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Biotech / Medical : Elan Corporation, plc (ELN) -- Ignore unavailable to you. Want to Upgrade?

To: Gary Korn who wrote (650)	11/10/1999 8:54:00 AM
From: William Partmann	Read Replies (4) \| Respond to of 10345

From SmartMoney Next to Join the Merger Minuet? By Stacey L. Bradford DRUG MERGERS INVESTORS LEARNED AN important lesson last week. Even friendly mergers don't always go off without a hitch. That's especially true in the pharmaceutical industry. Just take a look at the battle brewing between Pfizer (PFE) and American Home Products (AHP) for Warner-Lambert (WLA). While Wall Street seemed stunned by Pfizer's hostile bid for Warner-Lambert, pharmaceutical analysts say it's just another example of how difficult it is for two large drug firms to hitch up. Last year, SmithKline Beecham (SBH) failed to pull off mergers with both Glaxo Wellcome (GLX) and American Home Products. And a planned marriage of American Home Products and Monsanto (MTC) went awry. In these cases, personality conflicts between executive suites overpowered the attraction of potential synergies. Despite the difficulties, though, the urge to merge in the drug industry isn't likely to subside anytime soon. In fact, most analysts say things are just heating up. The large drug companies are experiencing a wave of patent expirations that will make their existing products less profitable — all at a time when their new-product pipelines are producing relatively meager results. Unless these companies act fast, they are likely to fall short of the earnings growth they have promised Wall Street. So what's the solution? Mergers of unequals. "It's always been my opinion that it is a heck of a lot easier to integrate a smaller pharmaceutical company than a merger of equals," Richard Stover of Arnhold and S. Bleichroeder says. And such deals, he also says, often make more sense. "If you are a big pharmaceutical company, you don't need the science," Stover says. "You need the products." This trend of buying second-tier drug companies is already well underway. Warner-Lambert recently bought Agouron, Johnson & Johnson (JNJ) purchased Centocor and Pharmacia & Upjohn (PNU) picked up Sugen. And analysts who cover smaller companies ranging from specialty pharmaceutical producers to generic-drug makers say their phones haven't stopped ringing since Warner-Lambert and American Home Products announced their intentions last week. So we decided to screen for midcap drug companies that can offer the larger firms some value — as measured by existing and potential product sales and relative valuation. We wanted to find companies with at least $300 million in sales and a price-to-earnings ratio that is equal to or less than the industry average. We figure that cheaper targets are likely to be bought out first. After all, who doesn't want a bargain? Our screen turned up 11 companies. One of them, drug-delivery firm Alza (AZA), has a definitive agreement to merge with Abbott Laboratories (ABT). Closing the transaction is now a matter of getting Federal Trade Commission clearance. And should the acquisition go through, analysts speculate the new combined company would be a nice fit for Johnson & Johnson. With Alza out of the running, investors may wish to consider another drug-delivery firm that turned up on our screen. Elan (ELN) is not only still up for grabs, but Jerry Treppel of Banc of America Securities argues it is an even more compelling buy for either investors or an acquirer. Investors have shaved $1 billion off Elan's market cap because of a recent product delay that will cost the company roughly $60 million in revenue, and its price-to-earnings ratio has slipped below its growth rate. It now sells for a mere 15 times 2000 earnings — even though it has a three-to-five-year growth rate of 24%. So what does this company offer aside from a bargain price? It's a leader in Alzheimer's disease research, and it will have three new drugs out on the market by next year, including one to treat epilepsy. Elan also expects to hit the $1 billion revenue mark this year. That's 46% higher than in 1998 and two years ahead of schedule. "So do I think any other company would find them attractive?" Treppel says. "You bet." Forest Laboratories (FRX) is another company that could add substantial value to a buyer's bottom line, especially if Warner-Lambert merges with either American Home or Pfizer. Forest jointly markets antidepressant Celexa with Warner-Lambert, and their agreement stipulates that Warner-Lambert must dedicate a set amount of promotional effort to Celexa — including a sales force that doesn't promote any other antidepressant, says Corey Davis of Hambrecht & Quist. That could create problems if Warner merges with either Pfizer, which sells the popular antidepressant Zoloft, or American Home, which sells a second-line treatment for depression, Effexor. If Forest ends up terminating its deal, it might look considerably more attractive to a buyer. With a 10% market share, Celexa is expected to generate $385 million in sales in 2000. The likeliest suitor would be a European or Japanese drug company looking to buy its way into the faster-growing U.S. pharmaceutical market, Hambrecht & Quist's Davis says. Forest sells for 26 times next year's earnings and has a three-to-five-year growth rate of 27%. Another indirect beneficiary of the latest merger talk is generic-drug maker Mylan Laboratories (MYL). As name-brand drugs come off patent, companies like Mylan will begin offering generic versions of these lucrative products. "There has been more interest in the [generic-drug companies] in the last three days than there has been in the last three years," Banc of America Securities' Treppel says. "The next five years ought to be incredible." Mylan currently has 28 generic drugs awaiting approval at the Food and Drug Administration. Their branded equivalents currently generate over $7 billion in sales. And within fiscal 2000, the company plans to file 16 more generic products with a branded value of $6 billion with the FDA. Mylan's own branded division is also expected to file two drugs, an antifungal and a Parkinson's disease treatment, with the FDA by the end of this fiscal year. Mylan sells for just 14 times next year's earnings and has a growth rate of 20%. So which companies would be interested in buying a generic-drug maker? Once again, European drug companies come to mind, says Kenneth Kulju of Donaldson, Lufkin & Jenrette. "[Generic drugs] are an inexpensive back door into the U.S. pharmaceutical market," Kulju says. Speculating on takeover plays is a high-risk game we'll leave to the punters. But investors who want to play the consolidation angle could do worse than looking for solid companies in an industry where merger-and-acquisition activity has already started to take off.