2 Swiss Drug Firms Agree to Merge in $27-Billion Deal

Two Swiss drug rivals have agreed to a $27-billion merger that would create a global powerhouse in pharmaceuticals and chemicals and form one of the largest corporate marriages in history.

The merger of Ciba-Geigy Ltd. and Sandoz Ltd., announced Thursday by the companies’ Basel headquarters, would form the world’s second-largest drug company, behind Britain’s Glaxo-Wellcome, itself the product of a 1995 merger.

The deal is the biggest yet in the once-sleepy drug industry, turned topsy-turvy in recent years by a wave of mergers involving virtually every big-name player. The Ciba-Geigy and Sandoz deal, if approved by shareholders and regulators in several countries, will probably prompt countermoves by other drug companies seeking to remain competitive, analysts said.

Though the two companies are little known to the average American, many of their products are. They range from Ritalin, the prescription drug for hyperactive children, to Ex-Lax, an over-the-counter laxative. Sandoz created the hallucinogen LSD in the 1950s.

The firms also have significant U.S. manufacturing operations and 28,500 U.S. employees. Most of their employees are on the East Coast. Their biggest California presence is Ciba-Geigy’s 49% ownership of Chiron Corp., a major Bay Area biotechnology company.

The merger will mean job losses of about 13,000 out of their combined worldwide work force of 134,000, the companies said. Analysts said most of that will occur at corporate offices in Europe.

The Swiss giants were driven together by some of the same forces propelling other drug mergers: intensifying efforts by governments and private industry to slow the relentless rise in the cost of medical care. In the United States, the health care industry is going through a dramatic, top-to-bottom restructuring, affecting not only drug manufacturers but also doctors, hospitals and insurers.

Experts are divided about the impact that drug industry consolidations will have on drug prices and research into new products. Some say mergers will produce cost savings that will make these corporations leaner and more profitable, leading to increased spending for drugs to fight cancer, AIDS and more obscure diseases. But others say mergers will lead to less innovation--and possibly higher prices--because there will be fewer companies to develop new drugs.

There is agreement on one thing: More giant mergers are in store for the drug industry.

“We’re in the early innings of long-term consolidation in which half of the current drug companies will cease to exist in five years,” said Jack Lamberton, analyst with NatWest Securities in New York.

The pairing of Sandoz and Ciba-Geigy would be bigger than the $25-billion buyout of RJR Nabisco in 1989. It would be second only to a pending $33.8-billion merger between Mitsubishi Bank and Bank of Tokyo.

Alone, Sandoz and Ciba-Geigy are considered middle-tier drug makers with lackluster products and average reputations for developing innovative new therapies. Together, they become a stronger force, with a 4.4% global market share, closely behind Glaxo-Wellcome, with a roughly 6% share.

Investors liked the deal. On the Swiss stock market, Ciba-Geigy’s registered shares leaped 29% on Thursday, while Sandoz’s registered shares jumped 21.5%.

Ciba-Geigy, in addition to Ritalin, is noted for such drugs as Voltaren, an arthritis painkiller, and Program, the first prescription flea-control pill for dogs and cats. Its nonprescription drugs include Allerest allergy medicine, Doan’s pills for backaches and Maalox antacid.

Sandoz is best known as the maker of drugs that suppress the immune system for patients undergoing organ transplants, and for Clozaril, used to treat schizophrenia. It also makes such nonprescription remedies as Ex-Lax and TheraFlu cold medications. It also owns U.S. baby-food maker Gerber Products Co.

The combined company, to be called Novartis, would be run by Ciba-Geigy’s chairman, Alex Krauer. It would have annual sales of about $22 billion, including health care, agricultural chemicals and nutrition products.

Neither company is acquiring the other. Rather, the transaction calls for an exchange of stock.

Both Ciba-Geigy and Sandoz, founded as dye companies before World War I, have checkered histories. Experimenting with psychotropic drugs in the 1950s, Sandoz scientists created LSD, which remained legal until authorities realized its bizarre hallucinogenic effects.

In 1976, Ciba-Geigy admitted testing an insecticide by paying six Egyptian boys to stand in a field while they were sprayed. Two years later, 1,000 deaths in Japan were blamed on a Ciba-Geigy diarrhea drug.

Despite the recent spate of mergers, analysts noted, the drug industry remains relatively fragmented, with no single company commanding a dominant market share.

“If you compare this industry to one like the chemical business, you have much less fragmentation in chemicals and companies that are two to three times the size of Merck or Glaxo,” said Steven Gerber, analyst with Oppenheimer & Co. in Los Angeles. “A $40-billion to $50-billion merger is not out of the question” in the drug business, he said.

Industry analysts say the “bigger-is-better” strategy has caught hold in the drug business in response to today’s demand for medical cost containment. In the U.S., managed care organizations and employers have been insisting on sharp discounts in drug prices. Overseas, many national government-run health programs have been exerting similar pressure on drug makers to hold down prices.

Indeed, the drug industry may now be paying the price for decades of having things pretty much its own way. For years, drug companies routinely set high prices for new drugs, then raised them nearly at will. Finally, with drug price inflation growing at double-digit rates through the ‘80s and early ‘90s, insurers and government payers demanded price cuts.

“This has been a very inefficient industry that for years enjoyed the luxury of great pricing power,” analyst Lamberton said. As that power has been stripped away, “it has provided the imperative for drug makers to get bigger and bigger, to get the pendulum swinging back their way.”

Indeed, some experts voice concern that the merger trend will eventually allow drug makers to call the shots again on prices. And they question whether mergers will foster innovation, as some contend, or frustrate it.

But some analysts contend that drug industry mergers should not only help corporate profits, but also will benefit consumers by generating savings that can be used to replenish research budgets.

* MERGER IMPACT: How deal affects California, merger scene and the industry. D1