Feb. 5 (Bloomberg) -- Novartis AG is building a financial war chest with a $5 billion bond sale that could be used for acquisitions that the Swiss drugmaker is seeking to replace products facing generic competition.

The sale, announced yesterday, was the company’s biggest offering of corporate bonds. It was split between $2 billion of 5-year 4.125 percent notes and $3 billion of 10-year 5.125 percent bonds. The sale “further enhances” the company’s financial flexibility, Novartis said in a statement. Proceeds will be used for general corporate purposes, Novartis said.

Novartis is taking advantage of a thaw in credit markets and the best environment to sell bonds since credit markets collapsed in September. Average yields have plunged 2 percentage points since October to five-month lows, prompting borrowers to sell $147 billion of bonds in the U.S. in January, the most since May. Novartis has about $6.1 billion in cash.

“If they wanted to do something, this enhances their flexibility,” said Birgit Kulhoff, an analyst at Rahn & Bodmer in Zurich. She said she expects Novartis to pursue small deals.

Chief Executive Officer Daniel Vasella said last week that the Basel, Switzerland-based drugmaker is planning to buy smaller companies and invest in research. Novartis needs to replace income from the heart medicine Diovan and the Gleevec cancer treatment when patents expire starting in 2012. Novartis plans to make more acquisitions in the next 12 months than the three purchases it made last year, Joe Jimenez, head of the company’s drug unit said last week.

Alcon Purchase

Vasella last year agreed to spend $115 million for Nektar Therapeutics’ pulmonary unit, as much as $400 million for antibiotic maker Protez Pharmaceuticals Inc. and about 1.01 billion Swiss francs ($932 million) for hypertension drug partner Speedel Holding AG.

He also paid Nestle SA $10.4 billion in cash for a 25 percent stake in Swiss eye-care company Alcon Inc. Novartis has rights to acquire and Nestle has an option to sell the remaining 52 percent stake between January 2010 and July 2011 for a price that doesn’t exceed $28 billion, the Swiss drugmaker said July 8.

“If they did do anything major, it would be Alcon, but at a reduced price,” Kulhoff said.

Novartis’s cross-town rival Roche Holding AG also plans to tap bond markets to finance its $42.1 billion acquisition of the 44.2 percent of Genentech Inc. it doesn’t own. Amgen Inc., the world’s biggest biotechnology company by sales, issued $2 billion of 10-year notes with a 5.7 percent coupon and 30-year bonds that pay 6.4 percent on Jan. 13.

“Our approach was to be very opportunistic and look for a window,” said Pamela Wapnick, Amgen’s vice president and treasurer, last month.

Yields on bonds rated AA have dropped 2.02 percentage points to 5.95 percent since reaching a eight-year high of 7.97 percent on Oct. 13, according to Merrill Lynch & Co.’s U.S. Corporates, AA Rated index. The average yield relative to benchmark rates has narrowed 137 basis points to 378 basis points from a record 515 basis points. A basis point is 0.01 percentage point.

To contact the reporters on this story: Eva von Schaper in Munich at evonschaper@bloomberg.net; Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: February 5, 2009 11:49 EST