German healthcare conglomerate Fresenius could return to the acquisition trail after investors' response to its latest deal swung from cool to enthusiastic.

Two people with knowledge of Fresenius's growth strategy said the company - which traces its roots to a 15th-century pharmacy that still exists in Frankfurt - is gearing up for more deals after the purchase of generic infusion drug maker APP in 2008.

One of the sources added that the company would again train its sights on the injectable generics sector, as soon as it has completed a planned overhaul of its legal form and share-class structure early next year.

"The market has a lot of trust in the company's management and its ability to execute more takeover deals," said Stefan Muehlbauer at Silvia Quandt Research.

"For a while, there was a lot of uneasiness about the price they paid for APP but many are now taking a more favorable view after the strong performance over recent quarters."

A Fresenius spokesman declined to comment.

Fresenius bought APP to help its Kabi unit branch out into the U.S. injectable generic drugs market, drawing criticism for the $3.7 billion price tag.

An initial slump in new drug approvals further weighed on its shares, but Fresenius cleared most of the backlog and rivals' manufacturing problems soon provided an additional boost.

Fresenius shares jumped last month in the wake of the company raising its earnings outlook and saying its APP operations would boost earnings per share this year, where it had previously expected a neutral effect.

Britta Holt, a director at Fitch Ratings in London who heads the credit rating agency's coverage of European healthcare companies, said she could see merit in expanding Fresenius's injectables unit.

"Injectable generics are an interesting field for Fresenius. It is a market where know-how and critical mass is important. As one of only a number of companies, Fresenius has experience in this highly profitable field," she said.

Lucrative Market
With estimated annual sales of between $5 billion and $10 billion, the injectables market is much smaller but far more lucrative than that for generic pills.

U.S.-based Hospira, with a market value of some $9.3 billion, is the largest player in this sector; others include Hikma Parmaceuticals, Daiichi Sankyo's American Regent unit, Henry Schein and Boehringer Ingelheim's Bedford Laboratories, though neither the sources nor analysts ventured a guess as to which companies Fresenius might target.

Competition in this market is limited because few generics makers maintain a sales force targeted at hospitals, which is needed to bring injectables to market.

Another deterrent is that production and logistics can be fiendishly complex, as APP's battered rivals can attest.

Israel-based Teva Pharmaceutical Industries in May stopped production of a widely used anesthetic after U.S. inspectors took issue with manufacturing practices. When Hospira ran into similar problems, Fresenius had a temporary U.S. monopoly on the product. Fatalities forced Baxter International to recall anti-blood clotting drug heparin in early 2008, giving Fresenius a temporary monopoly in that segment too, which has translated into a dominant market position.

Overall the market is expected to see swift growth over the next few years as blockbusters including Sanofi-Aventis's Taxotere chemotherapy drug lose patent protection.

Injectable drugs worth $40 billion in 2008 sales will attract generic competition over the next nine years, according to British market researcher Espicom Business Intelligence.

Fresenius -with former Credit Suisse investment banker Stephan Sturm in charge of its finances - is building a history of successful takeovers. In 2006, its FMC unit bought U.S. rival Renal Care Group, cementing its position as the largest U.S. operator of dialysis clinics. The year before, Fresenius acquired German hospital operator Helios.

"I clearly expect more deals in (the injectable generics) market next year," said Bankhaus Lampe analyst Leslie Iltgen. "Fresenius will probably look for (fairly large deals) but arguably something smaller than APP."