Deal Would Create a Generic-Drug Giant : Mergers: Watson’s proposed acquisition of Circa is valued at $600 million. It’s the latest in a series of such unions.

In a deal that would create one of the nation’s largest makers of generic drugs, Corona-based Watson Pharmaceuticals on Thursday agreed to buy Circa Pharmaceuticals in a stock-swap deal valued at nearly $600 million.

The acquisition would become the latest in a string of drug industry mergers as former rivals join forces in the face of government and corporate efforts to cut costs. Even fast-growing generic-drug makers, whose products are often priced well below their brand-name counterparts, are under pressure to reduce expenses and expand product lines.

The Watson-Circa merger, which must still be approved by shareholders and regulators, would help Watson expand its stable of generics and build a growing supply of proprietary drugs. For Circa, the deal caps a dramatic turnaround after a fraud and bribery scandal in the 1980s that devastated the Copiague, N.Y.-based drug maker.

“We’re looking at diversification of sources of revenues,” said Allen Chao, Watson’s chief executive and president, who would serve as chief executive of the combined company. “That’s important to reduce reliance on a few products.”

Under the deal, each share of Circa would be exchanged for 0.86 of a share in Watson. The merger could be called off if Watson’s common stock traded below an average of $25 a share in the weeks before shareholders of both firms vote on the transaction.

On Thursday, Circa shares jumped $6 to close at $23.75 on the American Stock Exchange, while Watson shares fell $1.75 to $30.75 in Nasdaq trading. Based on current stock prices, the deal would be worth about $573 million.

Watson, which generated profits of $18.7 million on revenue of $87.1 million last year, makes various generic drugs ranging from anti-depressants to oral contraceptives. The company has also developed patches that release medication into the blood through a patient’s skin.

Circa relies more heavily on royalties from the sale of drugs--such as the hypertension medication Dilacor--and owns half of Somerset Pharmaceuticals, which sells Eldepryl, a treatment for Parkison’s disease.

Circa, formerly known as Bolar Pharmaceutical Co., paid more than $80 million to settle criminal and civil lawsuits stemming from a U.S. Food and Drug Administration investigation into company bribes of FDA officials and doctored drug samples in the 1980s. Several company employees pleaded guilty in the case and were sentenced to prison.

The merger of the two firms is a good fit “without much overlap” in products, said pharmaceutical industry analyst David F. Saks at Gruntal & Co., a New York-based brokerage firm.

However, independent industry analyst Hemant Shah warned that both companies rely too heavily on a few products, including some proprietary drugs that, ironically, will face competition from generics next year.

“I think in 1995 the merger will have a positive effect, but in ’96 you’re going to have a disaster,” Shah said. “The only question is the extent of the disaster.”