| Europe's fast-growing generic pharmaceuticals industry will consolidate further over the next few years through more mergers and acquisitions, predicts a report published today by Standard & Poor's Ratings Services, "More Mergers Prescribed For Europe's Fast-Growing Generic Drug Industry".
"In the high-risk and competitive industry environment, the wave of mergers and acquisitions over the past two years is likely to continue in the future as companies fight to optimize their geographic reach and their portfolios," said Standard & Poor's credit analyst Olaf Toelke.
The outlook for the generics industry is positive, as it will benefit from a wave of branded drug patent expiries due over the next few years, as well as from the efforts of growing numbers of European governments to cut spiraling public health-care costs by promoting the use of generic drugs over much pricier originals, the report says. As a result, Standard & Poor's expects the industry to grow by about 10% over the next few years, a significantly higher rate than the average 6%-8% sales growth expected for the global pharmaceutical industry as a whole.
Nevertheless, generic drug firms cannot expect to achieve the profit margins or strong credit quality of Big Pharma, the report states. As producers of commodity products in a short-term business, they lack the protection of makers of patented drugs that enable high margins and long-term stable cash generation. They are also more susceptible to continuous pricing pressure and the threat of new competitors.
"We therefore consider a typical sizable and pure generics company is likely to achieve a long-term corporate credit rating in the 'BB' to 'BBB' categories, considerably lower than the existing global top 20 Big Pharma average 'AA-'," said Mr. Toelke.
The report says a number of characteristics of the generics industry support further consolidation over the next few years. The global market is still fairly fragmented, with the top 10 global players, of which European companies make up about one-half, representing only 38% of sector sales in 2005. Top of the league is Israel-based Teva Pharmaceutical Industries Ltd. (BBB/Stable/--), followed by the generic brands Sandoz and Hexal, owned by Switzerland-based Novartis AG (AAA/Stable/A-1+).
The strength of the generics market differs widely between European countries--ranging from market penetration levels of 65% in Poland to less than 10% in Italy and France. "Owing to the different levels of penetration of generic drugs in European countries, mainly reflecting cultural and regulatory differences, corporates are more likely to rely on international acquisitions rather than on organic growth to become successful pan-European players," said Mr. Toelke. | 
