Novartis is starting a strategic review of Sandoz, its generics and biosimilars business. Is another wave of industry consolidation in the generics industry on tap?  

Sandoz: performance and possible moves

Always highly competitive, over recent years, the generic-drug industry has experienced consolidation and restructuring among several leading companies, and another move may be in the offing. Late last month (October 2021), Vas Narasimhan, CEO, Novartis, announced that the company would begin a strategic review of Sandoz, its generics and biosimilars business, and is evaluating options ranging from retaining the business to separation. He made the announcement in reporting the company’s third-quarter 2021 earnings results.

The announcement comes as Sandoz faces continuing revenue and margin pressure. For the first nine months of 2021, Sandoz’s global sales were $7.1 billion, a 4% decline (at constant currency [cc]) compared to the year-ago period. Sales in Europe declined 4% (cc), and sales in the US declined by 17%. Overall, volume growth was offset by a negative price effect of 9 percentage points mainly due to increasing competition and the impact of prior year off-contract sales in the US. Overall, core operating income for Sandoz was $1.5 billion in the first nine months of 2021, a decline of 18% (cc) compared to the year-ago period.

Retail generics, consisting of small-molecule active pharmaceutical ingredients and generics, is the largest piece of Sandoz and accounted for approximately 73% of sales, or $5.2 billion, in the first nine months of 2021. Sales in Sandoz’s retail generics business declined 6% (cc) in the first nine months of 2021 compared to the year-ago period. Global sales of biopharmaceuticals in Sandoz, which includes its biosimilar business, increased by 5% in the first nine months of 2021. For all of 2021, Novartis expects Sandoz’s overall global sales to decline in the low-to mid-single digit range, and for core operating income to decline in the mid- to high-teens digit range.

Pricing and margin pressures, particularly in the US generics market, was the impetus behind Novartis’ decision three years ago (September 2018) to divest a portion of Sandoz’s US portfolio to focus on more value-added medicines, complex generics, and biosimilars. Novartis had struck a deal with Aurobindo Pharma USA, the US arm of Aurobindo Pharma, a Hyderabad, India-based generics and manufacturing company, to sell Sandoz’s US dermatology business and US oral solids generics portfolio for approximately $1 billion ($800 million upfront plus cash and potential earnouts). The deal was conditional on obtaining regulatory approval, and the companies mutually terminated the deal in April 2020 after not receiving approval from the US Federal Trade Commission within agreed timelines.

One year after the formation of Viatris

Novartis’ decision to once again evaluate strategic alternatives for Sandoz is yet another move by a leading generics company to reshape its business to improve performance. Perhaps the most notable recent deal occurred a year ago (November 2020) with the completed merger that combined the generics company, Mylan, and Upjohn, Pfizer’s off-patent branded and generic established medicines business, to form Viatris.

For both Mylan and Pfizer, the deal reflected a common strategy to address performance in their respective businesses. In August 2018, Mylan formed a strategic review committee to evaluate alternatives for its businesses following weak performance in its North American segment. Mylan, like other large generic-drug companies, faced increased pricing pressure and competition, particularly in the US market. For its part, Pfizer had been evaluating a possible separation of its generics and established product business from its core prescription innovator drugs and vaccines business dating back to when the company was led by Ian Read, who stepped down as CEO in January 2019, with Albert Bourla, formerly the Chief Operating Officer of Pfizer, taking the role of CEO. Pfizer then re-organized into three main areas: the Biopharmaceutical Group, which included its prescription, innovator products; Upjohn, which included its off-patent branded and generic established medicines business; and Consumer Healthcare, which included its over-the-counter (OTC) business, which was subsequently combined with GlaxoSmithKline’s (GSK) consumer healthcare business in 2019 to form a new consumer healthcare joint venture. Earlier this year (June 2021), GSK announced that it plans to spin off its Consumer Healthcare division into a separately listed company.

For Viatris, the question now is whether the Mylan–Upjohn combination will improve the fortunes of the combined company. Post-merger, Viatris is proceeding with a multi-year, $1-billion global restructuring initiative that involves a potential reduction of 20% of its workforce and a rationalization of its manufacturing footprint. Viatris first announced plans for its restructuring last November (November 2020) following the closing of the deal that combined Mylan and Pfizer’s Upjohn. In its second-quarter 2021 earnings release, the company said that it is on track to realize approximately $500 million of cost synergies this year (2021) and expects to achieve at least $1 billion of cost synergies by 2023.

Viatris will be announcing its third-quarter 2021 earnings next week (November 8, 2021). For the first six months of 2021, Viatris reported a net operating loss of $1.3 billion on revenues of $8.96 billion. The company also reported progress in paying down debt and has repaid approximately $1.15 billion of debt. The company expects to repay additional debt in the second half of 2021, which was in line with the company’s plan to repay approximately $6.5 billion of debt through 2023.

Teva: debt reduction and the US market

Teva Pharmaceutical Industries, another top generics player and leading generics company in the US, is now four years past the launch of a major restructuring plan that the company announced in late 2017. The plan addressed declining revenue from its generics business, large debt caused by its $40.5-billion acquisition of Allergan’s generics business in 2016 and declining revenue from its number one specialty innovator product at the time, Copaxone (glatiramer acetate) for treating multiple sclerosis, which faced its own generic-drug competition. Kåre Schultz, who became Teva’s President and CEO in 2017, was hired to turn the company around. He has since overseen the company’s restructuring and developed the ensuing strategy of further diversifying in innovator drugsand optimizing its generics portfolio by rationalizing the portfolio and moving it away from less profitable areas to more value-added products, such as complex generics, biosimilars, and other products with a higher barrier to market entry.

So how has the company fared since? Teva reported 2020 global revenues of $16.66 billion, of which generics accounted for 56% of its global revenues, or $9.315 billion. On the generics side, North America is its largest geographic market, accounting for 43% of its 2020 generics revenues, then Europe (38%) and other international markets (19%).

Thus far in 2021, Teva reported global revenues of $12.2 billion for the first nine months of fiscal year 2021 and revenues of $3.9 billion for the third quarter ending September 30, 2021. For the third quarter 2021, revenues from generics, including biosimilars, declined in North America due to increased competition and lower volumes while revenues were up in Europe and international markets. Revenues from generics in North America were $859 million, a 7% decline in the third quarter 2021 compared to the year-ago period. Generics sales in Europe were $895 million, up 9%, and generics revenues in international markets were $412 million, up 4%.

On the company’s third-quarter 2021 earnings call, Teva’s Schultz said the company is committed to $4 billion in annual generics revenue on average over the coming years in the North American market, a level that was consistent with its 2020 showing. He said that the company does not see a structural weakening in the US generics market in the coming years. In addition, the company is progressing it debt-reduction goals and reported that it has reduced debt by $12 billion over the past four years to $21.7 billion.

Perrigo exits generics

After a three-year effort, Perrigo finally realized its strategy to become a pure-play over-the-counter (OTC) business with the divestment of its generics business earlier this year (2021). In March (March 2021), Perrigo agreed to sell its generic prescription pharmaceuticals business to Altaris Capital Partners, an investment firm, for $1.55 billion. Perrigo first announced plans in 2018 to separate its prescription pharmaceuticals business, which consisted primarily of generic drugs, to focus on its OTC business.