Novartis is aiming to acquire Hexal, the number two generics company in Germany, as well as a two-thirds stake in Eon Labs of the US. The acquisitions will see it vault over Teva - which wrested the top spot from Sandoz via its $3.4bn acquisition of Sicor last year - into first place.
Novartis is buying Hexal and the Eon stake for €5.65bn in cash, and has launched a tender offer to acquire the remaining one-third of the US firm. Once merged into Sandoz, it said, cost synergies of $200m a year will be achieved within three years and the deal will be accretive to earnings within 12 months.
Analysts suggested that the price paid seemed a little high on a sales multiple basis, given that Sandoz has reported a slowdown in growth as a result of increased competition and pricing pressure. But ranking one or two in key markets such as the US and Germany, and expanding in Asia and Latin America, would enhance its competitive strength.
The larger scale will "increase penetration of the physician and pharmacist markets, which is particularly important as the new company plans 70 launches in the US and Germany alone in 2005," said Novartis in a statement.
Competition has led Teva and Sandoz to square off over the last couple of years, each buying up companies in a bid to become the top company in the sector. In addition to Sicor, Teva recently added Italian generics house Dorom to its portfolio, while Sandoz has snapped up three firms - Croatia's Lek, Canadian company Sabex and Durascan of Denmark - in the past few months.
After the closing of these transactions, expected in the second half of the year, Sandoz will be the global leader in generics with combined pro forma 2004 sales of $5.1bn - just ahead of Teva's $4.8bn tally. It will have a portfolio of over 600 active ingredients in more than 5,000 dosage forms and more than 20,000 employees. It also claims to have the ability to make just about all the drugs coming off patent between now and 2009, representing an estimated $69 billion in US product sales.
The wave of consolidation affecting the industry could have an impact on companies supplying machinery and materials to the drug sector, as the generics industry has emerged over the last few years as a major new customer base for vendor firms. Between them, Teva and Sandoz now account for more than 20 per cent of the global generics market.
Sandoz said the deal brought it a leading position in Germany, an expanded presence in the US and access to Eon's expertise in 'difficult-to-make' generics.
In the past three years, Hexal has launched 121 products, including versions of Merck & Co's cholesterol-lowering drug Zocor (simvastatin). It is also preparing to launch a generic of Johnson & Johnson's transdermal pain treatment Duragesic (fentanyl).
Meanwhile, over the past three years alone, Eon Labs has produced 15 first-to-market launches and has positioned itself as the market share leader for nearly half of the products in its portfolio, which includes 67 molecules in 147 dosage strengths. Eon Labs currently has 27 generic marketing applications pending with the US Food and Drug Administration (FDA) covering approximately $14.3 billion in annual branded prescription drug sales.
The news heightened speculation that Stada, another German generics company, would be the next to walk up the M&A aisle. Novartis CEO Daniel Vasella told a conference call that the company would now enter a quiet period, as it 'digested' its stable of generic acquisitions, so the rumour mill is now grinding out Teva's name as the likely suitor.
Sandoz said the acquisition would add to its technology base, particularly in the application of transdermal patches, inhalation products, sustained-release implants and multi-particulate drug delivery dosage forms, as well as biopharmaceuticals. The latter has the potential to be a lucrative new market for generics firms, provided regulatory obstacles to approval can be ironed out.
In addition, Sandoz said the move would "reinforce its vertical integration in active pharmaceutical ingredient manufacturing, which is often critical to gaining first-to-market status and offering high-quality generics products at a competitive price."