New FTC rules hurt M&A prospects for hard-hit generics players

The generics sector has been looking to M&A as a way to combat the pricing pressure crushing top lines around the industry. But that strategy just got a whole lot less attractive.

The Federal Trade Commission (FTC) has suggested it will take steps that could force buyers to hold onto drugs they don't want, a shift that may even be holding up one big deal already. 

It’s not uncommon that when generics companies combine, the acquirer winds up with two versions of a complex drug—one on the market, and one still in development. In the past, a divestment of the pipeline candidate has solved the issue.

But gone are the days when companies can decide which version to keep, The Wall Street Journal reported. According to the newspaper, Bruce Hoffman, acting director of the FTC’s Bureau of Competition, said earlier this month that the body will no longer allow companies to jettison complex drugs that are still in the works.

That’s not a good development for wannabe buyers, as on-the-market drugs are much more valuable than prospects that may or may not ever see any sales. The move "has potential to change valuations and add risk to generic deals in the future," RBC Capital Markets analyst Randall Stanicky wrote to clients earlier this month.

And it also may already be holding up agreed-upon deals, Stanicky noted. For one, Fresenius’ acquisition of Akorn, announced last April, "has taken longer than we expected," and the new scrutiny around complex products could be feeding the delay.

Generics makers have lately flocked to the dealmaking table as a way to deal with the double whammy of increased pricing pressure and more competition on account of sped-up FDA approvals. In October, Impax and Amneal agreed to a $6.4 billion merger to create the U.S.’ fifth-largest copycat company, and struggling Endo could pursue a similar strategy, Stanicky has speculated.

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