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Generic Manufacturers Find Their New Medicine

Emerging markets will be the next frontier of generic drug industry M&A.

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Consolidation to Continue in the Generics Industry
The generics industry remains in the midst of a consolidation phase. Operating in a highly fragmented and relatively commodity-based segment of the health-care industry with low barriers to entry, generic manufacturers gain advantages from acquisitions, which can quickly boost economies of scale as consolidated fixed costs become allocated over a larger manufacturing volume base. Therefore, generic manufacturers have an incentive to get big and drive down relative operating costs. Additionally, moving from a fragmented industry toward an oligopoly generally raises barriers to entry and eases pricing pressure.

The largest generics industry players,  Teva (TEVA), Sandoz (subsidiary of  Novartis (NVS)),  Mylan (MYL), and  Watson (WPI) continue to drive industry consolidation. As Table 1 shows, there has been at least one large acquisition every year since 2004. Teva has demonstrated the largest appetite for acquisitions, quickly rising into its position as the world's top generics manufacturer with an acquisition every other year. Through acquisitions, we estimate these four generic manufacturers now possess nearly 50% of the generic drug market, and we anticipate unannounced deals could put combined market share near 60% by 2015.

Michael Waterhouse does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.