Hunting the Generic Takeouts

Following last month's $7.4 billion bid for Ivax (IVX Quote) by Teva Pharmaceutical (TEVA Quote), it didn't take long for people on Wall Street to ask, "Who's next?"

The same question emerged a few months earlier, when Novartis (NVS Quote) made two bids -- for a German generic-drug company, as well as for U.S. generic-drug maker Eon Labs.

For a few years, bigger generic companies have been buying smaller ones, although none of the deals has been as massive as these last two. So maybe the appropriate question now is, "Who's left?"

"This raises the stakes for the midsized generics players," says Arthur Wong, a credit analyst at Standard & Poor's. Last month, he issued a report predicting "tougher times ahead" for generic-drug makers because of more competition.

"Consolidations that produce a larger, financially stronger generic player would be favorable developments," he said in that prescient report on an industry that's still fragmented.

But don't expect a massive merger trend. "There won't be a wave of acquisitions," says Richard Watson of William Blair & Co. "It will come in increments over [two to four years]. It will be an ongoing process."

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Some analysts figure Novartis has enough spare change and ambition to bulk up its Sandoz unit again. Sandoz is the world's largest generic-drug producer, at least until the Teva-Ivax deal is approved.

The conventional wisdom says Big Pharma won't try to emulate Novartis. "History has shown that conglomerates don't do well with generics because it's such a cutthroat business," Watson says.

Instead, analysts predict what Watson calls "bolt-on acquisitions." These are strategic purchases meant to expand a company's geographic reach or expertise in a specialty area.

Across the generics industry, some companies have moved into selling higher-margin brand-name drugs, and some have dropped their brand-name aspirations. Some focus on certain diseases and conditions. Others have acquired foreign operations, hoping to win big stakes in underserved markets rather than devoting all their efforts to slugging it out in the U.S.