Mylan Acquires Merck Generics
The beginning of a new era?
By Enrico T. Polastro
The European generic space has traditionally been characterized a high degree of fragmentation. This partly explains the asymmetry of geographical scope for industry majors on either side of the Atlantic. Indeed, while large players with roots in Europe (or nearby), such as Actavis, Sandoz or Teva, have had a presence in both North America and Europe for many years, we haven’t seen U.S.-based majors, such as Barr, Mylan or Watson, make a priority out of setting up bases in the "old continent" until recently.
This situation can be easily explained by the respective sizes and dynamics of the European and the U.S. generic markets. To maintain their top- and bottom-line growth momentum, European majors had little choice but to cross the pond. In fact, the sheer size of the U.S. generic market left little choice for any player aiming for the top spot; they simply have to participate in that region.
On the contrary, the presence of U.S.-based generic players in Europe has been very modest until recently, with major players appearing content to stick to their home market. This is due to that fragmented and heterogeneous space: generics in Europe represent a far-from-monolithic scene, with a patchwork of individual markets sharing apparently few similarities.
Regulatory requirements, pricing mechanisms, and marketing and distribution channels, along with the roles of various stakeholders (payers, health care providers and patients), have traditionally differed widely all across Europe. Economies of scale and competitive edge through a truly pan-European scope were questionable propositions; selling unbranded generics in the highly mature UK market shared few if any similarities with effectively competing in Germany or Italy, two countries where the demands has been traditionally mainly for branded products.
However, this situation is rapidly evolving. The European generic market is moving towards maturity, showing increasing degrees of convergence with its U.S. counterpart. While national boundaries remain, the motto across Europe is for cost containment. Payers, whether they are government-funded or private insurance funds, are pushing for more cost-effective healthcare provision patterns. This involves embracing measures already adopted since several years in the U.S., including:
- Pushing for wider use of generic products, as payers try to influence prescription patterns of doctors through direct and indirect financial incentives
- Exerting leverage on suppliers through purchasing scale, as healthcare systems operated by governments such as in Belgium or Italy, as well as the German Krankenkassen, are gradually embracing the practices of "Group Purchasing Organizations."
This can be illustrated by Germany, where the government has empowered the Krankenkassen (the various insurance bodies covering healthcare for the population) to enter negotiated supply agreements for the supply of generics, with affiliated patients having to stick to the products marketed by the supplier that won the bid. This represents a major departure from the situation having traditionally characterized Germany -- a generic market where the role of brands and active promotion to the physician has been of paramount importance.
Changes prompted by these developments are expected to be sweeping, especially in terms of the cultural barrier as the balance of power between payers and healthcare providers inexorably shifts in favor of payers. Pricing pressures will increase, forcing down unit margins. This will deemphasize the branding element and stress the need to reach and achieve low cost position, creating economies of scale.
Thus, the recent inroads of U.S. majors such as Barr and Mylan in the European generic space -- through their respective acquisitions of Pliva and E.Merck Generics -- is to be viewed within the frame of:
- Tapping a market predicted to experience major growth;
- Leveraging the skills and tools applied in the U.S., which have become increasingly relevant for the European scene (while being careful to adapt these to local peculiarities and sensitivities). Examples of such skills and tools include leveraging the ANDA developed for the U.S. for use in Europe; taking advantage of the differences in market exclusivity periods, which often expire earlier in the U.S.; and most importantly exercising the ability to prosper in a highly price-sensitive environment dominated by a handful of powerful purchasing groups.
However, to effectively grab the opportunities associated with the European generic space, it will be crucial for these new entrants to understand the peculiarities of each individual market in terms of both written and unwritten rules of the game. They must quickly gain insights on how these systems effectively work. Their offerings and approaches to the market will need to be adopted accordingly; trying to impose an identical business model all across the EU, particularly if this is a carbon copy of what is applied in the U.S., will be a guaranteed recipe for disaster. Within this frame companies like Barr and Mylan will be able to leverage the heritage and range of experiences stemming from their acquisitions.
In this respect, building on their diversity while extracting synergies among the various national companies is likely to represent the main challenge for a player such as Mylan, which will need to integrate the European networks it gained through the takeovers of Matrix and E.Merck Generics. The key for success will be establishing and maintaining a subtle equilibrium between centralization -- a key to scale-based synergies -- and the ability to operate locally.
