Swiss-based Novartis will also make a tender offer to buy the rest of Eon Labs for $31 per share at a cost of about $1 billion, and merge the two companies into its Sandoz unit, currently the world's number 2 maker of generic drugs, it said. Eon Labs stock closed at $27.92 on Friday.
The deal will give Novartis access to high-margin versions of "hard-to-make" branded drugs and the scale required to reduce costs aggressively in a market marked by cut-throat competition and pressure on prices, analysts said.
However, analysts said it was relatively expensive, at an estimated 3.5 to 4 times the combined sales of Hexal and Eon.
Novartis shares rose after the news, and were 3.2 percent higher at 59.15 Swiss francs by 1340 GMT. They performed in line with the broader European drug sector, however, which rallied after relatively benign recommendations from US regulators on so-called COX-2 painkillers on Friday.
Analyst Ben Yeoh of ABN Amro in London said the acquisition looked "a little expensive", but he added: "Considering the deal is all cash, the return on this cash is likely to be more than if it remained stuck on the balance sheet."
The Hexal deal, rumoured since earlier this month, sparked market talk of increasing consolidation in the German generics market, Europe's largest, with shares in Stada Arzneimittel soaring by as much as almost 10 percent.
Novartis Chairman and Chief Executive Daniel Vasella has made no secret of his desire to steal the top slot in the global generics market. The firm snapped up Slovenia's Lek in 2002 and Canada's Sabex last year.
However, Vasella said Sandoz would now focus on digesting the most recent acquisitions, unless a "jewel" became available. "One shouldn't overdo it," he told an analysts' call. "In all likelihood you can expect a digestion period and a focus on internal growth and not a flurry of acquisitions. Having said that, if a jewel does come available, one would remain open."
Novartis had some $14 billion in net liquid assets, $7 billion of which was cash, at the end of 2004.
Novartis's generics unit would have had combined proforma sales of about $5.1 billion in 2004 if the transactions had been in place, compared with $4.8 billion for the current world leader, Israel's Teva Pharmaceutical Industries.
Executives at Novartis, the world's sixth-biggest drug maker by sales of prescription drugs, said that by 2010 they expected to take a 10 percent share of the global market for generic drugs, which by then would be worth around $100 billion. "Cost containment means generics will continue to penetrate the market," Vasella said.
Generic drugs are cheaper but identical copies of medicines whose patents have expired.
The deal to buy Hexal and Eon Labs - expected to close in the second half if regulators approve - will create cost synergies of $200 million a year within three years of closing, half of which would be realised within 18 months, Novartis said.
Various departments would be consolidated as part of the merger and Novartis said that jobs created through growth would partially offset necessary reductions in the workforce.