Here's what Dow Jones said yesterday:
SmithKline Beecham, American Home Agmt Could Be 6
Mos Away
By Erik Portanger
LONDON (Dow Jones)--Despite their formal courtship announcement Tuesday, SmithKline
Beecham and American Home Products Corp. could still be six months away from finally making it
to the altar, market observers say.
That is how long it could take regulators on both sides of the Atlantic to finish examining potential
competition issues arising from the merger. Even further delays could occur if the companies are
pushed into selling certain vaccine or drug assets.
Regardless, drug shares could keep climbing in the interim, said analysts, who believe that what look
like lofty valuations across the global pharmaceutical sector could become the norm.
'We believe the sector still has some room for upside in P/E absolute valuations, but is limited by the
recent sharp performance,' said Mark Becker, London-based drugs analyst for J.P. Morgan.
Becker is among the more enthusiastic supporters of the proposed SmithKline-American Home
merger. He thinks SmithKline shares, which closed Tuesday at 740 pence, are worth 800 pence
even if the merger doesn't take place. This valuation increases to a hefty 1,100 pence for SmithKline
and $120 for American Home if the companies get together. Shares in American Home closed
Tuesday at 94 2/8, having jumped from around 81 before the merger talks were announced.
'If this deal falls apart it'll be a travesty,' he said.
Peter MacDougall, an analyst at Dresdner Kleinwort Benson, thinks the marriage will go ahead, but
not before the third quarter.
He expects tough scrutiny of the deal by regulators and thinks some assets might have to be sold,
especially in vaccines - an area in which the combined company would control around 35% of the
world market.
MacDougall also believes some competition problems could arise for drugs that haven't even hit the
market yet.
For example, American Home Products is due to apply next week for U.S. marketing approval for
Verdia, a new class of drug known as ACE Inhibitors used for treating hypertension. SmithKline,
meanwhile, is expected soon to gain approval for its own ACE Inhibitor, Teveten.
'They'll only be allowed to keep one of those,' the analyst predicted.
MacDougall believes SmithKline and American Home shares are trading near fair value at current
levels. He believes it is impossible to calculate the relative per-share benefit for the two companies
until the terms of any deal are announced.
So far, the companies are giving nothing away. In a terse statement Tuesday, SmithKline confirmed
market speculation that it was in merger talks with American Home but said it wouldn't comment
further unless a deal was done.
The merger, if it goes ahead, would be valued around GBP75 billion and create one of the world's
top two or three drug companies by market capitalization.
J.P. Morgan's Becker thinks the companies' assets should be split roughly down the middle.
However, when historical sales, growth prospects and the legal problems facing American Home
are factored in, SmithKline shareholders could emerge slightly on top - maybe 56% to 44% - he
suggested.
This is among the key issues being hammered out by the two companies, according to insiders.
They say agreement has been reached on who would run the new company: American Home
Chairman John Stafford would initially take control, but would retire soon after and leave
SmithKline's Jan Leschly at the helm.
However, talks about how the assets should be divided remains a sticking point. There is also some
doubt about how European shareholders in SmithKline would react to owning shares in a
U.S.-registered company.
Shares in SmithKline eased back 34 pence Wednesday to 706 pence as investors took profits and
settled in for what could be several weeks of waiting before new information becomes available.
Other U.K. drug stocks were mixed.
Shares in Zeneca Group PLC continued to soar, gaining 83 pence, or 3.5%, to 2440 pence, while
Nycomed Amersham PLC climbed 45 pence, or 1.9%, to 2442 pence. Glaxo Wellcome PLC, on
the other hand, slipped 49 pence to 1620 pence, as did American Home Products, down around
$4 to $90.31 in mid-session U.S. dealings.
One U.K. analyst said he believes Zeneca remains slightly undervalued, even at current levels. He
also thinks there's an argument for the stock to climb sharply higher on the back of takeover
speculation.
'It's the most obvious remaining target,' he said.
Among the companies being named as possible merger partners with Zeneca include Roche Holding
AG, Schering AG and Pharmacia & Upjohn.
SmithKline Beecham PLC is an Anglo-American healthcare company. Its principal operations are in
the U.S. and Britain, but it has substantial sales and facilities throughout Europe and Asia.
Headquarters: New Horizons Court, Brentford, Middlesex, TW8 9EP, U.K.
Significant Developments: In February, SmithKline said it was in merger talks with American Home
Products. The merger if it proceeds, is expected to create the world's second-largest healthcare
company with a market valuation around GBP76.40 billion.
In August 1997, 37 health insurers in the U.S. filed law suits against Smithkline Beecham alleging
racketeering and overcharging. Also in August, shareholders in SmithKline approved the company's
2-for-1 stock split.
In February 1996, SmithKline Beecham announced a $325 million provision for possible liabilities
for anti-trust litigation in the U.S. and a continuing inquiry by the U.S. government into its clinical
laboratories unit.
In April 1995, it bought Eastman Kodak's Sterling Winthrop R&D units for $120 million.
In May 1994, SmithKline bought pharmaceutical benefit manager Diversified Pharmaceutical
Services of the U.S. for $2.3 billion.
All figures are in sterling, some numbers are rounded:
3-Mos To 3-Mos To Year To Year To
9/30/97 9/30/96 12/31/96 12/31/95
Profit 385 mln 374 mln 1.545 bln b. 1.62 bln
Sales 1.92 bln 1.98 bln 7.93 bln 7.01 bln
EPS a. 4.7 p 9.1 p 37.9 p 36.1 p
Div a. 2.20 p 4.0 p 17.85 p 14.25 p
a. Reflects the impact of a two-for-one stock split in August 1997.
b. Includes an exceptional gain of 512 million GBP from the disposal of the
company's animal-health business
Currency History (Dollar vs Sterling)
London 9/30/97 9/30/96 12/31/96 12/31/95
Close 1.6145 1.5653 1.6900 1.5482 |
