Novartis is to become the biggest generic drug maker in the world after the acquisition of a privately held German manufacturing company and a majority stake in a fast-growing US generics firm.

Novartis acquired Hexal, the second largest generics company in Germany, which recorded sales of £870 million last year, and a 67.7% stake in Eon Labs (a strategic partner of Hexal) which produced 15 first-to-market launches in the past three years.

In addition to the £3.89 billion cash payment for the companies, Novartis will acquire the remaining 31.9 million Eon Lab shares at around £16 a share, a 25% premium over what was expected before the takeover rumours.

Novartis, the world's fourth biggest pharma company, will integrate the firms into its generic subsidiary Sandoz, which will now have a portfolio of over 600 drugs nearing revenue of £3 billion a year. The combined pipeline will cover most of the major drugs predicted to lose patent protection between now and 2009, representing about $69 billion in US sales.

Israel's Teva Pharmaceuticals, the market leader in generic drugs, recorded around £2.5 billion in sales last year.

The acquisition will, according to Novartis, mean "necessary job cuts" but due to production savings, and consolidation of market and sales operations, will result in £100 million in savings within three years.

Sandoz, which has expertise in anti-infective treatments, will now have an added capability in product development and delivery techniques, like patches and implants, and it plans 70 launches in the US and Germany in 2005.

The new Sandoz team, under the leadership of chief executive officer Dr Andreas Rummelt, will include top management from all three companies.

Its enlarged status will give Sandoz considerable marketing muscle and it will be number one or two in major markets, including the US and Germany, while providing a strong foothold in emerging Asian markets, like India and China, as well as Latin America.

Long-standing speculation that Novartis would move in on its Swiss rival Roche is likely to abate temporarily, although the company's chief executive Daniel Vasella said he would not rule out buying a "jewel" should the opportunity arise.

Hexal reviewed a number of options before agreeing to the sale, including a public offering, a merger and a sale.

The German company employs around 7,000 people in 40 countries and has launched a version of cholesterol drug Zocor and will soon launch a version of pain treatment Duragesic. Meanwhile, Eon Labs, which recorded 2004 sales of nearly £230 million, currently has 27 Abbreviated New Drug Applications (ANDA) before the US regulator.

Novartis' strategy of maintaining a generic business alongside its research based business is unique among the major pharma companies, who frequently fight legal challenges to their patents from generic producers.

The deal has sparked share price rises in UK pharma companies as speculation mounts of further acquisitions and mergers.

Shares in GSK and AstraZeneca, subject to takeover rumours themselves, rose by around 2% on the back of the Novartis deal.

pharmafocus@wiley.co.uk