Merck KGaA becomes a bigger fish in the generics sea
SummaryMerck KGaA has announced plans to consolidate its position in the highly competitive US generics market with the launch of new generics subsidiary, Genpharm LP. If the venture proves successful, it could catapult Merck KGaA into the global top three, behind Teva and Novartis. Datamonitor's Santwana Kar analyzes the reasons for and possible benefits of this move...
The global generics market is forecast to grow 20% by 2008 when it will reach $80 billion, according to figures from IMS Health. The market is, however, becoming increasingly difficult to penetrate in both the and because of low profit margins, caused by regulated pricing and reimbursement schemes, and high competition, due to the presence of established players.
Western generics players, particularly those in the , also face the emerging threat of low-cost manufacturers based in and central and eastern Europe. Companies such as Ranbaxy, Dr Reddy's and Pliva have made significant inroads into the generics market.
A mature fighting ground
The US, and are mature generics markets experiencing substantial price competition. This is reflected by the fact that, while generics make up 55% of all global prescriptions, generic market sales equate to only 17% of total sales.
However, less mature markets also exist, including , , and . These markets offer better growth opportunities as generics' current market share is comparatively small.
Commodity generics have low barriers of entry and low margins of profits due to competitive pricing, while specialty and supergeneric drugs are reformulations of off-patent drugs and have higher margins. Merck has been predominantly catering to the specialty market in the , through its Dey affiliate.
Crucial to generics companies' strategies in the is the use of Paragraph IV patent challenges to gain lucrative market exclusivity periods. Being the first to market a new generic drug makes for exceptionally attractive market share and profit margins. However, these profits are short-lived, thanks to rival launches coming at the end of the exclusivity period. This means generic companies must continually launch new products to maintain their margins.
Merck already has a presence in the market, deriving 31% of total generics sales from this sector. This predominantly stems from DuoNeb and EpiPen, supergeneric respiratory therapies marketed by Dey. Revenues have also been boosted by licensing payments from Schwarz Pharma for omeprazole sales, but revenue has declined sharply since 2003, with omeprazole sales declining following the launch of competing generics. This might have triggered Merck's decision to strengthen its presence in the .
From pharma to generics
Merck derives its sales from its chemicals and pharmaceuticals businesses. In 2004, 51.5% of its pharmaceutical sales came from generic products, which made $1,986 million. Pharmaceutical sales were $3,857 million, a 26.7% increase on 2003 figures, which is primarily attributable to the company's generics division.
The integration of Dey into Merck's generics business in 2004 now makes this unit the company's largest pharmaceutical division in terms of sales. The purchase, which represented Merck's first move to consolidate its position in the generics market, followed the company's acquisition of Pfizer's Scandinavian unit, NM Pharma, which helped bolster its European generics operations.
In the recent past, a trend of consolidation has swept across the generics market, with Teva's acquisition of Ivax being a recent example - one itself prompted by Novartis' purchase of Hexal and Eon Labs. These moves strengthened Teva and Novartis' leading positions in the global generics market and enabled the two companies to diversify geographically. This need for geographical consolidation may be key to Merck's buy, as the company attempts to keep up with the market leaders.
Merck has decided to focus on manufacturing high-value specialty products in the , with offerings such as DuoNeb and EpiPen. Both of these specialized drug delivery systems have shown moderate growth, with combined sales rising 12.5% between 2003 and 2004. Genpharm Inc, Merck's Canadian subsidiary, has also registered strong growth due to the launch of generic paroxetine and citalopram antidepressants in 2004.
It is likely that Merck will continue to cater to the specialty generic market, although it might look to launch Genpharm Inc's successful products in the , as demand is likely to be similar across the two regions.
The future is bright
Geographical diversification is rapidly becoming important to generics companies in order to maintain profits. By 2010, more than 70% of 2003's blockbuster drugs will face generic competition, resulting in a huge market for generic products. By moving into the generics sectors early, Merck should be able to diversify and expand as the generics sector becomes an increasingly lucrative area of the pharma industry to be in.