Here comes another big health care merger

Teva PharmaceuticalsREUTERS/Ronen ZvulunA sign bearing the logo of Teva Pharmaceutical Industries is seen in its Jerusalem oral solid dosage plant (OSD) December 21, 2011. Israel-based Teva is the world’s leading generic drugmaker.

Israel-based drug company Teva Pharmaceuticals is reportedly in talks to merge with Allergan’s generic drug company, the Wall Street Journal reports.

An official announcement on the deal — valued at $US45 billion — could come as early as Monday, according to sources cited by The Journal. Allergan’s generic drug unit would be “spun off and combined with Teva,” The Journal says.

Before news of the potential Teva-Allergan link-up, Teva had been unsuccessfully pursuing another merger with generic drug-maker, Mylan Pharmaceuticals.

Teva’s primary motivation for the Allergan deal is to increase its position in generic, WSJ reports, because the margins for low-priced drugs are “razor thin.”

It’s another in what has been a flurry of health care and biotech mergers since the Supreme Court last month handed down a key ruling on the Affordable Care Act (ACA) that effectively ensured its continued existence in the near term.

But, despite the high court’s ruling last month, the mergers also signal a pushback by health care giants aiming to remain competitive in the marketplace. President Barack Obama has said one of the goals of the ACA — better known as Obamacare — was to ensure increased competition that would, ideally, offer more choices for consumers and keep costs low.

During a forum on health care mergers at Wharton School of the University of Pennsylvania, health care management professor Mark Pauly said the increased M&A activity could be broken down as a two-pronged initiative. Pauly says on one hand, it’s “a kind of counterattack on the part of insurers,” who may seek to reduce the number of competitors and avoid being “stabbed in the back” by rivals who could try to undercut them on prices.

On the other hand, Pauly says, Obamacare contains provisions specific to Medicare that affect so-called “provider-side” entities known as accountable care organisations (ACOs). These ACOs — which house doctors, hospitals and other health care providers — are also closing ranks, which could potentially give them leverage in bargaining with insurers.

Pauly effectively boils down all of this in one sentence:

“What we’re seeing here is a reaction to that consolidation by insurers saying, well, if the providers are now going to gang up on us, we better gang up on them.”

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