A steady growth market
As indicated in a study by IMARC, the generic market remains dynamic. It recorded global annual growth of 6.7% from 2010 to 2017 to reach a volume of $ 315 billion, and this growth should continue at a rate of 6.8% from 2018 to 2023 to achieve a global market of $ 474 billion. This dynamic is maintained by the various private or public health insurance organizations because these drugs do not bear any specific cost of R & D, clinical trials or marketing to prescribers. They are therefore sold cheaper. In addition, as patents fall in the public domain, new molecules can be permanently offered to patients. The aging of populations, with the consequent development of chronic diseases, also contributes to the dynamism of this industry.
Given the lower costs to generic manufacturers and the steady growth of the industry, higher operational performance and profitability than traditional manufacturers would be expected. To assess their respective performances, we have selected, on the one hand, generic manufacturers Teva, Mylan, Sun and Lupine (even if they have other activities like Teva), and on the other hand, four giants of the pharmaceutical industry little or not present in the manufacture of generic drugs: Roche (Switzerland), Sanofi (France), Merck (United States) and Astra Zeneca (United Kingdom).
Data as of December 31, 2018, except Sun and Lupine March 31, 2019, Yahoo! Finance and Exchange Zone / n. : not available
But he has nothing. In fact, generic drug companies are first of all smaller sizes. Even though they logically spend much less on R & D, their operating margin, measured by comparing operating profit (EBIT) to turnover (turnover), although quite honorable, is generally lower than that of traditional manufacturers. .
This situation is very likely attributable to two concordant phenomena: on the one hand, the pressure of health insurance organizations to lower prices, and on the other hand competition between generic manufacturers since there is more exclusivity when patents fall into the public domain.
In terms of profitability, whether economic (ROA) or financial (ROE), the differences are even more pronounced, with intrinsically low performance among generic manufacturers and significantly lower than those of traditional players. In addition, (with the exception of Indian companies), we note that generics specialists are much more indebted.
Lesser performance validated by the market
When we observe the evolution of stock market prices for companies over the past five years (as of August 22, 2019), the trends in this comparative diagnosis are confirmed: the values of the generics manufacturers all show significant decreases (Teva, -86, 5%, Mylan, -60.5%, Sun, -51.6%, Lupine, -56.4%), while those of traditional players remain stable or increasing (Roche, + 2.3%, Sanofi, -3%, Merck, + 46.6%, and AstraZeneca, + 65.8%). Similarly, the EV / EBITDA valuation multiple, which reports the value of the business to its operating income before interest, taxes, depreciation and amortization, remains significantly higher for the latter.
Data as of December 31, 2018, except Sun and Lupine March 31, 2019, Exchange Zone.
In a way, this observation is reassuring since it is in line with the profitability-risk arbitrage advocated by financial theory. In other words, the higher risk-taking associated with investing in research results in higher profitability. The Mylan-Pfizer / Upjohn merger can thus find a new interpretation: that of seeking a strengthening of market power to achieve higher profitability. However, in view of the evolution of Mylan (+ 3.4%) and Pfizer (-18.9%) respective share prices between the date of the announcement of the transaction, July 29, and the August 22, it seems that the market is not really convinced by the relevance of this orientation.
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http://theconversation.com/industrie-pharmaceutique-du-generique-recherche-rentabilite-desesperement-122415
