Generic drug maker to acquire rival company

Mylan Laboratories, the nation's largest maker of generic drugs, agreed Sunday to acquire a rival, King Pharmaceuticals, for about $4 billion in stock, executives close to the deal said.

The transaction was approved by the boards of both companies and is expected to be announced today, the executives said. It is the latest move among generic drug makers to bulk up and diversify their business as they face escalating pressure from the big pharmaceutical companies, which are scrambling to extend patent protections for their biggest branded drugs.

The deal is being driven, in part, by Mylan's interest in gaining a foothold in the branded drug market where King has devoted much of its energy in recent years. King has built an extensive sales and marketing infrastructure as well as a business development arm devoted to acquiring branded products and companies. In particular, Mylan is hoping to take advantage of King's experience in selling Altace, an inhibitor for hypertension and cardiovascular protection. Mylan is planning to market its own branded version of the hypertension product nebivolol, which is currently working its way through the Food and Drug Administration's approval process and is expected to be available in 2006.

The deal comes as all generic makers are switching their focus toward the branded drugs to bolster their margins. Teva Pharmaceutical, Barr Laboratories, Forest Laboratories and Watson Pharmaceuticals and other generic makers -- accounting for roughly 40 percent of all prescriptions -- are building their sales and marketing forces, which are the backbone of the ability to sell branded drugs.

The pressure to change direction is even more intense because fewer and fewer patents for the current crop of popular branded drugs will expire this decade, leaving the generic makers with little opportunity to expand their business. Generic drug makers typically make the most money during the first two years after a patent expires. Initially, generic drugs are discounted at anywhere between a quarter and third less than the branded versions; after the first several years, however, the price differential can go as high as 80 percent, leaving little room for profits.

Mylan approached King after its co-founder, Jefferson J. Gregory, resigned as chief executive and Kyle P. Macione quit as president in May, executives close to the deal said. Brian Markison, who was named chief executive early this month, had been filling those two roles on a temporary basis.

King is under formal investigation by the Security and Exchange Commission and the Department of Health and Human Services for its pricing of drugs for Medicaid. Executives close to Mylan said that the investigations did not deter its interest.

Under the terms of the agreement, King shareholders will receive 0.9 Mylan common share -- or about $16.659 for each outstanding King common share. Upon completion of Mylan's acquisition of King, current Mylan shareholders will own approximately 56 percent of the outstanding common shares of Mylan, and King shareholders will own approximately 44 percent. The transaction, which is anticipated to close by the end the year, is subject to regulatory approval.

For the 12 months ended March 31, 2004, the combined company would have had approximately $3 billion in revenue, approximately $650 million in operating cash flow and nearly 6,000 employees, with a combined sales force of almost 1,400.

Merrill Lynch acted as exclusive financial adviser and Skadden, Arps, Slate, Meagher & Flom served as legal adviser to Mylan. Goldman, Sachs acted as exclusive financial adviser and Cravath, Swaine & Moore legal adviser to King

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