Novartis AG cemented its No. 2 position in off-patent drugs yesterday by agreeing to buy Canada's Sabex Holding Ltd. for $565-million (U.S.) in cash, and the Swiss company predicted more consolidation in the fast-growing sector.
The deal gives Novartis's Sandoz Ltd. generic drugs unit an entry into the $7-billion market for copycat injectable drugs, and boosts its capacity to develop biotechnology products -- an important skill in the emerging field of biogenerics.
Novartis, the world's fifth-largest seller of prescription drugs, has bought up several generic drug companies, and built Sandoz into the world's second biggest player in unpatented medicines after Israel's Teva Pharmaceutical Industries Ltd.
Sandoz is a rarity among global drug makers in having a strong generics business, which has been aggressive in taking on brand-name rivals and exploiting rising demand for cheaper off-patent treatments from cost-conscious health providers.
Sandoz chief executive officer Christian Seiwald said Boucherville, Que.-based Sabex provides a good fit in terms of technology and geography. "It also gives us a presence in Canada -- the world's sixth largest generics market -- where we were not really represented. It gives us significant access to the [rapid growth]U.S. business market in injectables." Between 2003 and 2010, U.S. branded injectable medicines with peak sales of $14-billion are expected to lose patent protection. Sales are concentrated in the top 20 brands.
"Injectable generics is going to be a large business so, looking at the big picture, this is a good acquisition. Generics are going to grow," said Clariden Bank fund manager Eric Bernhardt, although he said the deal looked expensive.
"Injectable generic drugs are a higher margin business," said portfolio manager Laurent Payer at Sectoral Asset Management.
Novartis shares closed up 70 cents to $46.72 yesterday on the New York Stock Exchange.
About 160 companies operate in the fragmented generics market. But size is seen important in an industry where up to $100-billion worth of branded drugs may be off patent by 2007.
"As far as consolidation is concerned, I assume you will see further acquisitions in our industry," Mr. Seiwald said. "We will follow the same approach we did in the past -- first strong organic growth. Then second, also see what fits with our strategy from a portfolio, market perspective, and of course it has to fit from a price perspective."
The prime focus of generic companies is the United States, where many blockbuster drugs are set to come off patent.
Sabex, a privately held company and part of RoundTable Healthcare Partners of Lake Forest, Ill., had sales of almost $90-million in fiscal 2003/4 and sustained "high teens" percentage growth.
"It looks expensive. It is not a publicly listed company and 6.3 times sales is high for a public company -- for a private company it is even more," said analyst Patrick Burgermeister at Zuercher Kantonalbank. Sandoz, which had sales of $2.9-billion last year, said the transaction is in line with multiples paid on past acquisitions such as Slovenia's Lek in 2002.
Mr. Burgermeister said he expects Sabex profit margins to be about 15 to 16 per cent, similar to those of Sandoz. "You can be sure this is an attractive business," said Mr. Seiwald, who declined to comment on margins. "We expect significant growth in 2004/5."