Novartis to acquire Hexal AG and Eon Labs

Novartis has acquired two leading generic drug companies, Hexal AG and Eon Labs which will be integrated into its Sandoz division, creating a world leader in the generic drug industry.

Novartis will acquire 100% of Hexal, a privately-held number two generics company in Germany with a strong European presence, and will take a 67.7% stake in Eon Labs, a fast-growing US ge-nerics company that has a strategic partnership with Hexal, for a total of €5.65bn in cash.

In addition, pursuant to a merger agreement unanimously approved by Eon, Novartis will launch a tender offer to acquire the remaining 31.9m fully diluted shares (34.6%) in Eon Labs for $31.00 per share.

The acquisitions bring together three premier generics companies that combine Sandoz's global geographic presence and expertise in anti-infectives, Hexal's leadership in Germany and strong track record of successful product development, and Eon Labs' strong position in the US for 'diffi-cult-to-make' generics.

The merger will make Sandoz the global leader in generics, with a combined pro forma 2004 sales of $5.1bn, a portfolio of over 600 active ingredients in more than 5,000 dosage forms and more than 20,000 employees.

Annual cost savings of $200m are anticipated within three years of the deal being completed, with 50% in the first 18 months. Savings will be mainly in:

• production, especially in sourcing, lower processing costs and reduced cost of goods sold through vertical integration;

• marketing & sales through consolidation of back-office operations and distribution;

• development through the streamlining of the project portfolio and less need for in-licensed products;

• and consolidation of general & administrative expenses

The strong growth outlook for Sandoz, which will create jobs, is expected to partially compen-sate for necessary reductions in the workforce.

'Generic drugs are crucial to meeting the healthcare needs of patients in industrialised and develop-ing countries as cost pressures continue to mount due to the ever-increasing demand of an aging population. As such, generic medicines are complementary to innovative medicines, freeing up re-sources and also providing an indirect stimulus to continued innovation,' said Dr Daniel Vasella, chairman and ceo of Novartis. 'The acquisitions of Hexal and Eon Labs will significantly strengthen our geographic presence and product portfolio, our development and registration capa-bilities, and increases our scale to rapidly bring a broad array of generic products to patients.

The new company will be number one or two in major markets, particularly in the US and Ger-many, and will have a strong foothold in Asia (India, China and Japan) as well as Latin America.

The acquisition of Hexal will propel Sandoz into a leading position in most other European mar-kets. In the past three years, Hexal has launched 121 products, including highly 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.

In the US, the world's largest generics market, 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. It currently has 27 ANDAs pending before the FDA covering approximately $14.3bn in annual branded prescription drug sales.

The combined pipeline covers nearly all of the major molecules predicted to lose patent protection during the next few years, representing an estimated $69bn in US product sales between 2005 and 2009.

In addition, Sandoz will have strong development and regulatory capabilities with high productiv-ity and a goal of delivering more than 100 registration files annually. The larger scale will further 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.

'This agreement with Novartis has been reached to secure the future of Hexal and its employees. We have reviewed all options, an initial public offering (IPO), merger or sale, and decided that this option not only allows for what we have created to continue, but more importantly to keep devel-oping with the capabilities and resources of an industry-leading company. This merger provides the best possible fit in the industry in terms of product, geography, technology and employee skills that will form the basis for the most competitive generics company,' said Dr Thomas Struengmann, a co-founder and co-ceo of Hexal along with his twin brother, Dr Andreas Struengmann.