Rhone-Poulenc SA, France's largest pharmaceuticals company, signed an agreement Monday to buy a majority interest in Ft. Washington, Pa.-based Rorer Group and merge its human drug business with Rorer to create one of the world's 10 largest drug companies.
Analysts said the two-step transaction--including the issuance of special new rights to all Rorer shareholders--puts a value of $3.2 billion, or $73 a share, on the merger.
The intent to merge was first announced in January but faced an uncertain future because of Securities and Exchange Commission charges that insider traders, including foreign investment groups, illegally profited from knowledge that the two companies were talking about a transaction. News of the signing of a definitive agreement Monday pushed Rorer's shares up $2.875 to close at $65.75 in heavy trading on the New York Stock Exchange composite.
In the first part of the transaction, Rhone-Poulenc said it would begin a tender offer Friday for 21.6 million shares--just over half of the company--at $78 a share, or $1.7 billion in cash. Rhone-Poulenc will eventually control 68% of the new company.
Since Rhone-Poulenc and Rorer disclosed their intent, Roche Holding Co. of Switzerland announced its intent to invest $2.1 billion in South San Francisco-based Genentech Inc. That came on the heels of last year's creation of SmithKline Beecham from the merger of SmithKline Beckman Corp. and London's Beecham Group PLC. Analysts said the transactions are probably just the beginning of a series of investments in U.S.-based pharmaceutical and biotechnology firms by Europe's large drug companies.
There have also been a number of big mergers among U.S.-based companies recently, including last year's merger of Bristol Myers and Squibb to create the world's second-largest drug company. While a number of specific factors have influenced the drug mergers, analysts and drug company executives agree that the huge cost of bringing new drugs to the market is a common underlying factor. European companies are actively making investments because they have cash, they added.
Rorer, whose best-known product is the Maalox line of antacids, "is too small to go it alone," said analyst Michael A. Martorelli of Janney Montgomery Scott Inc. in Philadelphia. "With all of the multibillion-dollar drug mergers going, Rorer has shrunk as a competitive force. With this merger, they jump back into the big leagues overnight," he added.
Rorer, which also markets prescription drugs for the treatment of asthma, hypertension and other disorders, had 1989 sales of about $1.2 billion.
"The competitive potential of our new company will come from the expanded line of existing and future products, enhanced marketing power in major pharmaceutical markets," Rorer Chairman Robert E. Cawthorn, who will be chairman of the new company, said in a statement. "We will have the research potential to support a flow of exciting new products for improving human health," he added.
Rhone-Poulenc, a French state-owned company, achieves access to the U.S. market and Japan through the merger, said Samuel D. Isaly, a principal in the New York-based Mehta & Isaly research firm. Rhone-Poulenc has three products in development that could be sold by the combined firm, he said, including products to treat infections, blood clotting disorders and sleep disorders, he said.
The French company years ago licensed to SmithKline the rights to sell the anti-psychotic drug Thorazine in the United States. It also licensed Flagyl for the control of parasites and fungi. Its human pharmaceuticals business had sales of $1.9 billion in 1989.
The combined company will have sales of over $3 billion and expects to have a research and development budget of more than $400 million for its first year.
It will continue as a publicly traded company based in Fort Washington with a majority of its board to be representatives of Rhone-Poulenc.
As part of the transaction, Rorer shareholders will receive shares of the new company and Rorer will issue to Rhone-Poulenc about 24 million new common shares to bring its holding to 68%. Rhone-Poulenc will also issue to all Rorer shareholders a new equity instrument called a contingent value right (CVR), which entitles holders to a payment from Rhone-Poulenc if the market value of the shares of the new company doesn't achieve a price of at least $98.26 within three years of the merger. Analysts said the rights were worth about $33.50 a share.
Rorer will assume about $265 million of Rhone-Poulenc debt, according to the agreement, and will also buy for about $20 million the French company's U.S. human drug assets. The merger does not include other Rhone-Poulenc businesses such as serums and vaccines, veterinary medicines, animal nutrition lines and its interest in France's Roussel Uclaf chemicals company.
The transaction is conditioned upon Rorer shareholders waiving an anti-takeover provision prohibiting partial cash tender offers and final financing of the agreement of about $1.6 billion. The companies said they have written commitments for the financing from Societe Generale, Barclays Bank PLC, Chase Manhattan Bank and Royal Bank of Canada.
FOREIGN INVESTMENT IN U.S. DRUG AND BIOTECH COMPANIES
July, 1989: Beecham Group PLC (England) merges with SmithKline Beckman Corp. Valued at about $7.7 billion, it is considered a merger of equals to create world's second-largest pharmaceuticals company.
November, 1989: Chugai Pharmaceutical (Japan) bought Gen Probe, a San Diego biotechnology company for $115 million.
February, 1990: Roche Holdings (Switzerland) agrees to invest $2.1 billion in Genentech Inc., including acquiring 60% of the stock.
March, 1990: Rhone-Poulenc SA (France) agrees to merge its human drug business with Rorer Group in a transaction valued at $3.2 billion.