The feeding frenzy is on among generic drugmakers. That's the message behind Watson Pharmaceuticals' ( WPI) planned $664 million buy of Schein Pharmaceutical ( SHP), whose long-suffering shareholders sent Schein shares up 22% at the prospect of cashing out. Watson, casting itself as an acquirer in an industry where analysts expect to see significant consolidation, saw its shares slide 14% on the news. The cash-and-stock deal will end Schein's dismal saga in the fast-growing $9 billion generic drug industry and give Watson greater scale, better to compete with rivals such as Mylan ( MYL) and Teva ( TEVA). In combining Schein, the ninth-biggest U.S. generic-drug firm, with No. 6 Watson, the deal puts the merged Watson just below Israel's Teva, the top generics firm with $1.2 billion in 1999 sales and a voracious appetite to consume rivals.
Generic drug companies, which leapfrogged to claim 41% of the nation's $74 billion drug market in 1999 from a slender 18% in 1984, are all maneuvering to benefit from a raft of branded drug patent expirations in the next five years, which include major blockbuster drugs like Merck's ( MRK) cholesterol-fighting Zocor and AstraZeneca's ( AZN) heartburn drug Prilosec. Emboldened by recent court wins such as Ivax's ( IVX) victory against Bristol-Myers Squibb ( BMY) over the anticancer drug Taxol, generic drugmakers are lining up to sue drug companies and bring cheaper generic versions of drugs to market. In addition, generic drugmakers are expected to be the prime beneficiaries of any prescription drug benefit plan that Congress could enact in the next two years.
Keying on DistributionWatson's move, which came after Schein put itself up for sale in January, follows a series of acquisitions among second-tier, "specialty" pharmaceutical companies. Recent acquisitions include Teva's buys of Copley and Novopharm, Shire's ( SHPGY) acquisition of Roberts and Galen's recent offer for Warner Chilcott ( WCRX). Analysts say generic-drug companies are all looking to better appeal to large drug buyers like health maintenance organizations by offering a wider range of products and services. Watson's move will give it about 14% of the market for generics, where size is increasingly important. "We continue to believe the emerging pharmaceutical and generic sector will continue to consolidate, similar to the large-cap pharma industry," says Jeff Kraws, drug industry analyst with Gruntal, which doesn't underwrite for the drugmakers. All companies, says Kraws, are looking to be "larger, stronger and have greater distribution."
|Shaking Out |
Generic drug companies gird for consolidation
|Company||1999 revenue (millions)||Recent price||P/E ratio*||Market cap (millions)|
|Teva (TEVA:Nasdaq)||$1,200||47 1/2||49||$5,910|
|Forest (FRX:NYSE)||892||87 1/2||68||$7,382|
|Mylan (MYL:NYSE)||790||27 1/4||22||$3,524|
|Alpharma (ALO:NYSE)||774||48 1/2||34||$1,448|
|Ivax (IVX:NYSE)||691||33 1/2||63||$5,203|
|*Trailing 12-month price-to-earnings ratio. Source: Yahoo! Finance.|