If you can’t beat them, buy them……………

Novartis AG announced today (Feb. 21, 2005) that it will buy generic drugmakers Eon Labs of the United States and Hexal AG of Germany for $8.3 billion, creating the world’s largest generic drug company.

Novartis Chief Executive Daniel Vasella has made no secret of his desire to build up the Swiss group’s Sandoz generics business, the world’s second biggest behind Israel’s Teva through acquisitions. But he did not want to overpay, especially since many analysts believe the fundamentals of the German generic drugs market may be deteriorating, putting margins under pressure.

Novartis said it will buy all of Hexal and the two-thirds of Eon Labs that the German company owns for 5.65 billion euros (about $7.3 billion). In addition, Novartis expects to spend close to $1 billion to buy the remaining Eon Labs shares, which trade on the Nasdaq Stock Market.

The acquisitions, to be integrated into the Novartis generics subsidiary Sandoz, will create the world’s largest company specializing in generic versions of drugs that have lost patent protection.

Sandoz’s 2004 annual sales including the other companies would be $5.1 billion, ahead of Israel’s Teva Pharmaceuticals Inc., which will hold the top spot until the deal closes in the second half of this year.

Novartis said it expects annual cost savings of $200 million within three years after the deals close, with half in the first 18 months. The company, one of the world’s largest drugmakers, said there would be “necessary reductions in the work force” but offered no details.

Patent Expirations Looming

Pharmaceutical companies have complained in recent years that revenues were evaporating in part because of competition from generic drugs, which are significantly cheaper than drugs under patent protection.

Between 2002 and 2007, pharmaceutical companies including GlaxoSmithKline Plc and AstraZeneca Plc will have lost patent protection on products worth an annual $82 billion in sales, according to London-based industry consultant Datamonitor Plc. Novartis is the only one of the world’s top 10 drugmakers with a large generics business and Vasella is expanding it after failing to make a large acquisition in branded drugs and passing up a chance to bid for France’s Aventis SA last year.

Novartis’s competitors are also looking to boost generic drugs business through acquisitions. Teva and India’s Ranbaxy Laboratories Ltd. are looking in Germany, seeking to tap growing demand for cheaper medicines throughout Europe. France’s Sanofi-Aventis SA has also said it wants to use acquisitions to increase its generic drugs business.

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