Ties Can Bind Generics

Bond-rating firms note that Barr, Mylan and Watson closed big deals in 2006 and early 2007. "We would be more comfortable if they took a breather," says S&P's Wong.

"They are still digesting," adds Michael Levesque, vice president and senior credit officer at Moody's Investors Service. He doubts they would make another big deal soon. The Merck unit would be much bigger than anything they have acquired.

Barr bought Croatia's Pliva for $2.5 billion; Mylan bought a majority stake in India's Matrix for $756 million; and Watson paid $1.9 billion for Andrx. Analysts say Teva and Sandoz have fully digested recent, big acquisitions. Teva closed its $7.4 billion Ivax purchase in early 2006. Novartis/Sandoz bought two companies in mid-2005 for $8.3 billion.

Deal-Making Prospects

The Merck division is hitting the auction block after many generic-drug makers enjoyed a rich diet of U.S. patent expirations in 2006, such as U.S.-based Merck's(MRK Quote) cholesterol drug Zocor and Pfizer's(PFE Quote) antidepressant Zoloft.

This year's U.S. patent-expiration bonanza won't be as large, although generic-drug companies will fight over Pfizer's Norvasc for high blood pressure and Sanofi-Aventis'(SNY Quote) Ambien for insomnia. U.S. patent expirations on major drugs will slow down next year but will pick up dramatically in 2010-2012.

When opportunities for patent-expirations decline in the low-margin generics' business, the appetite for acquisitions increases. Still, it's hard to envision a U.S. company making a run for the Merck division.