$4bn deal heats up generic drugs war

A new battle to corner the market in cheap, off-patent medicines began yesterday as America's Mylan Laboratories bought its rival, King Pharmaceuticals, in a $4bn (£2.1bn) deal which will create the second biggest prescription drugs company in the US.

A new battle to corner the market in cheap, off-patent medicines began yesterday as America's Mylan Laboratories bought its rival, King Pharmaceuticals, in a $4bn (£2.1bn) deal which will create the second biggest prescription drugs company in the US.

The agreed all-paper takeover of Tennessee-based King will create a corporation with $3bn in annual revenue and 6,000 staff - including an army of 1,400 sales representatives.

Between them, the two companies want to build an organisation which can be first off the mark in manufacturing valuable drugs as soon as their creators lose exclusive patent protection.

Mylan's chief executive, Robert Coury, said the combination had "compelling strategic rationale". King's president, Brian Markison, described it as a "transforming deal" which "creates a new era" in speciality pharmaceuticals.

The business of making generic drugs has become more popular since charities mounted a campaign urging big pharmaceuticals companies to permit cheaper versions of their products to be sold to Aids patients in Africa.

Multinational pharmaceutical companies typically have patents of 20 years over drugs, which allow them to recoup development costs by preventing rivals from encroaching on their markets.

Many companies have been using increasingly elaborate tactics to squeeze their generic rivals. Some use legal loopholes to extend the patents on their drugs. Others have struck "licensing" deals with generic manufacturers, giving them a continuing cut of sales even after a product has gone off-patent.

King has been expanding from generics into branded drugs. Its top product is a hypertension treatment, Altace, which commanded sales of $450m last year. It also has Estrasorb - a drug to prevent "hot flushes" among menopausal women.

Analysts said the main attraction for Mylan was King's 1,000-plus sales force. Mylan wants to use the workforce to distribute its hypertension drug, Nebivolol, which was recently accepted for review by the food and drug administration.

The tie-up is the latest in a string of deals involving generic manufacturers, which want to increase their geographic reach and financial muscle. Sales of generics have been rising as healthcare providers in America and Europe try to cut their costs by buying cheaper medicines.

Generic manufacturers face intense competition from Indian drug firms, which have lower production costs and are making inroads into western markets. Exports by Indian drug firms to the US surged by 23% last year, while sales to Germany jumped 45%.

King Pharmaceuticals has faced criticism over its $850m purchase last year of two drugs from Elan, the struggling Irish firm. King's purchase of a sleep aid, Sonata, and a painkiller, Skelaxin, was poorly received in the US, where analysts suggested that the buyer had overpaid.

Under the latest deal, King investors will get 0.9 of a Mylan share for each King share they hold - valuing the stock at $16.60.

Some industry experts questioned the logic of Mylan buying a company which has struggled to satisfy investors. Richard Silver of Lehman Brothers said: "We believe that more attractive for Mylan would have been to seek a co-promotion partnership for marketing Nebivolol rather than acquisition of a company."


Andrew Clark in New York

The GuardianTramp

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