Novartis Nabs Sabex

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With its purchase of Sabex Holdings, Novartis (NYSE: NVS) marches on with its long-term goals and expands into the growing, albeit highly competitive, segment of generic drugs.

The company announced early today that it will purchase Sabex, a Canadian generic injectable drug maker, for $565 million. Sabex's recent sales growth has been in the high teens, although sales in its most recent fiscal year were just $90 million. Even though the purchase likely includes significant assets, at first blush, the price tag seems to be fairly high.

But upon closer examination, the economics of the deal become clearer. Sterile manufacturing, in which Sabex specializes, is a highly complex undertaking. Developing new facilities to produce sterile products can take several years, because such sites must undergo a thorough vetting by national regulatory agencies before the first vial can roll off the assembly line. This onerous approval process constitutes something of a barrier to entry.

Through the acquisition, Novartis snaps up manufacturing capacity that has not only been approved by Canadian regulatory authorities, but also, more importantly, cleared by the FDA. Essentially, Novartis has leapfrogged over regulatory headaches and furthered its strategic plan to bolster its presence in the burgeoning U.S. drug market.

Perhaps more importantly, though, Novartis now will be positioned to capitalize on promising future trends in generic injectable drugs. The Swiss pharmaceutical giant noted that, between 2003 and 2010, some medicines with peak U.S. sales of $14 billion will be coming off patent. The generic equivalents of these products won't be nearly as profitable as their patent-protected equivalents. Nonetheless, the long-term opportunity is hard to ignore.

This purchase won't make up for Novartis losing out on an opportunity to buy Aventis (NYSE: AVE), but at least investors can take comfort in knowing this deal has a number of pluses.

Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.