Combination therapy

BUSINESS
Pharmaceuticals

Feb 24th 2005
From The Economist print edition

Novartis buys two generic drugmakers

WHILE coping with sluggish pipelines of new drugs, rising development costs and pressures on product pricing, big pharmaceutical companies are not particularly inclined to regard imitation—in the form of generic versions of their blockbuster products—as flattery. Relations between the big firms selling branded drugs and the generics industry are often frosty, especially now that at least $9 billion-worth of patented drugs may face generic competition in America this year and several landmark patent challenges are before the courts. Yet this week Novartis, a Swiss drug giant, took a huge step towards the dark side, announcing its purchase of Hexal, a German generics firm, and a sister company in America, Eon Labs, for a combined cost of $8.3 billion.

Novartis already has a generic drug division, called Sandoz, which struggled last year to sell $3 billion-worth of drugs, roughly one-third more than Hexal and Eon Labs combined. The acquisition will make Sandoz the world's largest generic drugmaker and, critically, give it a stronghold in Germany, the world's second-largest generics market. Generic drug sales totalled $30 billion last year in the eight biggest markets and are likely to grow by a healthy 10% a year until 2009, says IMS Health, a data and consultancy firm, as public and private buyers in Europe and America look for ways to cut their drugs bill. Moreover, several biotech drugs now face patent expiry and—regulatory issues in both Europe and America permitting—may soon offer another source of business for Sandoz, which already sells one such “biosimilar” drug in Australia.

Only a few years ago big drug firms, which had bought generics companies in the hope of making easy money, were busy trying to off-load them. There are few synergies between the two sorts of drug manufacture, as generic drug-making is “a gloves-off business compared to the gentlemanly boxing match which is Big Pharma,” says Neal Hansen of Datamonitor, a research firm. In generics, success depends on being cheap enough to keep manufacturing and other costs down, big enough to dominate distribution channels to wholesalers, and fast enough to move in and out of markets as opportunity ebbs and flows. Staying ahead of the competition, particularly the various low-cost Indian firms with their sights on western markets, is a further challenge.

With this week's move, Novartis may make Sandoz big and broad enough to do that, at least for now. But not everyone is happy. Health activists, concerned about rising drug prices and restricted access to medicines, are already grumbling about the incursion of the big drug firms into the plucky underdog business of generics.

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