The Swiss drugs firm has taken an unprecedented step into the usually hostile territory of generic pharmaceuticals by agreeing to pay €5.65 billion in cash to buy German firm Hexal AG and just over two thirds of Eon Labs Inc of the US. Novartis is expected to launch a tender offer of nearly $1 billion (€757 million) for the remaining third of Eon that is publicly traded.
The merger of these firms will make Novartis the world's largest manufacturer of generics, overtaking Teva Pharmaceuticals of Israel, which has been the world's biggest generic-drug producer, with $4.8 billion in annual sales.
Hexal has carved out a successful line of generics, particularly in Germany, the second-largest generics market in the world. In the past three years, Hexal has launched 121 products, including successful versions of the cholesterol-lowering drug simvastatin (Zocor), and is preparing to launch the pain treatment fentanyl (Duragesic) based on its proprietary transdermal patch drug-delivery technology. Eon has been experimenting with biologic generics in its labs but doesn't yet sell any.
The combined pipeline is expected to cover nearly all of the major molecules predicted to lose patent protection during the next few years, representing an estimated $69 billion in US product sales between 2005 and 2009.
Novartis, the world's sixth-largest branded drugs maker, has a growing portfolio of breakthrough drugs under patent, such as Glivec, a powerful treatment for chronic myeloid leukaemia. Unlike other pharmaceutical companies, Novartis' pipeline of innovative therapies ensures that lost billions in sales to generic companies will not have as many implications financially.
The deal is likely to accelerate the trend that may see an increasing number of big pharmaceutical companies creating a larger role for themselves in the generics sector.
Until now, the pharmaceutical industry has seen generics as more of a threat rather than an opportunity for development. The branded drugs industry has increasingly been striking deals with generic firms to allow them to manufacture the drugs earlier which has made the market more competitive and hurt the generic drug firms' sales over the past year. They have also been hit by low-cost competition from Indian and Chinese manufacturers.
Novartis' business strategy differs from that of 'big pharma.' The company are only one of a handful, which already has a significant range of generics from its Sandoz unit, although the division has suffered from increased competition. This has seen Sandoz's profits halved to $235m (£124m).
The poor performance was blamed on the competition within the American market and the price war that had opened up between the German market leaders. Both countries have a strong Hexal and Eon presence.
Sandoz's sales last year were $3bn. Adding in Hexal and Eon would give a total of $5.1bn more than Teva Pharmaceuticals, though still small compared with Novartis' total sales of $28bn.
Novartis' French rival Sanofi-Aventis, the world's third largest seller of branded drugs has equally followed suit and established its own generics division, Winthrop Medicines. Winthrop is planning to launch at least 30 generic medicines, including copycat versions of Sanofi-Aventis brands about to lose their patents.
Other pharmaceutical companies have been more wary of the impending generic threat and have implemented a more defensive-minded strategy. In October 2004, Pfizer began selling a generic version of its own $2.2 billion epilepsy pill, Neurontin, to limit the damage of generic rivals
GlaxoSmithKline, on the other hand, has struck partnerships with generics companies to sell copies of a number of its products losing patent.
"We have looked at this business three times in the last 10 years and have always come to the conclusion. No," said Roche chief executive Franz Humer told journalists earlier this month. He said there would always be a competitor that could undercut Roche on price.
"Generic drugs are crucial to meeting the health-care needs of patients in industrialised and developing countries as cost pressures continue to mount due to the ever-increasing demand of an aging population," said Dr Daniel Vasella, chairman and CEO of Novartis.
According to market-research company IMS Health, global generics sales are about $35 billion annually, or less than 10 per cent of the more than $450 billion global market for branded drugs. But IMS expects sales of generics to grow at about 22 per cent annually during the next five years, while branded-drug sales will grow by less than 10 per cent annually.