Ranbaxy: Considers Bid for Merck’s Generics Unit

As the first company to express an interest in buying Merck’s generics business, Ranbaxy has recognized that the acquisition would make it the world’s third largest global generics player behind Teva and Novartis’ Sandoz. However, the Indian-based company is likely to face competition from not only rival generics companies but also Big Pharma groups keen to diversify into the high-growth market.

Teva and Sandoz, the generic arm of Novartis, have stretched their lead at the forefront of the generics industry over the past two years following a series of acquisitions. The divesture of Merck KGaA’s generics business is set to continue this trend of industry consolidation. Teva and Sandoz clearly represent other potential buyers; Teva could view the purchase as a means to extend its market leading position, while Sandoz could leapfrog its rival into pole position if it acquired the business.

At this stage, however, Ranbaxy is the only company to have expressed an interest in the unit. The Indian company has also implemented a growth via acquisition strategy over the past few years, and bought three European-based generics firms in 2006, the largest of these deals being the purchase of Romanian-based Terepia for around $324 million.

However, the potential sale of the generics unit remains at a very early stage. Merck only revealed last week that, following the recent launch of Merck Serono, (Merck acquired Serono for around $13.3 billion, in a deal announced in Q4 2006) it would consider selling its generics unit. Merck also confirmed that it had not yet entered into negotiations with potential suitors.

Since the Serono acquisition, Merck has re-positioned itself as a pharmaceutical player with a pre-dominant biotechnology focus – building on Serono’s standing as Europe’s largest biotech company and enhanced by its own movement into biologics over the past few years, having in-licensing the monoclonal antibody cancer treatment Erbitux, for example. It would appear that retaining a presence in the generics market does not fit with the company’s strategic thinking, while disposing of the non-branded drugs unit would also presumably reduce the debt burden forced on Merck by the Serono deal.

In addition to existing generics players, Big Pharma companies seeking to replicate Novartis’ migration into the generics market via its Sandoz arm could emerge as other potential buyers. With a number of the industry’s leading players forecast to record flat sales growth over the next five years, diversification into the high-growth generics market could provide a medium-term boost to revenues.