Watson Gets Some Hand-Me-Downs

Watson Pharmaceuticals (NYSE: WPI) is getting some consolation for the tougher competition it'll face after Teva Pharmaceuticals (Nasdaq: TEVA) and Barr Pharmaceuticals (NYSE: BRL) consummate their marriage. Teva is giving it 15 products and two pipeline candidates for $36 million, plus some additional payments when the pipeline drugs reach certain milestones.

Teva is presumably disposing of the drugs to avoid antitrust issues, so the transfer of the drugs likely won't occur until the acquisition is complete. Barr's shareholders approved the acquisition last week, and the companies continue to say that they're on track to complete the transaction by the end of the year.

It's probably not surprising that Teva shipped the drugs off to tiny Watson, rather than to much larger Novartis (NYSE: NVS) or Mylan (NYSE: MYL). First off, the larger generic-drug makers already sell some of the drugs Teva is trying to get rid of. But more importantly, there's no reason to help out the main competition.

Much like discount stores Wal-Mart (NYSE: WMT) and Target (NYSE: TGT), generic-drug makers are in a cutthroat low-margin business, where "larger" almost always means "better." Acquiring Barr will likely put Teva in an even more dominant position, allowing it to reduce overhead as it sells more generics all over the world.

It seems almost inevitable that we'll see more mergers in the coming years. The smaller generic-drug companies that specialize in one area will get snatched up, and we could even see a branded-drug company pick up a generic counterpart.

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