Generics sale on the cards as Merck Serono starts dealing

By Anna Lewcock

- Last updated on GMT

Related tags Generics Generic drug Merck kgaa

Merck KGaA last week confirmed that it is considering selling off
its generics division, prompting mass speculation over potential
buyers within the industry.

While the company itself has released few details and no sale process has yet been initiated, commentators are estimating the sale could be worth up to €4bn.

Despite Merck stating that it had not yet begun discussions with any potential buyers, industry analysts have proposed several companies that they expect will be paying close attention following the announcement.

It has been suggested that Sandoz, the generics division of Swiss pharmaceutical Novartis, could be interested in the unit in an effort to keep up with Israel-based Teva Pharmaceuticals, which recently snapped up IVAX putting them at the top of the generic drug manufacturing tree.

Other organisations being touted are Barr Pharmaceuticals (who recently bought up Croatian generics company Pliva), French firm Sanofi-Aventis, and Iceland-based Actavis which is fast rising up the ranks following recent acquisitions in the generics sector. It is also thought that private equity firms Blackstone and KKR could bid for the business.

Merck Generics is one of the top generics businesses worldwide, though is in competition with major players Teva, Novartis and Barr. Fighting off the rivals would involve continued investment and further acquisitions, moves which the company is unlikely to make following its acquisition of Swiss biotech Serono for €10.6bn last year.

Merck Serono

The new division, Merck Serono, was officially launched by the company today, and is due to be combined with the Merck Ethicals division during 2007 before beginning operation within the pharmaceuticals business division of Merck KGaA. Particular emphasis is being placed on the therapeutic areas of oncology, neurology and autoimmune and inflammatory diseases.

Under pressure to reduce its debt following the Serono purchase, industry analysts are of the opinion that further investments by Merck to promote its growth in the generics business would not seem a viable option, whereas selling off the unit would appear to make strategic sense for the company. Shares in the firm rose 6.5 per cent following the announcement of the possible sale.

Consolidation within the generics sector has also pushed Merck lower down the global rankings, and although generic drugs are less profitable than branded versions, the market for copies is growing at a significant rate. The global market for generics was valued at around €29bn in 2005, up 14.3 per cent on 2004. The generics market as a whole has doubled in size since 2001.

Although selling off the generics unit will cut off over a quarter of Merck's operating profit, divesting in the current climate could enable the company to demand a higher price. In 2005 the generics unit reported sales of €1.8bn and an operating result of €238m. Irrespective of the decision to consider selling the unit, Merck still plans to make a capital increase of €2bn - €2.5bn in Q1 of 2007.

Consolidation has been the theme within the generics sector of late, with major pharmas snapping up generics manufacturers in a bid to expand product portfolios and geographical range to crowd out smaller competitors.

The trend is not exclusively within the European sector - Indian firms Ranbaxy and Dr Reddy's have been quick to get in on the game, acquiring generics manufacturers Terapia in Romania and Betatherm in Germany respectively during 2006. Ranbaxy also added GSK's Spanish generics unit Mundogen in July 2006.

Other major players in generics manufacture include Mylan, Watson Pharmaceuticals and Ratiopharm.

As more branded blockbuster drugs come up for patent expiry the generics market seems poised for even further growth, suggesting that the trend for consolidation is unlikely to slow down soon.

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