoption hasn’t been as high in all therapeutic areas. This is particularly the case in the E.U., where less than half of prescriptions are filled by generics.

Many blame a lack of competition among pharmacies and distributors, and several countries including France have adopted policies encouraging HCPs to prescribe generics where possible.

As the peak of patent expirations recedes further in the rear-view mirror, the generics industry can’t rely on rapid growth of new products, and must look to encourage market adoption of existing medications.

BaseCase apps for market access

The kind of clinical and economic value messages our clients typically develop on the BaseCase platform are often used to communicate the value of patented products, but the same kind of approach has proven popular among generic manufacturers.

As competition in the sector grows, there’s an increasing need to differentiate products from rival generic offerings. As industry analysts at Deloitte have reported*:

“…[there is pressure from] increased global competition, with local drug manufacturers in developing countries looking for ways to grow export revenue. In India, for example, companies are eager to expand their market access.”

A number of local manufacturers are also looking to compete on the global stage. Indian generics company Lupin, which this month acquired the New Jersey-based rival Gavis as well as a portfolio of products from Germany’s Temmler, describes itself as:

“…the fifth largest and fastest growing top-five generics player in the U.S. and the third largest Indian pharmaceutical company by sales. The company is also amongst the top-ten generic pharmaceutical players in Japan and South Africa.”