GIANT DRUG MERGER : Ciba-Sandoz Plan Is Part of the Bigger Survival Picture

Sandoz Ltd. and Ciba-Geigy Ltd. have already shown a keen interest in buying pieces of biotechnology companies, particularly in California. Their planned $27-billion merger should enable them to invest even more, at the same time spurring other drug giants to pursue further mega-mergers themselves, analysts said Thursday.

To survive in an intensely competitive new environment, analysts said, drug companies must cut overlapping costs while also developing profitable, novel treatments for diseases. Such “magic bullet” drugs offer the highest margins and best price protection against tightfisted health maintenance organizations and other health-care consumer groups forcing drug costs down.

Sandoz and Ciba-Geigy realize that investing in biotechnology is a good way to acquire rights to those drugs, said Richard van den Broek, a senior analyst with Hambrecht & Quist investment bankers in New York. In total, they have bought part or all of about 25 biotechnology firms, investments they have made to ensure prominent roles in new product development.

Ciba-Geigy’s investments range from its mammoth $2-billion, 49.9% stake in Chiron of Emeryville, Calif., to a $50-million holding in Isis Pharmaceuticals of San Diego and a $7-million stake in tiny Cocensys of Irvine. Sandoz put $80 million into Systemix of Palo Alto. Outside California, Sandoz paid $330 million last year to buy Maryland-based Genetic Therapy.

And industry observers expect that the combined company, to be called Novartis, will make more cash available to biotechnology companies. By merging, and by trimming administrative and distribution costs by as much as $1 billion per year, Sandoz and Ciba-Geigy will have more to invest in product development.

Meanwhile, such pressures are likely to help spur more consolidations among giant drug companies. Other merger candidates include Warner-Lambert and Schering-Plough, analysts say.

Sam Isaly, an industry analyst in New York, said the Ciba-Sandoz deal could prompt a spiral of ever bigger mergers as competitors leapfrog each other in size and cut duplicate functions in an attempt to stay profitable.

“Anybody below the top five in the industry has a very uncertain future, and even the top five can’t be sure,” he said.

Kenneth Lee, a biotechnology expert at the Ernst & Young professional services firm in Palo Alto, said there have been at least 25 major drug company mergers since 1990.

The Ciba-Sandoz proposed merger and the mergers of numerous others in the last five years, including Pharmacia and Upjohn, Glaxo and Wellcome, Roche Holding and Syntex, and Bristol-Myers and Squibb, are the industry’s response to a new order in which powerful purchasing groups such as HMOs are demanding lower-priced drugs.

Drug company mergers have been on the upswing since 1990, and the trend has accelerated over the last year or so, propelled partly by the disappointing efforts of major drug companies such as Sandoz and Ciba-Geigy to come up with new blockbuster products, Lee said.

Consolidation is in store because the drug industry is still “incredibly fragmented for a relatively mature industry,” said Howard E. Greene, chairman of Amylin Pharmaceuticals of San Diego. Drug industry leader Glaxo holds only a 6% global market share, compared with the worldwide market share of 25% of auto leader General Motors Corp.

“This deal is a couple of dinosaurs banding together. The only thing they can turn to is their mass--to become so big, so diversified, so everywhere that nobody can put them out of business,” Greene said

Merging won’t solve every big company’s problems, said Alan L. Hillman, director of the Center for Health Policy at the University of Pennsylvania. He said the drug industry is in the midst of a shakeout similar to that experienced by the airline industry in the late 1970s.

“You had a change in the environment with deregulation of airlines in the Carter administration, just like you have a change in the environment now in health care. They both went from more or less quiet, calm, quasi-regulated industries to the point where the free market is railing against both,” Hillman said.

Greene of Amylin said biotechnology investments are a good hedge for a drug company to make.

“The problem is that new product innovation requires a company to be smart, take risks and move quickly--things that big organizations are known to be bad at. Big companies are good at implementation and distribution, at getting a penny or two out of the cost of a taillight. When it comes to inventiveness, big companies are not known for that.”

Hillman of Penn was not so sanguine about the ultimate outcome of big drug firms’ biotechnology investments.

“The question is, ‘When do they pay off?’ A few drugs have come to market, but on the other hand there is a lot of money invested in gene therapy, and I’m not sure we’re very close to practical applications of that,” Hillman said. “Let’s just say there will be some big winners and some really big losers.”

Associated Press contributed to this report.

* GLOBAL POWERHOUSE

Ciba-Geigy and Sandoz agree to one of biggest mergers ever. A1

* LEADING DEALS

A look at top 10 transactions among drug, all firms. D5

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A Look at the Companies

Swiss drug makers Ciba-Geigy Ltd. and Sandoz Ltd. plan to merge in a stock swap valued at $27 billion--the second-largest corporate merger ever. The new company would be called Novartis.

Sandoz Ltd.

* Headquarters: Basel, Switzerland

* Chairman: Marc Moret

* Employees: 49,882 worldwide at the end of last year

* Major products: Produces and sells pharmaceutical, agricultural and nutritional products such as seeds and crop protection formulas. It also makes a rheumatoid arthritis drug, Sandimmun, or Neoral. It owns U.S. baby-food maker Gerber Products. (Some may remember Sandoz as the company that held the original patent for the hallucinogen LSD.)

* 1995 revenue: $12.7 billion

* 1995 earnings: $1.7 billion

Thursday stock price: $58.875, up $10.75

Ciba-Geigy Ltd.

* Headquarters: Basel, Switzerland

* Chairman: Alex Krauer

* Employees: 84,000 worldwide at the end of 1995

* Major products: Produces and sells pharmaceuticals, chemicals and biological products. Its best-selling products include the arthritis drug Voltaren, Ritalin for hyperactive children and the antacid Maalox.

* 1995 revenue: $17.25 billion

* 1995 earnings: $1.9 billion

Thursday stock price: $62.50, up $15.25

Sandoz ADRs*

Quarterly highs and latest:

Thursday: $58.875, up $10.75

Ciba-Geigy ADRs*

Thursday: $62.50, up $15.25

* Both stocks trade in the United States as american depository receipts on OTC bulletin lists.

Sources: Bloomberg Business News, TradeLine, wire reports. Researched by JENNIFER OLDHAM / Los Angeles Times

Largest Deals

Here are the biggest mergers and acquisitions worldwide:

All Companies

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Date Date Companies announced effective Bank of Tokyo--Mitsubishi Bank March 27, 1995 Pending Sandoz--Ciba-Geigy March 7, 1996 Pending RJR Nabisco-- Oct. 24, 1988 April 28, 1989 Kohlberg Kravis Roberts Taiyo Kobe Bank--Mitsui Bank Aug. 28, 1989 April 2, 1990 McCaw Cellular Communications Aug. 16, 1993 Sept. 19, 1994 --AT&T; Capital Cities/ABC July 31, 1995 Feb. 9, 1996 --Walt Disney Lloyds Bank--TSB Group Oct. 9, 1995 Dec. 28, 1995 Wellcome--Glaxo Holdings Jan. 20, 1995 May 1, 1995 Warner Communications--Time March 4, 1989 Jan. 10, 1990 US West-- July 25, 1994 Nov. 1, 1995 AirTouch Communications

Deal value, Companies in billions Bank of Tokyo--Mitsubishi Bank $33.8 Sandoz--Ciba-Geigy 27.0 RJR Nabisco-- 25.0 Kohlberg Kravis Roberts Taiyo Kobe Bank--Mitsui Bank 23.0 McCaw Cellular Communications 18.9 --AT&T; Capital Cities/ABC 18.8 --Walt Disney Lloyds Bank--TSB Group 15.3 Wellcome--Glaxo Holdings 14.3 Warner Communications--Time 14.1 US West-- 13.5 AirTouch Communications

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Drug Companies

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Date Date Deal value, Companies announced effective in billions Sandoz--Ciba-Geigy March 7, 1996 Pending $27.0 Wellcome--Glaxo Holdings Jan. 20, 1995 May 1, 1995 14.3 Squibb--Bristol-Myers July 27, 1989 Oct. 4, 1989 12.1 American Cyanamid Aug. 2, 1994 Dec. 21, 1994 9.6 --American Home Products SmithKline Beckman March 31, 1989 July 26, 1989 7.9 --Beecham Group Marion Merrell Dow--Hoechst Feb. 28, 1995 July 18, 1995 7.1 Pharmacia--Upjohn Aug. 21, 1995 Nov. 2, 1995 7.0 Marion Laboratories July 17, 1989 Dec. 2, 1989 6.2 --Dow Chemical Syntex--Roche Holding May 2, 1994 Nov. 3, 1994 5.3 Sterling Drug--Eastman Kodak Jan. 25, 1988 Feb. 29, 1988 5.1

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