* Sources had said India's Sun Pharma was eyeing Meda
* Shares in Meda fall 8 pct
* Generic drugs sector busy with deals (Adds Meda announcement on Cipla)
By Simon Johnson and Sumeet Chatterjee
STOCKHOLM/MUMBAI, June 5 (Reuters) - Swedish drugmaker Meda said it was not discussing being taken over, after a source with knowledge of the matter said talks about a deal with India's Sun Pharmaceutical Industries had foundered on valuation.
In a further blow to Sun Pharmaceutical, Meda said on Wednesday it was strengthening its existing cooperation with Sun's Indian rival Cipla over the Dymista allergy medicine.
Two sources with direct knowledge of the situation told Reuters on May 31 that Sun was in talks to buy Meda for between $5 billion and $6 billion to boost its generics business in developed markets.
"Due to the recent speculation in the press and news media concerning Meda merging with another pharmaceutical company, we have decided to inform the market that there are currently no such discussions," Meda said in a statement.
The company declined further comment.
Sources with direct knowledge of the talks said several banks had offered Sun funding to buy Meda, but one said a deal ran into problems due to "fundamental issues" over valuation, without elaborating.
Meda makes specialty products, over-the-counter drugs and branded generics - the same areas of focus as Sun Pharma - and has a market capitalisation of about $4 billion.
Meda shares closed down 8 percent, while Sun rose 1.8 percent.
The drugs sector has seen several deals recently, including a planned $5 billion purchase of Warner Chilcott Plc by Actavis Inc and Valeant Pharmaceuticals International Inc's $8.7 billion tie-up with Bausch & Lomb.
Buying Meda would have given Sun access to Dymista, an allergy medicine that received U.S. approval last year and is viewed by analysts as having good potential.
However, the inhaler product is manufactured and supplied to Meda by Sun rival Cipla. Meda said on Wednesday it was expanding its cooperation with Cipla which would give it access to more markets, including China.
It said Cipla would be responsible for formulation, while Meda will be responsible for clinical development, registration, marketing and sales of Dymista.
"If Meda and Cipla are extending the arrangement for Dymista to newer markets then there are chances that Sun Pharma might not pursue things further," said Siddhant Khandekar, analyst at brokerage ICICI Direct in Mumbai.
"Because if the deal goes through then Sun would be sourcing a key product from its rival in India ... which is not a good business situation," the analyst added.
Other Meda drugs have not performed so strongly, however, and its core earnings, or EBITDA, fell 16 percent last year on sales of about 13 billion crowns ($2 billion).
Analysts expect core earnings to be flat in 2013, making its enterprise value of around 10 times EBITDA relatively expensive, according to one banker.
Mumbai-based Sun is India's most valuable drugmaker, with a market capitalisation of some $20 billion, and has made several acquisitions in recent years including the purchase of U.S.-based Dusa Pharmaceuticals Inc for about $230 million. (Additional reporting by Patrick Lannin in Stockholm Editing by Jane Barrett and Erica Billingham)