Here's what Dow Jones said about the combo:
Amer. Home, SmithKline Merger Said
"Logical Combination"
By Jennifer Fron Mauer and Louis Hau
NEW YORK (Dow Jones)--At first glance a merger between American
Home Products Corp. (AHP) and SmithKline Beecham Plc (SBH) appears
to be a "logical combination," according to industry watchers.
Strategically, recent mergers have caused both companies to slip in the
ranks of the world's biggest pharmaceutical companies.
Operationally, both companies have obvious strengths in several areas that
could benefit from merging. Analysts see significant cost savings by
combining marketing, research and development and administrative
operations.
Each has strong presence in the over-the-counter drugs and vaccine
manufacturing areas. American Home Products, which sells Robitussin
cough syrups and such painkillers as Advil and Anacin, has clearer strengths
in marketing in the U.S, while SmithKline Beecham, which sells Aquafresh
line of oral care products, is strong in Europe. Together they would be
strong across the board, according to Kenneth Nover, an analyst with A.G.
Edwards.
Combining their vaccine business would create a powerful force in this
lucrative, high growth industry, according to Steven Gerber, an analyst at
CIBC Oppenheimer. American Home Products, with its line of childhood
vaccines would provide the foundation, while SmithKline Beecham with its
adolescent and adult vaccines targeting such diseases as Hepatitis-B, and
plans for Lyme disease and herpes shots, would provide the sizzle, he said.
In addition, both companies have similar philosophies when it comes to
embracing newer technologies. Both have invested heavily in biotechnology.
American Home Products owns a majority interest in Immunex Corp.
(IMNX), and in December 1996, it paid $1.25 billion to buy the 40% of
Genetics Institute Inc. that it didn't already own. SmithKline Beecham, made
a $125 million investment in Human Genome Sciences Inc. (HGSI) in 1993.
And both companies come to the table with proven ability to complete
mergers and acquisitions that lead to cost savings, analysts said.
SmithKline Beckman Corp., Philadelphia, and Beecham Group PLC of
London merged in 1989 to form SmithKline Beecham PLC. American
Home acquired A.H. Robbins in 1989 and American Cyanamid Co. in
1993.
Analysts say the combined company could slash 30% or more of its
operating costs. If merged, the companies are likely to divest several
non-core units. American Home Products, which has been selling off its
medical products units, is likely to continue doing so. In addition, American
Home would likely consider selling its animal health and agricultural products
business, A.G. Edward's Nover said.
At the same time, SmithKline could sell its clinical lab testing business, he
said.
SmithKline has been making a big research push into the lucrative
osteoporosis market, where American Home has a major presence with its
estrogen-replacement treatment Premarin, according to Lisa Tuckerman, a
portfolio manager with Spears Benzak Salomon & Farrell.
SmithKline has research partnerships with a number of biotechnology
companies, such as NPS Pharmaceuticals Inc. (NPSP) and Human Genome
Sciences Inc. (HGSI), to develop osteoporosis therapies, among other
products.
American Home would give SmithKline "an instant sales force" familiar with
gynecologists and general-practice physicians who prescribe osteoporosis
drugs, Tuckerman said.
"SmithKline clearly wants to get into women's health," she said.
American Home has sharply raised its research & development spending
during the last few years and completed its ownership of biotech concern
Genetics Institute Inc. in December 1996.
Nonetheless, the company hasn't been known as a major innovator of new
products. Tuckerman described American Home as "a decent company but
clearly not a top-tier company" such as SmithKline, Merck & Co. (MRK),
Eli Lilly & Co. (LLY), Pfizer Inc. (PFE) and Glaxo Wellcome PLC (GLX).
Without the same research efforts as those leading players, American Home
could find it "difficult to be super-competitive over the long-term,"
Tuckerman said. A merger with SmithKline could help address this concern,
she said.
Steven Weisman, practice director for the U.S. pharmaceutical practice at
the Weinberg Group, a scientific consulting firm in Washington, D.C., said
that one area of controversy might be SmithKline and American Home
Products' investments in Human Genome Sciences and Immunex,
respectively. He suggested one or the other investment might have to be
spun off if SmithKline and American Home merge.
SmithKline was rumored to have offered to swap its vaccine business four
years ago to American Cyanamid Co. for that company's therapeutics
business, which included anti-infectives and oncology drugs, according to
Charlie Beever, a pharmaceutical consultant for Booz Allen & Hamilton Inc.
However, he noted, those negotiations were interrupted by American
Home's acquisition in 1994 of American Cyanamid.
"Probably some of the same rationale that drove those talks are driving these
talks," said Gerry Michel, also a pharmaceutical consultant for Booz Allen.
In the field of oncology drugs, American Home and SmithKline are both
"midsize, but you put them together and they get interesting," Beever said.
SmithKline's DPS pharmacy-benefit management subsidiary probably isn't a
major topic of interest in the merger talks, Beever said.
DPS, formerly known as Diversified Pharmaceutical Services, hasn't had the
positive impact on SmithKline's sales that had been expected, he said.
More successful pharmacy-benefit managers, such as Merck's Medco unit,
derive a large portion of their sales from mail-order pharmaceutical
purchases, Beever explained. He noted that DPS is "not very large in
mail-order."
A dark cloud of potential legal liability looms over any merger involving
American Home, analysts said. More than 200 lawsuits have been filed
against the company since it withdrew fenfluramine, a drug that when used
with another drug called phentermine, created the popular weight-loss drug
combination fen-phen. Phentermine is made by drug companies including
SmithKline, Medeva PLC and others.
American Home also withdrew Redux, another weight-loss drug, last year.
Redux had been linked to primary pulmonary hypertension, a rare,
sometimes fatal, lung condition.
Linda Miller, who manages the $120 million John Hancock Global Rx Fund,
says such a merger makes sense. Consolidation within the pharmaceutical
industry would create obvious economies of scale, she said.
"Both managements have a great deal of expertise, both have been at the
forefront of consolidation," she said.
Miller said that while there are always last-minute items that could break up
such a deal, it is likely the two will combine operations in some way.
Companies of this size and stature typically don't announce they're in talks
unless they are close to announcing something, she said.
"Today the market is saying it's gone through," she said, noting investors
bought up shares of both companies.
Shares of American Home Products were up 13 9/16, or 16.8%, at 94 1/4,
while SmithKline Beecham gained 2 9/16, or 4.5%, to 59 9/16.
-Jennifer Fron Mauer; 201-938-5287
-Louis Hau; 201-938-5240 |
