Novartis Buys Eon, Becomes No. 1 Generic Drug Company

Novartis AG (NVS) announced a major push into the U.S. and German generic drug markets Monday by buying Eon Labs Inc. (ELAB) of the United States and Hexal AG of Germany for $8.3 billion in cash.

The Swiss pharmaceutical giant said integrating the two companies into its Sandoz (search) division would create the world's largest generic drug company.

The move also positions Sandoz for growth in the United States when millions more people qualify for Medicare prescription drug benefits next January under a change approved by Congress at the end of 2003.

Novartis said it will buy all of privately held Hexal and the two-thirds of Eon Labs that the German company owns for roughly $7.3 billion. Novartis also expects to spend close to $1 billion for the remaining Eon shares. The company will offer $31 each for the remaining Eon Labs shares, which closed Friday at $27.92 on the Nasdaq Stock Market (search). The Nasdaq was closed Monday for the Presidents Day holiday.

With the acquisitions, Sandoz would supplant Israel's Teva Pharmaceuticals Inc. (TEVA) as the largest company specializing in generic versions of drugs that have lost patent protection. Teva had sales of $4.8 billion last year. Including Eon and Hexal, Sandoz would have had 2004 sales of $5.1 billion.

"The acquisitions of Hexal AG and Eon Labs will significantly strengthen our geographic presence and product portfolio, our development and registration capabilities, and increase our scale to rapidly bring a broad array of generic products to patients," said Daniel Vasella, Chairman and CEO of Novartis.

Novartis shares rose nearly 3 percent Monday, closing at 58.85 Swiss francs ($49.71) on the Zurich exchange.

Basel-based 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 and said it also expected the deal to create some jobs.

Analyst Michael King of Code Securities said it was difficult to predict how many jobs would be lost.

"They maintain that the overlap is minimal in terms of specialty," King said. "Possibly they might argue that they wouldn't need to get rid of too many people."

But he said the level of cost savings announced would suggest "you're going to expect some job losses."

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.

But King said Novartis does not have the hostile attitude some branded pharmaceutical companies feel toward generic companies.

"Novartis see it very differently in that they believe that generics is a necessary product of the branded industry," encouraging drug companies to pursue research and development, King said. "So it sees it as quite a healthy existence between the two, and it looks to benefit its customers."

Novartis has built its generics unit through other acquisitions, including the European generics business of BASF AG in 2000 and the Slovenian company Lek in 2002. Last August it completed the acquisition of Sabex Holdings Ltd., a Canadian generic drug maker.

"In all likelihood you can expect a digestion period and a focus on internal growth and not a flurry of acquisitions," Vasella said. "Having said that, if a jewel does come available one would remain open."

Bob Pooler, an analyst at Lombard Odier Darier Hentsch in Zurich, said that having a strong presence in the United States was an advantage because U.S. health maintenance organizations prefer to buy drugs from a single source.

Vasella said that offering both generic and branded medicines increases Novartis' bargaining power in negotiations with large customers such as governments or chain pharmacies.

By 2010, he said, Novartis aims to command about 10 percent of the global generic-drugs market, which it expects to grow by then to $100 billion from $58 billion in 2004.

Vasella said he expects "tremendous" growth in revenue from generic drugs in Asia, especially in Japan, the world's second-largest market for pharmaceutical products.

Hexal, one of the largest generic pharmaceutical companies in Germany, had sales of $1.65 billion last year and employs about 7,000 people. Eon Labs reported 2004 sales of $431 million and has about 500 employees.

Novartis reported a record 2004 net profit of $5.8 billion, up from $5.02 billion in 2003. Sales rose 14 percent to $28.2 billion. Novartis has about 78,500 employees in more than 140 countries.

The company expects the deals to close in the second half of this year, subject to regulatory approvals in several countries.