Ranbaxy is understood to have pulled out of the race to acquire German pharmaceutical company Merck's generic business on concerns of over-valuation.

Ranbaxy, the only Indian company to have made to the second round of bidding, decided to opt out after valuations were stretched to $6 billion, industry sources said.

Sources said an auction at this stage could easily take the valuations to over $6.5 billion.

Earlier, another Indian company Dr Reddy's Laboratories had pulled out of the race citing over-valuation.

Ranbaxy officials declined to comment on the development.

Besides the Indian firm, global pharmaceutical majors, including Teva, Mylan and Actavis, had made it to the second round for acquiring the generics business Merck.

Ranbaxy bids for Merck's generic unit

Ranbaxy CEO and Managing Director Malvinder Singh had earlier said that the company was looking to evaluate the assets and were going to be very practical about it.

"We are not in a rat race for acquisition but are focused on creating value for shareholders in the best way we can," he had said early this month.

Merck is hiving off its generic unit to concentrate on branded formulations. It sells products in over 90 countries and is the fourth largest generic producer.

Ranbaxy shares gain 6%: According to another report, the company shares gained 6 per cent on decision to pull out of Merck bid. Shares of the domestic pharma major recovered on Tuesday nearly one fourth of losses it has suffered since the company evinced interest in acquiring the generic drugs business of German pharma major Merck KgaA.

Investors sighed in relief and returned to buy the company shares on reports that it was pulling out of the bidding race due to high price, a broker said. The deal could have put huge pressure on the company's balance sheet and cash flows, he added.

Ranbaxy shares rose nearly six per cent in intra-day trade to as high as Rs 334.80, after losing about 25 per cent since the company first said in early January that it might bid for Merck's generics business.

According to analyst Anshu Govil at CLSA Asia-Pacific Markets, Indian companies entering the bidding war run significant risks of over-stretching their balance sheets and disrupting their cash flows -- a scenario that could create significant share price dilution.