German generic drug firms seen ripe for M&A

Germany's generic drug-makers make attractive acquisition targets for global players and analysts say now may be the right time to get a foothold in a sector expected to have a bright future.
The generics industry world-wide is enjoying strong growth as cost-conscious health providers use more off-patent medicines and big players are looking to bulk up - a trend highlighted by Novartis's $565 million acquisition of Canada's Sabex on Monday.
Germany's generic market, valued by consultants IMS Health at just under 4.4 billion euros ($5.4 billion) a year, accounts for nearly half the European total and offers surprisingly high margins for drugs that are cheaper copies of patented ones.
Recently, the sector has been stirred by takeover talk.
Shares in one generic firm, Stada Arzneimittel, have risen some 13 percent in the last month on rumours that Israel's Teva or Switzerland's Novartis might make a move on the company.
Analysts say unlisted Hexal and ratiopharm, the top two players with turnover of around one billion euros each, could also be choice pickings for larger drug-makers.
At current prices, Stada, which makes copies of Merck & Co's Zocor cholesterol drug and AstraZeneca's Prilosec anti-ulcerant, is valued at 1.19 billion euros. A bid at a 20 percent premium could be attractive, analysts said.
Stada declined to comment.
"Stada's management has always seemed open-minded with regard to a potential bid if the price was good," said WestLB life sciences sector specialist Andreas Burckhardt.
He said Stada traded at a price-earnings multiple of 22.5, more than the global generics industry average of 19 but still cheap given its strong position in a key market.
A hostile bid for Stada is tough because about 20 percent of its stock is held by pharmacists, who are also its customers and likely to do what they are told by the management.
Novartis's move to buy Sabex, a manufacturer of injectable generics, underlines its reputation as an acquirer in the sector.
Analysts say margins for generics in Germany are higher than in the United States because prices are fixed by authorities. Prices often fall by less than 30 percent when a drug goes off patent in Germany, compared to 80 percent in the United States. It may also be a right time to do a deal because of the large number of patent expiries expected in the mid-term.