Novartis corners generic drugs with 6bn euro spree

Novartis is poised to become the world's biggest generic drug maker after agreeing to buy the German company Hexal and its US affiliate, Eon Labs, in a cash deal yesterday worth €6.4bn (£4.4bn).

Novartis is poised to become the world's biggest generic drug maker after agreeing to buy the German company Hexal and its US affiliate, Eon Labs, in a cash deal yesterday worth €6.4bn (£4.4bn).

The Swiss pharmaceutical giant will buy all of Hexal, a privately owned business, and 67.7 per cent of Eon Labs from Germany's Struengmann family for €5.65bn. This will give it the leading position for generic versions of drugs whose patents have expired. Novartis will also make a tender offer to buy the rest of Eon Labs shares, which are listed in the US, for $31 per share at a cost of about $1bn (£526m). It will merge the companies into its Sandoz unit, which will then command sales of more than $5bn (£2.6bn).

Daniel Vasella, the chairman and chief executive of Novartis, said: "Generic drugs are crucial to meeting the needs of patients in industrialised and developing countries, as cost pressures continue to mount due to the ever-increasing demand of an ageing population.

"Generics are a critical complement to innovative medicines, freeing up resources and providing a stimulus to continued innovation. The acquisitions of Hexal and Eon will significantly strengthen our geographic presence and product portfolio."

Novartis predicts the market for generic drugs will grow to more than $100bn in the next five years and it plans to make cost savings of €200m within three years of the deal, with 50 per cent achieved in the first 18 months. Job losses are expected.

The deal will give Novartis access to higher-margin versions of branded drugs and will also bring it scale to reduce costs in a market dominated by cut-throat competition and pressure on prices. Generic drugs are chemically identical to their more expensive branded rivals and manufacturers copy branded products after the protection of their patent has expired. This means they can sell them more cheaply because they do not have to pay for the research and development costs.

Hexal had been rumoured as a takeover target for Novartis for some time. Novartis is paying about four times the combined sales of Eon and Hexal, which has led to fears that it is overpaying to secure the top market position. But shares in Novartis climbed more than 3 per cent in Switzerland yesterday - a sign that investors approved the multibillion-dollar deal.

Mark Clark, at Deutsche Bank, said: "Investors should be confident that Novartis is buying robust and profitable businesses with strong combined margins and decent market shares. Novartis now has critical mass in Germany, one of the largest markets for generics.... The deal looks very sensible."

Novartis has about $8bn of cash on its balance sheet, and analysts have expected an acquisition for some time. The new power of Novartis in the generics market could spark other takeover deals in the sector, with rivals forced to bulk up to compete. "The generics market is fragmented," Mr Clark said. "Even by 2010, Novartis expects to have a market share of no more than 10 per cent."

Hexal, whose products include a generic version of a cholesterol-lowering drug, had sales of $1.65bn last year and commands the No 2 spot in Germany. Eon Labs, which sells a version of GlaxoSmithKline's Wellbutrin antidepressant, is expecting to make a $30.2m profit for the last three months of 2004, up 57.3 per cent on the same period last year.

Novartis will remain dominated by branded pharmaceuticals. The addition of Hexal and Eon, is expected to push revenues from generic drugs to about 15 per cent of the group's sales, compared with 10 per cent at present.