Roche Will Acquire Syntex for $5.3 Billion : Mergers: California firm’s deal with the Swiss pharmaceutical giant will create the world’s fourth-largest drug company.

Syntex Corp., a pioneering Silicon Valley company that lately has fallen on hard times, has agreed to be acquired by Switzerland’s Roche Holdings Ltd. in a $5.3-billion deal that would create the world’s fourth-largest drug company.

The merger, one of the largest ever between drug makers, comes as the pharmaceutical industry attempts to cope with health reform and intense pressure from government, health maintenance organizations and hospital groups to cut prices.

The deal also offers the clearest evidence yet of the dilemma faced by Syntex and other big drug makers when once-lucrative patents on their products expire.

Last December, Syntex lost U.S. patent protection on its flagship products--the prescription painkillers Naprosyn and Anaprox. The Palo Alto firm was besieged by competing generic versions that were priced as much as 80% lower than the brand-name drugs. While the lower generic prices have been good news for consumers, Syntex’s sales have been hammered.

Analysts said the prospect of health reform and a rapid decline in painkiller sales forced Syntex to give up its independence and seek a bigger partner. Roche, a $9-billion-a-year company with headquarters in Basel, is more than four times Syntex’s size.

“They couldn’t have survived in a very highly competitive health care market by themselves,” said Arvind Desai, an analyst with Mehta & Isaly in New York.

Syntex Chairman Paul E. Freiman said the company sought a buyer after concluding that rapid changes in health care would favor two types of companies in the next decade: global giants with the financial resources to fund research on multiple drugs, and small biotechnology firms with a narrow research focus.

“Syntex sees itself as a ‘tweener’ company,” Freiman said in an interview. “The company was too small to be big and too big to be small. Strategically, that’s not the place you want to be in this changing environment.”

Max Gurtner, a Roche spokesman, said Roche was interested in Syntex for several reasons. Syntex has several “innovative” drugs under development and its products complement Roche’s offerings. Moreover, by creating a larger company with a broader product line, Roche hopes to gain negotiating clout with the HMOs and hospital groups that are wielding growing influence on drug purchasing decisions, he said.

“We look at such investments with a very long-term eye,” Gurtner said.

Joseph Riccardo, an analyst with Bear Stearns & Co. in New York, said the merger also could produce “dramatic synergies” between the two firms. He says costs at Syntex could be cut sharply by reducing employment and other steps. A Roche spokesman declined to comment on the possibility of staff cuts.

In response to the Roche offer, Syntex shares rocketed $8.25 to $23.50 on the New York Stock Exchange. But the stock remains far below its peak of $54 in early 1992, at the zenith of the drug industry’s popularity on Wall Street.

Analysts said the deal is likely to fuel more consolidation in the $65-billion-a-year drug industry. The prices of such drug stocks as Eli Lilly & Co., Merck & Co. and Upjohn Co. also rose in heavy trading, as speculators tried to pick the next takeover target.

Eran Broshy, a partner at Boston Consulting Group who heads its U.S. health care practice, expects more “horizontal” mergers among the roughly 60 pharmaceutical companies.

“The industry is facing a more difficult set of circumstances than they’ve ever had to deal with,” Broshy said. “They’re having to deal with managed-care companies and intermediaries like pharmacy benefit managers. . . . The result is a business that’s becoming more of a commodity. Profits are down, prices are down and companies are laying off people.”

Under the deal, Syntex shareholders would receive $24 cash per share of common stock, a 57% premium over last Friday’s closing price on the NYSE.

While several analysts expressed surprise at Roche’s hefty offer, analyst Desai noted that Syntex stock has traded as high as $21 during the past year. “It’s a fair valuation,” he said.

Despite continuing rumors that Syntex was seeking a merger partner, analysts had been knocking its shares recently. Hours before the Roche deal was announced Monday, analyst Neil Sweig of Ladenburg, Thalmann & Co. in New York issued a sell recommendation on Syntex stock.

The deal would give Roche the sixth-largest share of drug sales in the United States. Because Roche does so much business overseas, it would rank fourth in worldwide sales.

Roche has a U.S. affiliate, Hoffman-La Roche, based in New Jersey, and owns roughly 63% of Genentech Inc., a South San Francisco biotechnology firm.

Syntex is a pioneering drug maker founded by scientists who invented the birth control pill in the 1950s. The company’s fortunes rose quickly in the mid-1970s, when it unveiled its blockbuster drug naproxen, the generic name for the arthritis pain reliever that generated nearly $1 billion in annual sales--or half the total annual sales for the firm--a few years ago.

When the U.S. patents expired last year, Syntex came out with its own generic naproxen to protect its market share. But many other generic competitors have eaten away at the company’s sales. Moreover, Syntex found itself with few new drugs nearing market approval to take up the slack.

Freiman, a 32-year veteran of Syntex, said he was personally torn between wanting to remain independent and doing what was best for the company and shareholders. “It’s a bittersweet day for me,” he said. He hopes to stay on after the merger, he said, but “there are no guarantees for anybody, the janitor or the CEO.”

Roche’s tender offer is subject to certain conditions, including acquisition of a majority of Syntex shares and government approval.

Syntex Corp. At a Glance

The purchase of Syntex Corp. by Roche Holdings Ltd. of Switzerland will create the world’s fourth-largest drug company.

* Headquarters: Palo Alto

* Chief executive: Paul E. Freiman

* Employees: 10,000

* 1993 revenue: $2.1 billion

* 1993 profit: $287.2 million

* Monday stock price: $23.50, up $8.25

* Major products*: In a joint venture with Proctor & Gamble, the popular non-steroidal anti-inflammatory prescription drugs Naprosyn and Anaprox, used to treat arthritis and pain, will soon be sold over-the-counter as Aleve.

* Provided by Kristine Bryan, a pharmaceuticals analyst at S.G. Warburg & Co.

Source: Bloomberg Business News; Standard & Poor’s Corp.

Drug Stocks Get a Lift

Drug stocks rallied sharply Monday on news of a takeover bid for Syntex. But many of the stocks remain well below their high prices of 1993.

1993-’94 Mon. Mon. Pct. Stock high-low close change change Syntex 23 1/2-12 5/8 23 1/2 +8 1/4 +54.1% Upjohn 35-25 5/8 28 1/2 +1 3/4 +6.5 Schering-Plough 71-51 3/4 64 +3 5/8 +6.0 Merck 44 1/8-28 1/8 31 1/8 +1 1/2 +5.1 Eli Lilly 62-43 5/8 51 5/8 +2 3/8 +4.8 Pfizer 75 5/8-52 1/2 61 1/8 +2 1/8 +3.6 Amer. Home Prod. 69-55 1/2 59 7/8 +2 +3.5 Warner-Lambert 76 3/8-59 3/4 69 1/2 +2 3/8 +3.5 Bristol-Myers 67 1/4-50 55 1/2 +1 5/8 +3.0