Ties Can Bind Generics

With $2.44 billion in generic-drug sales last year, Merck KGaA is one of the world's largest players. It offers an acquirer access to some 90 markets, with about 75% of sales coming from Europe and North America.

From India to Iceland to Israel, just about any company with a mortar and pestle has been cited by analysts as a potential buyer. But with a potential price tag of $6 billion to $8 billion, a deal for the Merck unit would raise the debt burden and/or dilute the equity of most companies.

Money Isn't Everything

Based on size, financial strength and deal-making history, the most logical acquirers would be Israel's Teva Pharmaceutical(TEVA Quote) or the Sandoz unit of Switzerland's Novartis(NVS Quote), the two largest generic-drug sellers.

But if the Merck unit doesn't provide a strategic addition, it may not be worth it to these giants, says Brian Laegeler, of financial research firm Morningstar. In addition to geographic expansion, Laegeler says, companies seek deals to develop -- or expand -- skills such as making injectable generics and biotech generics. Because Teva and Sandoz already have these skills in place, he wonders if they'll pursue Merck.

"Who knows if there's overlap in their products [with the Merck unit]," Laegeler says. "Teva makes acquisitions for very strategic reasons -- not just to grow in size."

Teva, Sandoz and Barr Pharmaceuticals(BRL Quote) are "well positioned" in strategic skills, overseas manufacturing and a strong presence in Europe, Laegeler says. Mylan Laboratories(MYL Quote) is "in the running," but Watson Pharmaceuticals(WPI Quote) has a "poor position," he says.