Teva, Watson and Mylan all reported their Q2 figures last week but while the companies experienced differing fortunes in the US (strong growth for Mylan and Watson, a sharp decline for Teva), they were united in experiencing a mediocre quarter in Europe. Mylan did worst, with constant currency sales down 12% compared with Q2 2010, while Watson claimed that its numbers were flat on an organic basis and Teva said that organic growth was 4%. For Watson, stable sales are actually a significant improvement on the situation in 2010, when declines were the norm, whereas Mylan’s performance has been worsening dramatically since the middle of last year. As for Teva, its growth rate appears to be fairly consistent with historical trends, although it’s difficult to say precisely because the company does not usually split out the impact of acquisitions – the ratiopharm deal has been an exception.
So why is it that the US companies are capable of generating growth of 30-40% in the US (in the case of Mylan and Watson at least) and yet in Europe, they appear to be running to stand still? To quote Robert Courey, the CEO of Mylan, who on its recent Q2 conference call admitted that the company has pushed its projection of a turnaround in Europe back to 2012, ‘…you do a little bit in the United States and you get an awful lot. In Europe, you do an awful lot and you get a little bit.’ This may somewhat understate the effort needed to do well in the US, but overall, his point is valid. The US is a single, very large market, where one product registration can potentially result in tens (or occasionally hundreds) of millions of dollars of sales. Europe consists of multiple markets, most of them small and many of them with only low levels of generic penetration, so that a single product launch in any given territory will rarely generate sales in more than single digit millions. Add to that the absence of 180-day exclusivity for patent-challenging first filers (which is the biggest single factor behind Mylan and Watson’s current good performance in the States) and you have a continent in which it is indeed necessary to do a lot in order to gain a little.
That said, the overall market environment and the intrinsic inefficiencies inherent in doing business in Europe are not the only reasons why the US companies are having a tough time; there are also company-specific elements at work. In the case of Mylan, its European business is dominated by France, where it is the leading company in the market. It has thus been hit particularly hard by falling prices, particularly as these have not been offset by new product launches. Apart from blaming general market weakness in France for its problems, Mylan also cited ‘irrational behaviour’ on the part of some of its competitors, by which it seemingly meant aggressive price competition. Since it also noted that these competitors had branded businesses that could absorb losses in generics, it is possible that it had Teva in mind, although Biogaran, the French number two, also falls into this category as it is owned by Servier. On its own earnings call, Teva said that growth in the French market overall was in low single digits, and that it had held its market position, but since the organic growth rates that it cited for Germany, Italy and the UK were all well above its stated 4% European average, it is hard to escape the conclusion that sales in France fell. Going back to Mylan, we believe that irrational pricing behaviour is epidemic in Europe and there is little chance of rationality prevailing any time soon. Moreover it is hard to understand how Mylan has extended its market share in France from the 25% level five years ago to the 30% that it has today other than by using price as a marketing tool, so it is possible that the company’s more recent focus on the bottom line is resulting in a loss of market share, despite what it says to the contrary. Also, rather more crucially, Mylan is simply not yet cost-competitive in Europe, where around 50% of its turnover comes from in-licensed drugs, so it finds it very hard to follow prices down without losing money.
Like Mylan, Watson’s European operation, which it inherited from Arrow, does not cover the region as a whole, but has a strong focus on France, the UK and the Nordic region. Many of its products are also in-licensed, often for one market only, so the portfolio differs widely from country to country and Watson has recently been culling loss-making drugs in an effort to improve profitability, which we believe to be currently somewhere between low and non-existent. Watson also lacks an internal pipeline of products that are ready to launch, which is one reason why it recently bought the Greek dossier development company Specifar. On its Q2 conference call, Watson’s Exec VP of Global Generics, Siggi Olafsson, said that prices had declined around 10% on average in France and somewhat more in the UK – another market where Mylan has both a big presence and big problems. Siggi did not mention product withdrawals in France or suggest that price declines were worse than anticipated, which tends to support our view that some of Mylan’s difficulties are specific to itself. On the other hand, Watson is going to be equally challenged to deliver much growth in Europe until it can improve its pipeline.
As already noted, Teva claimed that it had achieved organic growth in most of its European markets, including Germany (+8%, although this may not be on a constant-currency basis), the UK (+29% due to its at-risk launch of atorvastatin, now withdrawn after court action from Pfizer) and Italy (+25%). Spain was also cited as having generated strong growth, although Teva didn’t say explicitly that this was organic rather than resulting from the ratiopharm purchase. It also didn’t say anything about its other large European market, Hungary, but since most of its revenues there come from wholesaling we presume that it grew with the market as a whole. Compared with its US rivals, Teva has far more comprehensive coverage of Europe, with a top three position in most major (and minor) markets. As a result, it is more able to deal with downturns in individual countries. It also ought to have a far better pipeline, having had much longer to work on it, and it is certainly much less dependent on in-licensed drugs, which puts it in a far better position to compete on price (or behave irrationally, depending on how you look at it).
In the end, though, success in Europe depends on exactly the same thing as success in the US – identifying the correct products to launch and getting them to market on time and with a competitive COGS. Achieving this has always been hard for non-European companies, particularly ones that have big US operations, because there is a permanent tendency to prioritise development work for the US, with the result that European affiliates get products late or not at all. Even Teva has suffered from this in the past and Mylan’s closure of all its European R&D sites, while sensible financially, is likely to lead to trouble in the future, even if it is not necessarily the cause of its current difficulties. Meanwhile, Watson is having to start from scratch, with the additional handicap that it lacks a retail sales network in large parts of the continent. What constitutes a competitive COGS has also been shifting dramatically downwards in recent years, as Germany has introduced tenders that have taken it from being the highest-price to the lowest-price market in Europe, for some products at least. Price pressure has also been intense in other markets, so companies with sizeable European operations have an acute need to shift the emphasis of their product portfolios towards drugs with lower competition and/or more branded characteristics. Again, this requires a specific focus on Europe, combined with access to low-cost production, since no major player can afford not to launch the big products no matter how low the prices at which they sell. For Mylan, the short-term answer appears to be to persuade investors to stop looking at Europe (where, according to Mr Coury, they are putting ‘too much emphasis’) and to focus on the company as a whole, instead. But what’s the point of adopting a strategy of global expansion if it is not possible to deliver organic growth anywhere other than the US? A question for all the generic majors to ponder, surely.
Posted on 5th August 2011