Pfizer Gets Serious About Generics

Pfizer (NYSE:PFE) is stepping up to play with the (other) big boys.

The pharmaceutical and the generic-drug giant Teva Pharmaceutical (NASDAQ:TEVA) are reportedly the last two major players left in the battle to purchase German generic-drug maker Ratiopharm. Final bids are expected to be placed next month.

Purchasing Ratiopharm would be a good move for either company. For Teva, the advantages are pretty clear. Getting larger should increase margins and help more of the revenue trickle down to earnings.

Pfizer has been slowly adding generic drugs for some time, but, for the same reason that Teva needs to get larger, Pfizer needs to make a major purchase if it wants to be a player in the generic-drug business. With their low margins, generics just aren't something companies should "dabble in."

The price for Ratiopharm may hit 3 billion euros (about $4.3 billion), which would value the company at about 10 times last year's EBIDTA. Teva could have the upper hand in bidding since it can probably find more synergies than Pfizer.

Losing Ratiopharm to Teva wouldn't be the worst thing for Pfizer, though. There are still plenty of other decently sized generic-drug companies out there if it really is interested in stepping up and becoming a generic-branded combo drugmaker like Novartis (NYSE:NVS).

Source: Google Finance.

The key thing that investors need to keep an eye on is how much Pfizer has to pay for the privilege of a big move into generic drugs, because they come with lower margins and cutthroat competition. If it can't find a generic-drug company cheaply enough, Pfizer may be better off using its free cash to buy smaller drug companies in the branded-drug industry.