11/3/99 Dow Jones Int'l News Serv. 09:04:00
Dow Jones International News
Copyright (c) 1999, Dow Jones & Company, Inc.
Wednesday, November 3, 1999
Warner-Lambert, AHP Talks Reignite European Copycat Talk
By Michael Reid
LONDON -(Dow Jones)- European drug stocks have been lifted Wednesday by a
report that U.S. drug companies Warner-Lambert Co. (WLA) and American Home
Products Corp. (AHP) are in merger talks, with investors banking on yet more
deals among their European rivals.
Britain's SmithKline Beecham PLC (SBH), Glaxo Wellcome PLC (GLX) and
Switzerland's Novartis AG (Z.NOV) got the biggest boosts from the news. At 1221
GMT, SmithKline shares were up 28.5 pence, or 3.7%, at 796 pence, Glaxo shares
were up 42 pence, or 2.2%, at 1,801 pence, and Novartis shares were CHF54.00,
or 2.4%, better at CHF2326.00.
Earlier Wednesday, The Wall Street Journal reported Warner-Lambert and AHP
were in talks about a $65 billion merger - the largest drugs tie-up ever.
Until now, drug industry consolidation has been most prevalent in Europe,
with the likes of France's Sanofi-Synthelabo (F.SAN), Anglo-Swedish group
AstraZeneca PLC (AZN) and Franco-Germanic combine Aventis created through
mergers.
While some analysts described the potential U.S. deal as a "catch-up" to the
European trend, they said it does reemphasize the remarkable level of boardroom
talking going on between drug companies, a sign that more deals are surely in
the offing.
"It puts the sector in the spotlight again, intensifying the discussions
among them all," said Alexien Isaac, a pharmaceutical analyst at Teather &
Greenwood. "Everyone is speaking to everyone anyway. Consolidation is here to
stay and there are a number of companies looking for partners, such as
SmithKline Beecham, Glaxo Wellcome and Novartis," she said.
Sutherlands analyst Sally Bennett said "it was only a matter of time" before
the U.S. companies took part in consolidation. "American Home has been looking for a partner for a while. It just puts consolidation back on the agenda."
Bennett said the U.S. deal may up the urgency of European executives to
secure partners. "Larger pharmaceutical companies have to take part in that
consolidation or be left behind," she said.
Critical Mass, R&D Muscle Pivotal To Survival
Faced with spiraling drug development costs, critical mass is paramount to a
drug company's survival in the global top ten rankings. It now costs about $500
million to develop a drug and take it to market. When blockbusters like Losec,
Zantac and Prozac were developed, the cost was more like $50 million. Yet
despite the high cost, the attrition rate is restrictive. More than 80% of
Phase I drugs never make it to market.
And with the global drugs community facing an unprecedented raft of patent
expiries on blockbuster drugs in coming years, observers are banking on more
mega-mergers as the drugs leaders seek a wider array of therapeutic portfolios
to cushion declines in sales of once-key drugs.
That was precisely the reasoning behind AstraZeneca's creation. Astra's
blockbuster anti-ulcer drug Losec loses patent cover in 2001 and 2002, as does
Zeneca's hypertension drug Zestrl. Together these account for almost 50% of
AstraZeneca's drug sales, but now at least they have added research and
development muscle which is more likely to roll out replacement blockbusters.
Analysts said Glaxo's Chairman Richard Sykes has openly embraced the idea of
consolidation. SmithKline's Chief Executive Jan Leschly may have binned merger
suggestions for the last 18 months, but the fact he talked with AHP then Glaxo
inside a month in early 1998 sent a merger-message investors have been loath to
let slip.
Embarrassingly for Leschly, SmithKline shares jump every time there's a rumor
he's considering early retirement - a clear indication that investors think his
likely heir Jean-Pierre Garnier will marry the company off once he takes
charge.
SmithKline has been linked with Glaxo and Novartis and Bristol-Myers Squibb
Co. (BMY) of the U.S., while Glaxo has been linked with Ireland's Elan Corp.
(ELN) and also with Bristol-Myers Squibb.
But analysts are loath to predict which two companies will tie-up next, given
the raft of permutations possible and the various talks which have already
taken place.
"(AHP-Warner) is a catch-up...it's going to cause a lot of speculation but I
don't think anyone has to do anything," said Salomon Smith Barney analyst
Alexandra Hauber.
Should Novartis consider a deal it would be a merger rather than an
acquisition, said Birgit Kuhlhoff, analyst at Bank Lombard Odier & Cie.
But she thinks a deal is unlikely before Novartis decides to spin-off or sell
its ailing agricultural unit.
Before that, Novartis' price/earnings ratios of 24.4 for 2000 earnings makes
it an unattractive merger partner, she said. It also doesn't have the much
sought after U.S. listing.
Many U.S. companies have a p/e of around 27, she said.
In comparison, SmithKline and Glaxo's earnings potential and pipeline
strength is reflected in their heady p/e ratios in the thirties.
Roche's share structure makes it unlikely that the company will be part of a
merger, said Kuhlhoff. The bulk of Roche's bearer shares are still owned by the
founding family. The more liquid participation certificates entitle the holders
for a dividend, but have no voting rights.
-By Michael Reid;44-171-842-9292; Michael.Reid@dowjones.com
(Steve Rhinds in Paris and Anita Greil in Zurich contributed to this
report).
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