In a move seen by many as heralding a shift in pharmaceutical company strategy, Swiss drug giant Novartis AG agreed in principle to purchase Hexal AG and its American affiliate, Eon Labs, for $8.3 billion in cash. It is believed that the purchase, when completed, will make the combined company the world’s largest maker of generic drugs.

Prior to the merger, Hexal was the world’s fourth largest generic drugmaker. In an interview published yesterday in Germany, Novartis CEO Daniel Vasella said he would ultimately like his company to control 10% of the market.

Mr. Vasella said he expected the generic market to reach about $100 billion in sales annually by 2010, with Novartis representing about $10 billion of that. With the merger, the company will surpass Israel’s Teva pharmaceuticals, the longtime generic drug sales leader, which reported $4.8 billion in sales last year. Sandoz, Novartis’s generic arm, Hexal, and Eon had combined sales of $5.1 billion last year, according to Novartis.

Novartis paid 3.8 times Hexal’s and Eon’s combined $2.18 billion in sales last year. In comparison, Teva paid six times revenue of Sicor last January when it bought American generic maker for $3.1 billion. When completed, the Hexal and Eon companies will be folded into Sandoz.

One of the prime factors in the merger is the expiration of patents on billions of dollars’ worth of pharmaceuticals. Datamonitor PLC, a drug-industry data firm based in London, estimated that between 2002 and 2007, about $82 billion worth of patent protections will expire. Ironically, the pace of sales growth for Novartis’s name-brand drugs – 15% – far outstripped the 5% sales growth at Sandoz.

“The combination of having a brand business and a generics business is making more and more sense,” said David Maris, an analyst at Banc of America Securities in New York, as quoted by Bloomberg News.

“Novartis is getting a strategic bargain,” Mr. Maris said.

Holzkirchen, Germany-based Hexal is owned by 55-year-old twin brothers Andreas and Thomas Struengmann. It was the first company to introduce a generic in the statins class of cholesterol treatments with its version of Merck & Co.’s Zocor. The Struengmann brothers will have management positions in Sandoz and serve on its executive committee, according to the press release.

The deal should add to earnings within one year, Novartis said. Part of that profit boost will come from “cost savings” of up to $200 million in three years, including “necessary reductions in the workforce.”

Given Novartis’s prodigious cash flow – it generated $3.4 billion last year – and the fact that the deal was done without incurring debt, all Moody’s Investor Services, Standard and Poor’s, and Fitch Ratings reaffirmed their triple-A ratings on the company.