OREANDA-NEWS. Healthcare reform in developed markets, increased spending in emerging markets and the prospect of big profits from rapid growth in biosimilar drugs are likely to drive further consolidation in the fragmented generic drug manufacturing sector, Fitch Ratings says. The potential for companies to sacrifice near-term credit quality in pursuit of these acquisitions is a key risk to ratings, despite underlying trends pointing to good long-term growth prospects.

The generic pharmaceutical industry grew rapidly during the 2009-2012 patent expiry cliff, helping the sector evolve from a volatile, low cost, low margin segment, into a more profitable and stable industry. Underlying growth drivers are likely to continue, supported by a stream of further patent expiries.

Generic penetration is much lower in the developed economies of Western Europe and Japan than in the US. But this is starting to change as the desire to stem healthcare cost inflation is increasing regulatory and political pressure for the use of generics. Growth potential is also strong in emerging economies, due to rapid catch-up investments in their healthcare systems and a growing prevalence of chronic and lifestyle diseases.

All these growth opportunities will support consolidation, but the most lucrative potential opportunity for generic producers is also the most uncertain - biosimilars. These near-copies of out-of-patent large molecule biologic drugs open up a whole new segment of the market to potential generic-like competition. Biosimilars are attractive because they have the potential to be priced at a much smaller discount to the original drug and because regulators offer longer exclusivity periods.

However, the process of developing biosimilars is much more costly and risky than for normal generics, meaning stronger and more diversified companies will be at a significant advantage. We believe that not only will recent consolidation accelerate development of these compounds but that biosimilars' success in the US market, where the first approval has only just been given, could drive even more deals.