Summary
Today's $1.75 billion purchase of Arrow by Watson Pharmaceuticals illustrates the appeal of quality generics companies. GSK's alliance with Dr Reddy's is a smart strategic move to bring affordable drugs into emerging markets. Investors and competitors will be watching closely.
Analysis
Today's $1.75 billion purchase of Arrow by Watson Pharmaceuticals illustrates the appeal of quality generics companies. And so this is another step in Andrew Witty's strategic move to bring affordable drugs into emerging markets and places GSK in a strong position amongst the multinationals. Along with others - Novartis for example - GSK is positioning itself to capitalize on the economic and population growth in these markets.
Investors have seen drug stocks take a beating over the past year and expect 'things to change'. But how? Growth prospects in Western markets are reduced, prices are under strain, and new products are thin on the ground. The old ways are gone: companies no longer have the luxury of fat margins, flexible pricing and perhaps less scrutiny in the regulatory world. Perhaps that's a good thing overall, but it not for the share price of big and small pharma companies.
The current debate around US healthcare reform is unlikely to improve prospects for the pharma industry, while those countries in Europe that haven't already begun to build NICE-like structures soon will.
Witty's move is shrewd business and at the same time good news for patients in those countries. Although providing significantly lower margins than 'traditional' products generics can reach many more users and so can make in volume and lower margins much more than limited distribution of higher priced drugs. In theory a win:win.
We shall see.
chris.otoole@nine-tz.com
