Novartis Buys Drugmakers Hexal and Eon

Monday, February 21st 2005, 10:44 am
By: News On 6

GENEVA (AP) _ Novartis AG announced Monday 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.

The Swiss pharmaceutical giant 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.

``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 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.

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 Vasella said the deal will help Novartis increase its bargaining power with customers while providing cost savings. Being able to offer generic drugs as well as branded medicines is an advantage in negotiations with large customers such as governments or chain pharmacies, Vasella said.

He said in a conference call that by 2010 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.

``The focus will be on organic growth,'' Vasella said. ``But one will of course have to remain open to opportunities, if a real jewel comes along,'' he added.

In August, Novartis completed its acquisition of Sabex Holdings Ltd., a Canadian generic drug maker, for $565 million. It bought the Slovenian generic drug maker Lek in 2002.

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.

Novartis shares rose 2 percent to 58.40 Swiss francs ($49.33) on the Zurich exchange Monday.

Some analysts questioned the wisdom of expanding into Germany's very competitive generics market, especially at an expensive price _ nearly three times sales.

``To us, the deal is a bit puzzling,'' Denise Anderson, analyst at independent brokerage Kepler Equities in Zurich, told Dow Jones Newswires.

The deal for Eon Labs, however, ``makes a lot of sense,'' Anderson said.

Novartis will offer $31 each for the remaining Eon Labs shares, which closed Friday at $27.92.

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.

Hexal, one of the largest generic pharmaceutical companies in Germany, had sales of $1.65 billion in 2004 and employs about 7,000 people in more than 40 countries. Eon Labs reported 2004 sales of $431 million and employs approximately 500 people.

The transactions are subject to regulatory approvals in several countries.

Earlier this year Novartis said its 2004 net profit grew to a record $5.8 billion from $5.02 billion in 2003. Sales rose 14 percent to $28.2 billion. Novartis Group companies employ about 78,500 people and operate in over 140 countries around the world.