M & A Roundup – More Megadeals Loom In the Drug Industry: After the Pfizer/Warner-Lambert Merger, Pressure Is on Holdouts to Combine

Now that Pfizer Inc. has won its struggle for Warner-Lambert Co. with an $85 billion deal, m&a specialists who are anticipating the next pharmaceutical hookup agree on one point: There will be many more mergers to come in the sector. “The industry still has a lot of room for consolidation. The pressures that sparked the battle between American Home Products (AHP) and Pfizer (for Warner-Lambert) haven’t gone away,” said Hemant Shah, an independent pharmaceutical analyst in Warren, N.J. The pressures that Shah refers to, mainly the need to assemble marketing clout and a pipeline of research projects that will produce commercial winners, are the drivers not only for Pfizer’s conquest of Warner-Lambert but also for the $76 billion purchase of SmithKline Beecham PLC by Glaxo Welcome PLC that was announced in January. After failing three times in two years to complete deals, it is obvious that AHP is amenable to combining with someone. The Swiss drug manufacturer Novartis AG, which is reportedly eager to increase its North American marketing presence, is a frequently cited possible partner. Another company that might want to hook up with AHP is Pharmacia & Upjohn Inc. Presumably, Pharmacia & Upjohn will have to wait until its pending merger with biotech firm Monsanto Co. is completed, which should be in place by the second quarter of this year. Schering-Plough Corp. and Eli Lilly & Co., while smaller companies, are also said to be potential partners for AHP. Both firms face expiring patents on key products and are thought to be willing to consider trading independence for increased scale. Time will probably serve to make AHP more appealing, notes Steven B. Gerber, a pharmaceutical analyst at CIBC World Markets in Los Angeles. Uncertainty about the extent of the company’s liability linked to its diet drug products has been a downside for potential acquirers, but Gerber said that continuing progress at settling and limiting this litigation should make the company a more appealing partner. He also noted that valuation of the company will become easier once the extent of the opt-outs in the diet drug class-action suit becomes available early in the second quarter. Abbott Laboratories dropped its $7.3 billion bid for ALZA Corp. because of Federal Trade Commission objections last year but might try another combination if it locates a willing partner. According to financial analysts, other companies said to be on the prowl include such European players as AstraZeneca PLC, Roche Holding Ltd., and Aventis SA. The blending of biotechnology companies and pharmaceutical operations has been a much-discussed synergy for some time. For Gerber, however, Merck & Co.’s purchase last year of Sibia Neuroscience Inc. is a significant move. “For Merck to end years of unwillingness to do deals by stepping up to the plate and buying Sibia carries a lot of symbolic value for us,” he said. Gerber also cited such cross-sector deals as Warner-Lambert’s purchase of Agouron Pharmaceuticals and Johnson & Johnson’s purchase of Centocor Inc. Despite the torrid pace of deals in 1999, the pharmaceuticals field remains one of the most fragmented major industries. The Glaxo-SmithKline combination, which would create the world’s largest drug company, would command only about 7% of the market worldwide. “We’ll see a steady pace of consolidation, as top-line growth is slowing and investors will continue to force companies into each other’s arms,” Gerber said.