Novartis: Eastern biogenerics to bring multiple rewards

Buying Slovenia's Lek gives an East European footing to Novartis' already large generics business. Lower R&D costs there should allow Novartis to move into the higher value specialty generics segment. The acquisition also gives Novartis revenues from generic Augmentin, which, unlike its own version of the product, are not dogged by risk of litigation.

Novartis has announced plans to purchase Slovenian generics outfit Lek. The Swiss pharma is already the third largest player in European generics; this latest move gives it access to the emerging Eastern European markets.

One of the key attractions for Novartis is the low cost of carrying out R&D in Eastern Europe. This is especially significant in generics, where margins can be low: improving R&D cost effectiveness would enable Novartis to produce difficult-to-formulate generics, which earn higher margins than commodity generics. This would improve the synergies between Novartis' branded and generics businesses.

The other companies that have moved into the East European market do indeed focus on specialty generics. IVAX, which focuses on products that are difficult to formulate or manufacture, carries out much of its R&D in Hungary; R&D costs there are one fifth of those in the US.

Injectable generics specialist SICOR, meanwhile, recently bought Lithuanian company Biotechna to gain an established biogenerics portfolio. Although there is no formal approval pathway for biogenerics in western markets, they can be sold in eastern Europe, enabling companies to gain a head start in developing and marketing such products.

As Western generics firms face increasing competition from Indian companies, whose costs are yet lower, moving to higher value market segments is a good way of maintaining their competitive edge.

Novartis also has good reasons to target Lek in particular. The company's main product, a generic version of GlaxoSmithKline's Augmentin, is soon to be launched in the US. Novartis's generics business - Geneva Pharmaceuticals - launched its version of the same drug in July 2002.

However, GSK is suing Geneva (along with two other companies), accusing them of developing their product using a stolen strain of bacteria. Lek is not named in this suit - so the acquisition will allow Novartis to continue generating revenues from the product, irrespective of the lawsuit's outcome.

Related research: Datamonitor, 2002: "Global Generics Guide"

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