In November the pharma world was buzzing over news reports that Novartis (NVS) - Get Report was seeking to acquire generics maker Amneal Pharmaceuticals LLC, in a deal that could fetch around $8 billion.

Acquiring Bridgewater, N.J.-based Amenal would help Novartis's generics unit, Sandoz International GmbH, maintain its spot as the third-largest U.S. generics maker as other generics leaders have been buying up smaller rivals.

That deal hasn't happened and Sandoz CEO Richard Francis recently suggested it won't because Sandoz doesn't need larger scale to remain competitive.

Nevertheless, it makes sense that pharma watchers would predict more consolidation in the generics space. Inflation, a looming "patent cliff" and consolidation in the healthcare services and goods segment as a whole are all putting pressure on the generics space causing those on Wall Street to wonder who and what may be next in terms of deals.

Oppenheimer analyst Derek Archila said the other major generic firms are also likely to limit themselves to acquisitions of small and mid-sized companies in the immediate future. "In the near term there's little capacity to a big deal-Teva, Mylan and Perrigo are over-leveraged or don't have a CEO," he said. "I don't think that will stop U.S. and Indian generic manufacturers and private equity firms from looking at small to mid-cap producers."

Possible acquirers in the space include Pfizer Inc. (PFE) - Get Report , which entered the market in big way with the 2015 acquisition of Hospira, Teva Pharmaceuticals (TEVA) - Get Report , Perrigo Co. plc (PRGO) - Get Report and Mylan NV (MYL) - Get Report , if it can escape the governance troubles that stemming from its controversial EpiPen pricing and investor unhappiness with the company's governance. Foreign acquirers of smaller U.S. generics are expected to be Germany's Fresenius SE (FMS) - Get Report , Jordan's Hikma Pharmaceuticals plc (LON) and India's Glenmark.

Takeover candidates include Impax Laboratories Inc. (IPXL) , Lannett Co. (LCI) - Get Report , Momenta Pharmaceuticals Inc. (MNTA) - Get Report and SciClone Pharmaceuticals Inc. (SCLN) .

The sector as a whole has been plagued by price deflation in the U.S., thanks to an influx of products from low-cost manufacturers in India and to record levels of generic approvals by the FDA. There's also fierce price negotiating by the three giant consortia that buy drugs on behalf of drug store chains—Red Oak Sourcing, a venture of CVS Health Corp.  (CVS) - Get Report and Cardinal Health Inc.  (CAH) - Get Report ; Walgreens Boots Alliance Inc.'s (WBA) - Get Report partnership with AmerisourceBergen Corp.  (ABC) - Get Report , and McKesson Corp.'s (MCK) - Get Report with Walmart Stores Inc.  (WMT) - Get Report .

Another worry is the looming "patent cliff" in which the number new drugs coming off patent will drop off precipitously, robbing generics of their ability to maintain a healthy flow of new products. According to numbers from Oppenheimer & Co., the annual sales volume of branded drugs coming off-patent will fall from $27.5 billion in 2018 to $10.7 billion in 20219 and then to $7.9 billion in 2020.

Generics are also being forced to beef up because their customer base--pharmacies, hospitals and other healthcare providers—are also consolidating and thus gaining negotiating leverage.

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Francis said Sandoz will focus on "more precise surgical bolt-ons" to enter treatment segments it isn't in already.

What will potential acquirers look for in a merger partner?

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Teva interim CEO Yitzhak Peterburg, spelled it out when he updated shareholders on the company's integration of Actavis Generics, which the company acquired in 2016, during Teva's first quarter earnings call in May.

An acquirer needs to expand its research base, he said, so that it has a deep pipeline of potential new products. "The [Actavis] acquisition has provided us with many benefits, especially much stronger and broader R&D capabilities, which we believe are the engine for any successful generic business," he said. "This is essential in today's world when we are operating across such an evolving competitive landscape and ongoing consolidation across our customer base."

Aside from the consolidation of key customers, Peterburg said an increase in generic drug approvals by the FDA has flooded many drug categories with competition.

The saturation of many categories with a dozen or more competitors is a worry shared by Sandoz's Francis, who said he's optimistic new FDA Commissioner Scott Gottlieb will address that concern. "One thing he's mentioned is his ability to prioritize," Francis said of Gottlieb's early comments on where the FDA may be heading.

Right now, the FDA looks at all generic drug applications almost equally, Francis complained. As a result, the FDA may review the 12th candidate to treat a condition before it gets around to reviewing the first generic candidate seeking to bring competition to an expensive branded monopoly. Letting the FDA place priority on approvals of the first or second generics to a market "would be a big win for companies that drive innovation and taking on challenges like Sandoz are, and I think it would be a massive win for the healthcare system, so very positive."

One of the new areas generic firms are striving to get into, either through their own R&D or through acquisitions, is biosimilars, which are the generic versions of injectables and other complex therapies grown from living cells rather that the typical chemically formulated tablets. Momenta, which specializes in biosimilars, is likely to be courted by generic giants looking to get into the category. Coherus Biosciences Inc. (CHRS) and Pfenex Inc. (PFNX)are likely targets too.

Mega deals, like a Sandoz/Novartis approach to Amneal and another attempt by Teva to get Mylan interested may have to wait a few more years, however. In the meantime, companies with the R&D pipelines and broad product portfolios are likely to solidify their spots atop the generic sector. Said Oppenheimer's Archila: "Companies with deep pipelines and robust first-to-file opportunities are likely to outperform over the long term."

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