Analysts Praise W-L/AHP But Also Endorse Pfizer Bid

15 November 1999 00:00  [Source: ICB Americas]

By Feliza Mirasol

The announced merger of US drug manufacturers Warner-Lambert and American Home Products Corporation is drawing praise from analysts, as most see a good fit between the companies. However, some analysts contend that a merger between Warner-Lambert and Pfizer Inc. would be a more sound combination. Warner-Lambert is going ahead with its plans to merge with AHP and has rejected a competing offer from Pfizer.

The combination of AHP and Warner-Lambert, to be named AmericanWarner Inc., will have a market capitalization of roughly $145 billion and pro forma sales of $26 billion. The companies expect to have a powerful pipeline of innovative future drugs and a strong combination of complementary products in many therapeutic categories.

"There is a very good overlap on the pharmaceutical side as well as in the over-the-counter business," says PaineWebber analyst Jeff Chaffkin. He notes that Warner-Lambert will lose patent protection next year on its anti-convulsant drug Neurontin, which posted a 79 percent increase in third quarter sales to $237 million. AHP, however, is preparing many new product launches.

"The two offset each other very nicely," Mr. Chaffkin says. "In addition, there's really no major patent expiration for the next several years, so I think this is a nice strategic fit. You get solid revenue growth and a very strong, 20 percent-type earnings growth."

Mr. Chaffkin concedes that a combination with Pfizer would also be a strong fit. "Obviously, they match up very well with [the] cardiovascular [area] and with Lipitor. Again, there would be no major patents to worry about. They would have a slightly stronger R&D effort combined at about $4 billion. The AHP deal would have a combined R&D of [roughly] $3 billion. Both are good deals."

From a strategic standpoint, Mr. Chaffkin considers Warner-Lambert and AHP to be a slightly stronger fit because their deal is a merger of equals with shared management. That would not be the case in a merger between Pfizer and Warner-Lambert. "With Pfizer, most or many of the senior and middle managers would be replaced," he says.

New York-based Datamonitor, which conducted a market analysis of the synergies between Warner-Lambert and each of the two merger candidates, says Pfizer has "much more to offer" and would be a better fit for Warner-Lambert.

Citing Pfizer's 18 percent revenue increase to $12.7 billion in 1998 and forecasting continued growth at a similar rate in 1999, Datamonitor says that Pfizer and Warner-Lambert would create "the strongest and one of the fastest growing pharmaceutical companies in the world, dwarfing all competitors."

Pfizer's level of growth more closely matches that of Warner-Lambert, which posted a 1998 revenue increase of roughly 25 percent to $10.2 billion. In comparison, AHP's revenues declined 5.2 percent in 1998 to $13.5 billion, and Datamonitor predicts that AHP's revenues will continue to decline in 1999.

"In terms of portfolio fit, Warner-Lambert would benefit most from choosing Pfizer over AHP," Datamonitor says. The consultancy notes that Warner-Lambert's portfolio will generate some synergies with either company, but that it most closely matches Pfizer's. Both companies also complement each other in their clinical R&D pipelines because both are strong in CNS, cardiovascular and cancer products. In contrast, "AHP's R&D focus lies in cardiovascular, women's health and vaccines."

During a presentation to analysts last week, Warner-Lambert and AHP outlined AmericanWarner Inc.'s growth strategy, particularly an emphasis on cost synergies.

AmericanWarner expects to fully realize $1.2 billion in annual savings by the third year after the merger's completion. Sustainable revenue growth is estimated at 11 percent per year through 2002 (an estimated $29.7 billion in revenue for 2000 climbs to $36.1 billion in 2002). Sustainable net income growth during the same period is forecasted at 20 percent per year ($4.8 billion in 2000 rises to $6.8 billion in 2002).

In addition, the company will have leadership positions in a range of therapeutic categories, leading to less dependence on Lipitor. Strong late-stage pipeline candidates and recent launches include ReFacto, Sonata, Rapamune, Meningitec and Lipitor (in Japan). New product growth is also expected from Pregabalin, Zenarestat, Prinomastat and Prevenar, which totals an estimated 21 launches from 1999 through 2002.

Two weeks ago, Pfizer filed suit in the Delaware Court of Chancery against the $2 billion breakup fee and lockup option that Warner-Lambert granted to AHP under their merger agreement. The lawsuit charges that those provisions are illegal and invalid. Should Pfizer's hostile bid prevail, the provisions would force it to pay the $2 billion breakup fee and prevent it from counting the merger as a pooling-of-interest deal.

In a separate move, Pfizer expressed interest in gaining control of Celebrex, Monsanto Company's anti-arthritis, COX-2 inhibitor drug, which Pfizer co-markets. Pfizer says it would like to acquire Monsanto's Searle pharmaceutical unit, but only if that unit becomes available by itself. Pfizer has no interest in buying all of Monsanto, a company spokesperson confirms.

LYCOPENE--BASF now offers a 10 percent lycopene powder, synthetic, to the pharmaceutical market. The company is the second major carotenoid producer to introduce a synthetic lycopene. Roche Vitamins Inc. launched its synthetic lycopene several months ago. In conjunction with its new product, BASF is issuing a brochure detailing clinical research into the health benefits of lycopene, an emerging antioxidant. The brochure is free and available for interested professionals.

PASTEUR MERIEUX CONNAUGHT, a wholly owned subsidiary of Rhone-Poulenc SA, has signed an agreement with Cambridge, Mass.-based Dyax Corporation to develop systems that optimize the purification of a series of vaccines. Under the deal, Dyax will use its proprietary Phage Display technology to develop highly selective affinity ligands to provide superior, high-yield purification of Pasteur MÄrieux Connaught's vaccines for infectious disease indications. Pasteur MÄrieux Connaught will fund the research and development effort.

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