Swiss pharmaceuticals giant Novartis AG announced over the weekend an $8.4 billion expansion of its generic drug holdings in a move that is widely viewed in the drug and medical communities as the continuation of trend toward consolidation in the generic drug sector. As a result of the deal, Novartis will become the world’s largest seller of generic drugs at a time when it is already the top seller of branded drugs. Novartis had total world-wide sales last year of just under $30 billion.
Novartis will pay $7.4 billion to buy Hexal AG of Germany and 68% of Eon Labs Inc., which are two generic-drug makers that are controlled by Germany’s wealthy Str¸ngmann family. As a part of the deal, Novartis will also launch a tender offer to acquire the balance of Eon shares for about another billion.
The generic drug industry has exploded in growth since the 1980s when U.S. law was modified to make it easier for drug companies to copy successful branded drugs. As a result, the generic drug industry became increasingly aggressive at challenging the legality of branded drug patents in court, which has often resulted in patents being overturned years ahead of the normal term.
Nevertheless, the sector has always been highly fragmented and now its profits are being squeezed by brutal price competition. Thus, these difficult market conditions are prompting consolidations in the generics business, and the Novartis deal reflects that the branded drug companies are going to be involved in the consolidation in a big way.