Investors dump Mylan stock

NEW YORK (CNNMoney.com) -- Mylan Pharmaceuticals' stock plunged after the drugmaker said it was purchasing the generic arm of German drug giant Merck KGaA.

Mylan (down $2.49 to $19.91, Charts) stock fell more than 13 percent Monday morning, in the first trading session after the company's Saturday announcement of the $6.7 billion all-cash deal. The decline later softened to 11 percent.

Corey Davis, analyst for Natexis Bleichroeder, said investors dumped the stock in a surprised reaction to Mylan beating the generic industry leader, Teva Pharmaceuticals (up $0.27 to $40.22, Charts).

"Wall Street hates to be surprised, and everyone thought that Teva was going to end up with this [Merck unit]," said Davis. "So the irony is that Mylan wins the battle, but their stock is down and Teva is up."

Wall Street is concerned about the size of this transaction for Mylan, whose market capatiization of less than $5 billion is mere fraction of Teva's $32 billion market cap.

David Buck, analyst for Buckingham Research, said in a published note that the deal would hurt earnings in the first year following the purchase, and wouldn't add to earnings until the third year.

Natexis Bleichroeder's Davis said that Mylan managed to outdo its larger rival by promising not to purge Merck's management and not to launch major lay-offs. But in his note, Buck noted that this agreement is a "key risk" going forward, because it blocks the company from a effective method of cost-cutting.

Teva's stock edged up 1 percent. Teva, based in Israel, still holds its place as the largest generic drugmaker in the world, followed by Novartis' (Charts) Sandoz subsidiary and Barr Pharmaceuticals (down $1.00 to $53.83, Charts).

Davis of Natexis Bleichroeder said the deal gives Mylan a greater international presence. This is important in the realm of low-cost generic drugs, because they are in high demand in countries less affluent than the United States.

"Mylan nailed Goliath between the eyes," said Davis. "They really stole this out from under Teva's nose."

The Mylan-Merck deal is just the latest consolidation in the merger-happy generics industry. In 2005, Teva bought Miami-based Ivax Corp. for $7.4 billion. In 2006, Barr, based in Woodcliff Lake, N.J., absorbed the Croatian biogenerics company Pliva for $2.5 billion, Also that year, Watson Pharmaceuticals (down $0.14 to $31.05, Charts), based in Corona, Calif., bought Andrx, based in Davie, Fl., for $1.9 billion.

German-based Merck KGaA is a separate company from Merck & Co., Inc., (up $0.08 to $52.08, Charts, Fortune 500) based in Whitehouse Station, N.J. The two companies were once the same, but the U.S. holdings split off as a result of anti-German sentiment during World War I.

The analysts do not own stock in the companies mentioned here. The Buckingham Research Group makes a market in Mylan and owns at least 1 percent of company securities.