Drug cocktails: Watson on the case Happy pills all around. The market is delighted by Watson Pharmaceuticals" €4.5bn acquisition of Switzerland's Actavis. Watson's shares popped 6 per cent when the deal was announced and have rallied a delirious 27 per cent since reports of the deal appeared last month. There is a strong logic to consolidation in generics - look at the impressive long-term chart for Teva, the biggest player, which was built largely on mergers. Big deals cannot, however, counterbalance the industry's big problems. Watson, happily, did not overpay. Including potential milestone payments, the price is 14 times Actavis's 2011 earnings before interest, taxes, depreciation and amortisation. Factoring in the $300m in predicted synergies, the multiple falls to about eight, not far above the industry's average. The deal more than doubles Watson's international presence and provides access to a growing eastern Europe. Alas, much of the industry's profits come from drugs that have recently come off-patent, and the number of expirations is dropping. In the US, fewer new generic drugs will have an exclusive generic supplier, which is where the very richest margins lie. Price pressure from strapped government buyers worldwide is never going to let up. The issues facing the industry are, ironically, not dissimilar to those the branded sector faced as waves of patent expirations hit over the past few years. Big pharma also tried to use consolidation to offset profit declines; it has not proved to be a long-term solution. If product-level economics are going the wrong way, corporate structure can only help so much. There is a reason why company valuations have fallen, and why more generic companies, including Watson, hope to increase exposure to branded drugs. This is a worthwhile experiment, as is manufacturing generic substitutes for biotech drugs. Both will require a lot of investment, giving an advantage to the biggest companies. Consolidation is no cure-all, but it will continue.