Prior to the year 2000, mergers and acquisitions played a minimal role in the generic drug sector. The growth in mergers and acquisitions afterward is consistent with industry reports noting that generic firms have expanded their operations through mergers and acquisitions in recent years [1, 18]. Our analysis confirms that 2015 and 2016 in particular experienced record levels of merger and acquisition activity in the generic drug industry, based on the date of deal completion. Our results suggest that there is a substantial movement in the last two years in the generic sector towards using merger and acquisition deals to grow rather than traditional greenfield investments. The identification of the largest mergers and acquisitions show that since 2011, three acquisitions were announced at more than $10 billion, suggesting that larger companies are being acquired.
The literature provides some explanations for the recent proliferation of merger and acquisition deals in the pharmaceutical industry [1, 4,5,6]; they include: 1 – generic firms can benefit from economies of scale through savings on administrative and capital costs; 2 – the loss of major patents have brought brand-name manufacturers to enter the generic drug market; 3 – mergers and acquisitions may be pursued as a way to enter emerging markets faster; 4 – loans can be obtained easily due to low-interest rates and because banks consider the healthcare sector as more reliable; 5 – investors’ pressure to create shareholder value and pressure; 6 – fear of ‘missing out’, where all the good assets are being bought out; 7 – vertical integration to buy parts or sections of the supply chain; 8 – the emergence of biosimilars also created new market niches for more complex products with better market exclusivity, thereby creating more appealing targets for mergers and acquisitions (in the United States, new biosimilars are granted 12 years of market exclusivity, compared to 180 days given to traditional generic drugs entering the market).
With the recent wave of mergers and acquisitions, it appears that the industry is consolidating; however, the number of enterprises in this industry grew from 2010 to 2015 . Despite the appearance of consolidation, the top four generic pharmaceutical manufacturing firms in the United States made only 26.4% of the industry’s total revenue in 2015 . The largest generic company, Pfizer Global Established Products, represented 9% of the global market value for generics and the top ten global companies represented less than 40% of global market value . The Herfindahl-Hirschman index (HHI), a commonly accepted measure of market concentration, was estimated at 0.021 for the global generic sector in February 2016, way below the United States Department of Justice threshold of 0.25 where caution starts to be exercised by antitrust authorities . However, the low overall concentration ratio might be misleading as compared to concentration index for specific therapeutic categories or molecules. For instance, a study that analyzed 1200 generic drugs showed that nearly half of the drugs had an HHI value exceeding 0.5, which is considered duopoly like competition level . The study also showed that increases in generic drug prices in the United States are strongly related with market competition levels. In fact, several companies developed a novel business model based on the domination on non-competitive markets for older drugs by cornering niche generic markets through mergers and acquisitions in order to substantially increase prices . Mergers and acquisitions were thus an important factor to explain the large price increases for different generics like albendazole (treatment for intestinal parasites), dextroamphetamine (treatment for attention-deficit disorder), and pyrimethamine (treatment for toxoplamosis), nitroprusside (treatment for high blood pressure) and isoprotenerol (used in cardiac emergencies) [11, 13, 20].
Our results show that merger and acquisition activity among generic drug companies have become a major trend in this industry since 2004, but that this trend has accelerated in 2015 and 2016, and that the United States target companies have been the center of this acceleration. It is important to note that the record level of mergers and acquisitions in the United States appeared after two years of price increases for a large proportion of generics in the country . Mergers and acquisitions should not be considered the root cause of generic drug price increases, but rather as a factor exacerbating the trend of rising prices. The results also show that the focus on United States generic targets in the last few years is not linked to the need to enter emerging markets or vertical integration with manufacturers of raw ingredients in emerging countries. The significant price increase for many generic drug products in the United States also means that mergers and acquisitions are not simply a means to increase efficiency and reduce costs.
While there was a “patent cliff” starting in 2010 when many blockbuster brand-name products lost their patent protection, greatly increasing the market for generics, many governments also imposed measures like generic substitution, heightening the demand for generics [15,16,17,18,19, 21]. Governments and private drug plans have also imposed downward pressure on the price of generic drugs, forcing a restructuring in some parts of the industry . This downward price pressure from large buyers is problematic for smaller manufacturers, creating incentives for mergers and acquisitions among sellers to adjust to the market factors .
Typically, mergers and acquisitions reduce the number of manufacturers for specific drugs in some therapeutic niches, which can potentially lead to price increases. Mergers and acquisitions are also identified as a potential cause for drug shortages since they may result in supply disruptions based on business decisions to narrow the focus of the product line, discontinue products or to shift manufacturing to another facility . For example, after acquiring the largest producer of generic injectable drugs in 2015, Hospira, Pfizer became the only supplier of injectable sodium bicarbonate in Canada . The drug, similar to baking soda, is widely used for emergency procedures, open heart surgery or during some chemotherapy treatment. After manufacturing problems, and because of a lack of alternative manufacturers, Canada had a shortage of the drug in 2017 .
The record level of mergers and acquisitions in the last two years indicate that the economic structures of the generic sector are shifting, especially in the United States. In this context of increasing economic restructuring, countries must adapt their regulations and procurement policies accordingly in order to protect themselves against abusive price increases or drug shortages. The market forces in the generic sector do not necessarily ensure lower prices and safe supply for all generics. Governments must thus develop institutional capacities to deal with potential problems.
Governments should consider implementing for their public drug plan a procurement process with tenders that include specific clauses to ensure the safety of the drug supply and reduce drug shortages [25, 26]. The establishment of a public generic manufacturer, like what is found in Sweden, could also be explored as a way to deter predatory pricing and reduce drug shortages [15, 24, 25]. Antitrust authorities should also examine the current practices of generic manufacturers in this context of merger mania.
In particular, in the United States, the antitrust laws protect consumers only against anticompetitive strategies such as price fixing among competitors. Generic manufacturers that legally obtain a monopoly on a product through mergers and acquisitions are free to unilaterally increase prices . To ensure more market competition between manufacturers, the United States Food and Drug Administration could create special pathways for foreign manufacturers or new competitors to promote competition and allow the market to work more efficiently . Because of the magnitude of current mergers and acquisitions in an evolving generic sector, solely relying on market forces might make some essential generic drugs inaccessible for many due to high costs or shortages.
Although this study starts to address the lack of information on mergers and acquisitions in the generic drug industry, it has several limitations. The most noteworthy limitation of this study is that we did not directly associate merger and acquisition deals with their specific outcomes such as the price or shortages of the products involved in the mergers. Looking at the years 2015 and 2016, it is too early to reliably determine the impacts of the mergers and acquisitions. Another limitation was that the announced value was “not announced” in cases where a private company acquired the generic drug company; the likely result is the underestimation of the value of mergers and acquisitions.