Novartis to become #1 in generic drugs
Novartis AG, a leading pharmaceutical company, announced today that it would acquire two generic drug makers, namely German Hexal AG and Eon Labs of the US (whose majority owner is Hexal). The total of the two deals is $8.3 billion. They will make Swiss-based Novartis the leader in generic drugs, ahead of Israel-based Teva.
Novartis will reportedly join the two companies with its Sandoz subsidiary, which is already a major player in the generic drug market. Generics are playing an ever more important role as the patents for major pharmaceuticals run out and as health plans demand less expensive treatments to help slow down the rise in health costs. Meanwhile, patent drug companies like Pfizer and Merck are starting to have problems prolonging patents and developing new therapies.
According to a Wall Street Journal article ("Novartis to Buy Hexal, Eon And Create Generics Giant", 2/21/2005):
Novartis Chief Executive Daniel 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, Mr. Vasella said.
In other words, by being able to offer both generics and patent drugs, Novartis believes it will have an advantage over companies that specialize in one or the other. Again, size matters in negotiation. Since the generics market has low margins, only a larger firm can make big money by selling large volumes.
Novartis has acquired several generic drug companies in the past few years, including last year's purchase of Sabex Holdings, a Canadian company as well as Danish generics company Durascan, a division fo AstraXeneca.. Other recent deals involve the purchase of German chemical company BASF's drug division (2002) and of Slovenian drug company Lek (2002).
Hexal manufactures a wide variety of generic medicines for everything from allergies to transplantations. Eon Labs makes medicines which treat a similar variety from epilepsy to arthritis.
The Eon deal may be even more important, as it gives Novartis a bigger foothold in the important US market. It is interesting that the name Wal-Mart came up in the merger press conference as one of the constituencies the new company plans to serve. (Wal-Mart is a growing player in the drug store industry.) Another case of the big serving the big.
