In May, I discussed the ongoing war of words being exchanged between generic drugmakers that were the subject of potential megamergers and concluded that Mylan N.V. (NASDAQ:MYL) wouldn't be likely to sweeten the offer it was making to acquire Perrigo (NYSE:PRGO), and that Teva Pharmaceuticals (NYSE:TEVA) might not be able to win over Mylan.
Given that Teva Pharmaceuticals gave up on its pursuit of Mylan on July 27, and Mylan failed to convince Perrigo's shareholders to tender their shares last week, hopes for both deals have now officially been squashed -- and that might be OK for investors.
Tossing up hands
The inability to negotiate a fair price for these companies suggests there's a lot of uncertainty surrounding how much the generic drug market is actually worth.
Teva Pharmaceuticals' failed bid to buy Mylan was valued at $40.1 billion, an amount 4.4 times greater than Mylan's trailing-12-month sales. Yet, according to Mylan's board of directors, that amount "grossly" undervalued it.
Meanwhile, Mylan's initial $205 per share offer for Perrigo led to Perrigo arguing that its 5% to 7% projected annual growth through 2017 made it worth far more that that, prompting Mylan to up its bid to $244 per share. Yet, Perrigo's board remained unconvinced that price valued it appropriately, an opinion that appears to have been supported by investors given Mylan's failed hostile bid.
Billions in sales up for grabs
According to a research report from Evaluate Pharma, over $290 billion in branded pharmaceuticals will have lost patent protection between 2011 and 2018, and because generic drugs typically capture between 80% and 90% market share, the opportunity for these generic drugmakers is massive.
In addition to the market opportunity available to generic drugmakers in traditional small-molecule drugs, the generic medicine market is about to change dramatically as biologics, which have previously been immune to the threat of generics because of their complexity, are finally challenged by them.
As part of healthcare reform, the FDA established a pathway to approval for generic variations of biologics that are similar, but not exact copies of biologics, and the first of these biosimilars hit the market this year.
The arrival of biosimilars could transform the generics industry, because biosimilars that have been launched in Europe, a market that has allowed biosimilar competition for years, have been priced at roughly 70% of the price of the branded biologic. That's far better than the 10% to 20% traditional generic small-molecule drugs have commanded relative to their branded counterparts.
An estimated $67 billion in branded biologics will lose patent protection by 2020, and that has industry participants projecting that the market for biosimilars will reach $20 billion that year.
In addition to growing sales tied to traditional generics and biosimilars, a larger and longer-living population should also boost demand for generic drugmakers' over-the-counter medicines.
Because baby boomers are turning 65 at a pace of 10,000 per day, and demand for medication increases with age, there should be plenty of tailwinds for OTC medications in the coming years.
Getting back to business
The M&A stand-off between these companies has created uncertainty that has been a distraction from the long-term market opportunity that exists for them. As a result, shares in all three of these companies have tumbled.
However, now that these distractions are coming to an end, a return to the business of capitalizing on growing global demand for low-cost medication could be just what's needed for shares in Teva Pharmaceuticals, Mylan, and Perrigo to begin heading higher again.
If so, then investing in these companies while their share prices remain below their pre-deal levels could prove to be savvy.
Todd Campbell owns shares of Mylan and Perrigo Company. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool recommends Mylan and Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days.
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