Europe’s fast-growing generic pharmaceuticals industry will consolidate

further over the next few years through more mergers and acquisitions,

claims a new report published by credit ratings agency, Standard and

Poor’s .

Analyst Olaf Toelke says “in the high-risk and competitive industry

environment,” the wave of mergers and acquisitions over the past two years is likely to continue” as “companies fight to optimise their geographic

reach and their portfolios.”

The report argues that the outlook for the generics industry is positive,

“as it will benefit from a wave of branded drug patent expiries due over

the next few years.” Another factor that will aid their progress is “the

efforts of growing numbers of European governments to cut spiralling

public healthcare costs by promoting the use of generic drugs over much

pricier originals.”

As a result, Standard & Poor’s expects the industry to grow by about 10%

over the next few years, a significantly higher rate than the average

6%-8% sales growth it predicts for the global pharmaceutical industry as a

whole.

Nevertheless, generic drug firms cannot expect to achieve the profit

margins or strong credit quality of ‘big pharma,’ the report states. “As

producers of commodity products in a short-term business, they lack the

protection of makers of patented drugs that enable high margins and

long-term stable cash generation. They are also more susceptible to

continuous pricing pressure and the threat of new competitors.”

The report notes that the generics market is still fairly fragmented, with

the top 10 global players, of which European companies make up about

one-half, represented only 38% of sector sales in 2005. Top of the league

is Israel’s Teva, followed by Novartis units Sandoz and Hexal.

The strength of the generics market differs widely between European

countries, Standard & Poor’s adds, ranging from market penetration levels

of 65% in Poland to less than 10% in Italy and France.

Therefore, Mr Toelke concludes, “owing to the different levels of

penetration of generic drugs in European countries, mainly reflecting

cultural and regulatory differences, corporates are more likely to rely on

international acquisitions rather than on organic growth to become

successful pan-European players.”