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Posted on 4th January 2016

Into the void: All change in UK generics in 2016

Teva’s announcement last year that it was to acquire Allergan’s generic assets (‘Actavis’), came as a total surprise to the market. All the more so since Teva was, at the time, in hot pursuit of Mylan. It was particularly startling news in the UK, where Actavis has very recently overtaken Teva to reach the number one spot in the generics market and where the two between them probably fill a third of all the prescriptions written annually.

Since the completion of the deal is still pending, the full implications have yet to be felt. There will certainly be some forced divestments from the new entity, but these are unlikely to put too much of a dent in its pro forma sales. As a result, one obvious change will be a clear shift of power from the wholesaler/retailers (particularly Alliance Boots) to Teva. There was already a large gap between Actavis/Teva and Generics UK (Mylan) or Sandoz, which are probably the third and fourth largest UK retail generic players (but smaller overall than Wockhardt or Fannin). Now, with a single dominant supplier in the UK, wholesalers and pharmacies will be scrabbling around to find alternatives in order to ensure that one plus one equals rather less than two. Unfortunately for them, MAs can’t be conjured up from thin air, so there is no realistic possibility of simply slotting in another provider to replace Actavis. The best that they can do is to use a patchwork of smaller companies while hoping that some of Teva’s competitors will see an opportunity to step up their UK operations in order to create a credible alternative.

Logically, it should be the existing larger operators that are best placed to gain market share and they probably will, at least in products that are already on the market. However, we are not convinced that either Mylan or Sandoz is going to be that interested in investing in a UK-specific portfolio just to give Teva a run for its money. Sandoz is now firmly oriented at the valued-added end of the generic spectrum, with a big emphasis on biosimilars, while Mylan is busy integrating Abbot’s brands, which offer far more attractive margins than high-volume plain-vanilla generics. Of course, whoever buys the products that Teva is forced to divest (not Mylan, we suspect) will get a leg-up, although the more commodity products will only be of interest to companies that can transfer production to their own sites in order to achieve a COGS that is competitive in the UK market. The niche products are far more attractive, but don’t offer much relief to the wholesalers, who really need someone with a broad product offering of staple, high-volume items.

Over the longer term, we see the shifting dynamics in the UK being of most benefit to companies that are relatively small now but already had ambitions to be much larger. Accord is perhaps the most obvious candidate: it began its UK business in hospital injectables but has recently started to expand aggressively into the retail market, hiring Michael Cann from Actavis to take responsibility for this across Europe. It specialises in high volumes and low prices, so it ought to be a good partner for the big wholesalers and pharmacy chains. Accord is the international arm of the Indian company, Intas, and it is the Indians in general who really ought to be leading the charge in the UK, since they have the low production costs needed to be competitive. However, neither Ranbaxy nor Dr Reddy’s, both of which have been in the UK for years, has historically managed to step up from the second tier and it may be a bit late for them to make a push now. Both are having production problems and Ranbaxy has meanwhile become a subsidiary of Sun, which has generally tried to take a slightly more specialist approach in Europe (albeit it will certainly take what advantage it can from the current situation). Wockhardt, which has a large UK presence, is also quite specialised, with a focus on liquids and injectables, while other Indian players in the UK – Glenmark, for instance – remain very small. Aurobindo might be a contender, as it would be well placed to pick up the products that Teva is forced to sell and it has also recently bought Actavis’s assets in western Europe outside the UK. It already has a small UK business, Milpharm, but the Teva assets would bulk it up substantially. Cipla is also an outside contender, since it has recently started to shift its business model from third-party supply to direct sales, although it is mainly focusing on its respiratory portfolio and may not want to bother with commodity generics.

Chinese manufacturers, attractive as they may be to the NHS due to their low costs, generally do not have the oral portfolio or the EU manufacturing approval to be serious contenders for UK retail supply as yet, so other than the Indians, it is producers closer to the UK that have the best chance of exploiting any gaps in the market. Among the home team, Genesis and Morningside each have some products and licences that they could do more with, while Kent Pharma (part of Fannin) has been steadily building up its portfolio. Dexcel, the European subsidiary of the Israeli company Dexxon, is another possible beneficiary, as is Consilient Health, which works with suppliers from CEE.

As well as considering who might benefit – or lose – from the Teva/Actavis combination, it is worth sparing a moment to think about what will happen to Teva itself. Teva has historically been quite good at identifying and incorporating the best management of its acquired companies and in this case, given that Teva’s global head of Generics, Siggi Olafsson, is the former CEO of Actavis, there is every reason to believe that the resulting entity will be at least as much Actavis as Teva, if not more so. Teva’s long-standing UK head, Richard Daniells, moved to a global role overseeing some of the company’s emerging market operations six months ago and although he was replaced (by Steve Oldfield, ex of sanofi), we consider that the door remains open for Sara Vincent, Actavis’s well-respected UK chief, to assume control of both operations. Should this happen, we might perhaps expect Teva to become a slightly more empathetic organisation (with suppliers at least: rather less so with the bigger customers) as well as potentially more dynamic – the latter being the opposite of what might be anticipated from a big organisation getting even bigger. Teva has been the UK number one for what seems like an eternity whereas Actavis has had to claw its way up over the years from a relatively low base. This has forced it to work somewhat harder and to be rather more innovative (as well as trying to appear a bit nicer) and although simply not being Teva is no longer a selling point, the Actavis blood could yet bring some new ideas and ways of working up from rural Devon to Teva’s northern stronghold.

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