May 13 (Bloomberg) -- Mylan Laboratories Inc. agreed to buy Merck KGaA's generic-drug unit for 4.9 billion euros ($6.7 billion) in cash to become the world's third-largest maker of copycat versions of drugs.

Mylan is paying more than its own market value to buy a unit with annual sales almost double its own, the Canonsburg, Pennsylvania-based company said in a statement today. It beat out Teva Pharmaceuticals Industries Ltd. of Israel, the world's largest maker of generic drugs, in a four-month battle.

The combination will let Mylan achieve economies of scale in manufacturing and gain access to new markets and products, Chief Executive Robert Coury said in a phone interview. The acquisition will let it sell cheap versions of AstraZeneca Plc's Prilosec ulcer pill and Merck & Co.'s cholesterol-lowering medicine Zocor.

``It's slightly on the expensive side, but I don't think they could have bought this kind of business any cheaper,'' said Rohit Bhat, a drugs analyst with Batlivala & Karani Securities in Mumbai. Mylan will more than double its revenue, so ``it's worth the effort. These opportunities don't come around very often.''

Mylan's offer values the Merck unit at 14.6 times 2006 earnings before interest, tax, depreciation and amortization and 2.7 times sales, according to Bloomberg calculations. That compares with the 13.7 times earnings that Zentiva NV agreed to pay in March for its 460-million-euro purchase of a majority stake in the generic drug unit of Turkey's Eczacibasi.

`Scale, Scale, Scale'

``Scale, scale, scale, scale is what we're after,'' Coury said. ``When you're in this type of low-cost pharmaceuticals, driving the cost of goods down is very critical.''

Mylan said it expects to save $250 million three years after the acquisition, which will dilute earnings this year. The deal will start contributing to earnings after two years. Mylan will keep Merck Generics's management and said it won't make ``significant reductions in headcount'' to achieve its goals.

The enlarged company will have 10,000 employees and would have had 2006 sales of about $4.2 billion, Mylan said.

``We believe Mylan is the best possible acquirer for our company,'' said Hank Klakurka, head of Merck Generics, in the statement. ``The two businesses are an excellent fit in terms of geography and product mix, and together we can offer extremely attractive product baskets across our combined territories.''

Paying Debt

The purchase is the biggest among generics companies since Teva's $7.6 billion takeover of U.S.-based Ivax Corp. in January 2006. Interest in generic-drug companies is increasing as patents expire and governments seek ways to stem the rising cost of public health care.

Darmstadt, Germany-based Merck is selling the unit to pay off debt from its $13.7 billion purchase of Serono SA in January, spokeswoman Phyllis Carter said in an interview. ``Shareholders can expect a dividend from the transaction,'' she said.

The company aims to grow and acquisitions are a possibility, Chief Executive Officer Karl-Ludwig Kley, during a conference call today. Merck doesn't have any ``concrete'' plans for a purchase, he said.

Merck reported a first-quarter loss last month because of writedowns linked to the purchase of Serono, which made it Europe's largest biotechnology company. While the company expects to report a profit this year, coming quarters ``will be tight,'' Chief Financial Officer Michael Becker said April 25.

The German Merck isn't affiliated with Whitehouse Station, New Jersey-based drugmaker Merck& Co.

`Top of the Range' Price

``It seems that Mylan saw a good fit here, because Merck has achieved a price that is right at the top of the range that we expected,'' said Jack Scannell, an analyst at Sanford C. Bernstein in London

Mylan has arranged debt financing to fund the transaction from Merrill Lynch & Co., Citigroup Inc. and Goldman Sachs Group, Inc., it said.

Merck Generics had 1.8 billion euros in sales last year, and accounted for about 20 percent of the German company's revenue and about a quarter of operating profit in the first quarter.

The price Mylan is paying is more than five times its own sales in the year ended March 2007 of $1.26 billion.

The acquisition comes almost two years after Mylan's failed $4 billion bid to buy King Pharmaceuticals Inc., the Bristol, Tennessee-based maker of the heart pill Altace.

Mylan in January completed the $560 million purchase of a controlling stake in Secunderabad, India-based drugmaker Matrix Laboratories Ltd., giving the U.S. company access to lower-cost labor and materials.

Pain Patch, Bladder Medicine

Mylan was the third-largest seller of generic drugs in the U.S. last year, according to data compiled by IMS Health Inc., a Fairfield, Connecticut-based research company. Petah Tikva, Israel-based Teva ranked first, and Sandoz, a unit of Basel, Switzerland-based Novartis AG, was second.

Mylan specializes in copies of brand-name medicines that are difficult to make, such as Johnson & Johnson's Duragesic pain patch and Ditropan XL bladder medicine. Exclusive sales of these generics have led revenue growth for the past six quarters, and new copies of Pfizer Inc.'s Norvasc blood-pressure tablets gave the fiscal fourth quarter an extra boost.

Mylan was founded in 1961 by Milan Puskar and Don Panoz in West Virginia.

Iceland's Actavis Group hf, Germany's Stada Arzneimittel AG, India's Ranbaxy Laboratories Ltd. and private equity bidders including Apax Partners Worldwide LLP and Bain Capital LLC also had vied for the Merck unit along with Teva and Mylan, according to people with direct knowledge of the process.

Teva today said that the terms of a deal for Mylan didn't fit with its investment guidelines. ``While Merck's generics business would have been a strategic fit for Teva, the terms of this opportunity did not fully meet our investment criteria,'' the Israeli drugmaker said in a statement on Business Wire.

To contact the reporters on this story: Angela Cullen in Frankfurt at acullen8@bloomberg.net; Jason Gale in Gautam Chakravorthy in Mumbai at chakravorthy@bloomberg.net.

Last Updated: May 13, 2007 12:40 EDT