June 11 (Bloomberg) -- Daiichi Sankyo Co. will buy a controlling stake in India's Ranbaxy Laboratories Ltd. for up to $4.6 billion to enter the generic-drug market, where sales are growing twice as fast as branded medicines.

Daiichi Sankyo, Japan's third-largest drugmaker, will acquire more than 50.1 percent of Ranbaxy, India's biggest pharmaceutical company, for 737 rupees a share, 31 percent above yesterday's closing price, the Tokyo-based company said in a statement today. Ranbaxy's billionaire chief executive officer Malvinder Singh, 35, will keep his post and Ranbaxy will continue to trade on Indian stock exchanges.

The purchase propels Daiichi Sankyo into the top 10 companies in the $120 billion generic-pharmaceutical market, which grew 11 percent last year, compared with 6 percent for all drugs. Daiichi Sankyo, the maker of the Benicar hypertension medicine, is mimicking Novartis AG and Johnson & Johnson in diversifying as sales of branded products slow. Price cuts in Japan mean Daiichi Sankyo's profit is likely to fall 18 percent this year as its main blood pressure treatments lose sales.

``Daiichi Sankyo's strategy follows Novartis and it's convincing,'' said Fumiyoshi Sakai, a health-care analyst at Credit Suisse Securities Ltd. ``The essence of the deal is Daiichi Sankyo will seriously challenge generic businesses.''

Daiichi Sankyo shares rose the most in two months to 2,975 yen, gaining 4.9 percent at the close on the Tokyo Stock Exchange. Ranbaxy rose 0.25 rupees, or less than 1 percent, to 561 rupees in Mumbai trading.

Expanding Market

Basel, Switzerland-based Novartis used the 2005 takeovers of German generic-drug maker Hexal AG and Eon Labs Inc. of the U.S. to reduce its reliance on patent-protected drugs. It is buying Swiss eye-care maker Alcon Inc. to further that aim. New Brunswick, New Jersey-based J&J sells pharmaceuticals alongside consumer health and medical devices.

Daiichi Sankyo is paying about 4.7 times Ranbaxy's sales in the acquisition, according to Bloomberg data. That compares with 2.7 times that Mylan Inc. paid last year when it bought Merck KGaA's generic unit for 4.9 billion euros ($7.6 billion).

Stada Arzneimittel AG, Germany's third-largest maker of copied medicines, expects the generic-drug market to expand more than 10 percent a year to as much as 137 billion euros by 2012, compared with 6 percent growth for patent-protected products.

Japanese rivals Takeda Pharmaceutical Co., Astellas Pharma Inc., and Eisai Co., have spent more than $14 billion on acquisitions since November 2007 to buffer sales declines as their best-selling drugs lose patent protection.

Better Reach

``The acquisition will allow Daiichi Sankyo to have a better reach into emerging markets, including India, China and Eastern Europe,'' where the pharmaceutical market is growing at a rate of more than 10 percent, the company said in a statement.

The Japanese pharmaceutical market will grow 1 percent to 2 percent this year, said IMS Health Inc., a Norwalk, Connecticut health-research firm, in November. Global industry growth will be 5 percent to 6 percent next year, it said.

India's pharmaceutical market may expand by more than 12 percent a year, reaching $20 billion by 2015, McKinsey & Co. said in a report in August.

``This signals that there is a lot of value in the Indian pharmaceutical industry, said Jayesh Shroff, who helps manage $7.5 billion at SBI Asset Management Co. in Mumbai. ``The drugmakers have underperformed in the past three years. It's also a good signal for the overall market with about $4 billion in foreign direct investment coming in.''

Shares Trail

Ranbaxy shares lost almost a third of their value in the past three years while the benchmark Sensitive Index, or Sensex, more than tripled. Singh is fighting legal battles with drugmakers for the right to sell cheap copies.

The Indian company is trying to win the right to sell a version of Pfizer Inc.'s best-selling Lipitor treatment before the patent expires in 2010. On April 30, New York-based Pfizer said the U.S. Patent & Trademark Office will confirm the basic patent for its cholesterol medication, rejecting Ranbaxy's challenge.

The Ranbaxy purchase gives Daiichi a company that manufactures and sells drugs in 56 countries from the current 21. It follows Daiichi's takeover of German biotechnology company U3 Pharma AG for 150 million euros on May 21 to gain cancer treatments.

The Nikkei newspaper reported the Ranbaxy acquisition in its evening edition. Ranbaxy shares rose as much as 5.4 percent to 591.1 rupees in Mumbai trading after the Economic Times newspaper reported the company's owner may sell a stake, citing an unidentified person.

Ranbaxy Purchases

Ranbaxy has purchased seven companies in the past two and a half years, including Romania's Terapia SA. The company has been built over the past three decades by copying blockbuster drugs such as Merck & Co.'s Zocor cholesterol treatment drug and selling them for a fraction of the price in countries including France, Germany and the U.S.

Ranbaxy aims for sales of $5 billion by 2012 and said it wants to be among the top five generic drugmakers in the U.S., the world's biggest drug market.

The company, founded in 1961, had sales of 74.3 billion rupees ($1.73 billion) in the year ended Dec. 31.

Daiichi Sankyo will buy the Singh family's entire 34.8 percent stake and a portion of about $1 billion of preferential stock Ranbaxy will issue. The sale will trigger a mandatory offer for 20 percent more from shareholders under Indian takeover rules.

Government Plans

The acquisition will help Japan to increase volume of copycat drugs as a part of government's plan to trim medical-care spending in the one of the most rapidly aging society.

``I welcome a decision by Daiichi Sankyo, a branded drugmaker, to seriously work on generic business,'' said Yoshihiko Yamamoto, an analyst at Nikko Cordial Securities Inc. in Tokyo.

Medical costs will swell 70 percent to 56 trillion yen by 2025 from 33 trillion yen in 2005, the government estimates. Japan wants generics to account for 30 percent of prescriptions by 2012 from 17 percent to save about 500 billion yen.

Policies favoring the use of generic drugs are also luring foreign companies, including Teva and Mylan Inc. Petah Tikva, Israel-based Teva, the world's largest generic-drug maker, is hiring as many as 193 people in Japan this year.

To contact the reporter on this story: Kanoko Matsuyama in Tokyo at at kmatsuyama2@bloomberg.net

Last Updated: June 11, 2008 08:48 EDT