(Bloomberg) — The $40.5 billion merger that’s transforming the generics industry is the biggest yet in a series of deals by drugmakers adjusting to a market that has fewer buyers.
The deal Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) made for the generic business of Allergan PLC (NYSE:ACT) is partly a response to consolidation taking place among distributors, which purchase the lower-priced copycat drugs for eventual sale to patients. To gain negotiating leverage with those buyers, more generic makers may have to combine.
Four major buyers control most of generic purchasing in the U.S.: McKesson Corp. (NYSE:MCK); CVS Health Corp. (NYSE:CVS) through its partnership with Cardinal Health Inc. (NYSE:CAH); Walgreens Boots Alliance Inc. (NYSE:WBA) through its arrangement with AmerisourceBergen Corp. (NYSE:ABC); and Wal-Mart Stores Inc. (NYSE:WMT).
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McKesson bought Celesio AG for about $5 billion in 2014 to get more clout in drug distribution, and CVS and Walgreens struck their partnerships the previous year.
“The consolidation among the buyer groups in our most important market, which is the U.S.,” helped persuade Allergan to sell its generic division, Chief Executive Officer Brent Saunders said in an interview. The size of Teva’s offer, in cash and stock, also played a role, he said.
There are other reasons generic makers may want to get together. U.S. regulators are more heavily scrutinizing the industry’s manufacturing safety, increasing costs. And fewer big-name drugs are coming off patents, limiting growth opportunities.
Deals in the generic-drug business are part of a general acquisition frenzy that’s sweeping the health care industry, from pharmaceuticals to insurance to hospitals. Drugmaker Shire PLC (Nasdaq:SHPG) was the latest to enter the fray, announcing an unsolicited $30 billion offer Tuesday for Baxalta Inc. (Nasdaq:BXLT), a developer of treatments for rare diseases.