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Teva Pharmaceutical Wins Fight in the Generic Drug Market Battle

Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA) will buy sought-after German generic producer Ratiopharm for $4.97 billion, continuing a trend of highly competitive merger-and-acquisition (M&A) activity in the pharmaceutical industry.

Competitors have pursued Ratiopharm for nine months because of its position as the second biggest generic producer in Germany. It was put up for sale in June to help pay off debt amassed by the previous owner's stock market misfortune. Other contenders were rumored to be the Pfizer Inc. (NYSE: PFE) and Iceland's Actavis Group.

Israel-based Teva is the world's largest producer of generic pharmaceuticals. Its biggest market is the United States but it is finally expanding its European presence.

"This transaction is perfectly aligned with our long-term strategy in which Europe is an important pillar and growth driver," Teva said in a statement. "Ratiopharm will provide us with the ideal platform to strengthen our leadership position in key European markets, most notably in Germany, as well as rapidly growing generic markets such as Spain, Italy and France."

Its new purchase lifts it to the top spot from the fifth in the $8.6 billion German generic drug market, which is second to the United States in generic drug production.

"If you're number one in the world, you can't afford to not be in Germany," Gilad Sarig, an analyst for Bank Hapoalim, told Bloomberg. "They were looking for this opportunity for the last three or four years. They wanted it more than Pfizer wanted it, and I think Pfizer did have the intent to make this deal."

Ratiopharm is a smart choice as it has a hand in both developed and emerging economies, and Teva has been looking to expand its global footprint. This purchase is the biggest for Teva since it bought U.S.-based Barr Pharmaceuticals, Inc. for $7.4 billion in 2008.

Teva is paying 2.3 times 2009 sales, and is confident Ratiopharm's earning potential is well worth the price. The companies' combined 2009 sales would have been $16.2 billion, and Teva's earnings should reflect the change within three quarters after closing, according to Teva.

The move will help Teva fulfill its aggressive five-year growth plan that includes doubling its $31 billion in revenue, as well as its $6.8 billion in net income in 2015.

Future Holds Fewer Patents, More Generics

Teva's move is a harsh blow to other companies – like Pfizer – who are looking to expand their spot in the generics market as the pharma industry enters "the year of the patent cliff" – the 2010 expiration of a number of brand-name patents that could lose some big companies billions in profits. As much as $150 billion could be lost as patents continue to expire over the next five years and companies face increased competition from generic producers.

Some companies started prevention measures in 2009 with deals like Pfizer buying Wyeth and Merck buying Schering-Plough.

Teva feared a stumble at the patent cliff as well. Its top-seller, Copaxone, a multiple sclerosis drug, faces competition that could cut into the $1 billion it brings in. Ratiopharm is a smart purchase choice as it offers Teva 750 drugs on the market and almost as many awaiting approval to hopefully fill any void left by Copaxone.

Pharma M&A activity is also being stirred up by government healthcare reforms – like that in the United States – that could lead to a cost-cutting environment favoring more affordable generic drugs. Big firms need to consolidate to limit expenses and capitalize on smaller companies' research and development work, especially in the generic field.

Look for more M&A moves this year as bigger companies pursue those with smaller wallets and promising pipelines.

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