2 Giants Unveil Largest-Ever Drug Merger

American Home Products Corp. and Monsanto Co. on Monday unveiled a $34-billion stock swap that would create a drug and biotechnology giant capable of putting a raft of futuristic drugs and foods into consumers’ medicine cabinets and pantries.

If the deal passes muster with shareholders and regulators, it would be the largest union ever in the pharmaceutical industry.

American Home Products makes such familiar household items as Advil pain reliever, Chap Stick lip balm, Robitussin cough medicine and Preparation H hemorrhoid treatment. Monsanto’s technology-driven products range from a promising new arthritis drug called Celebra to a bioengineered strain of cotton called Roundup Ready, genetically manipulated to withstand doses of the company’s Roundup weed killer.

The linkage would produce a powerhouse--with likely combined sales in 1998 of $23 billion--in the emerging field of “life sciences,” which aims to develop more effective drugs, enable farmers to grow crops more economically and devise foods that are more nutritious.

“You’re putting Monsanto’s technology and product pipeline together with the enhanced muscle marketing of American Home Products,” said Sano M. Shimoda, president of BioScience Securities Inc., a research and investment firm in Orinda, Calif. “It’s a very strategic thing.”

Under the deal’s terms, American Home Products shareholders would retain their shares, whereas Monsanto owners would receive 1.15 shares in the combined entity for each Monsanto share.

The news elicited yawns on Wall Street. In New York Stock Exchange trading, American Home shares added 94 cents to $49.25, while Monsanto fell 88 cents to $54.50.

Although brimming with promise, the fledgling science of genetic engineering has yet to produce a boffo commercial payoff. As industry observers are fond of saying, technology in the back room isn’t enough. A company must have the distribution clout to bring that technology to market.

“We’ve been a relatively small pharmaceutical company with a good pipeline [of products],” acknowledged Nicholas L. Reding, vice chairman of St. Louis-based Monsanto. “We’ve been competing with companies that spend $2 [billion] to $3 billion on research. We couldn’t support that, yet we had a terrific pipeline.

“Frankly,” Reding added, “Monsanto could use a bit of the cost discipline that AHP is famous for, and AHP could use some of the visionary approach that Monsanto is famous for.”

Monsanto Chief Executive Robert Shapiro, 59, has long enjoyed a reputation as a visionary who early on embraced the potential for agricultural biotechnology and other cutting-edge sciences. In recent years, he has literally bet the farm on acquiring other companies to better compete with far larger rivals.

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Just last month, he nailed down purchases of two prominent seed breeders--DeKalb Genetics Corp. and Delta & Pine Land Co.--for a total of $4.2 billion. Last year, he engineered the spinoff of the chemical business, leaving the company with its flashier life sciences divisions, including Calgene Inc. in Davis, Calif.

Monsanto had also been weighing acquisitions to get into the fast-growing market for vitamins, dietary supplements and specialty foods. American Home has an established over-the-counter distribution network for its Centrum vitamins and a variety of other products in this sector.

Realizing the need for marketing prowess, Monsanto’s G.D. Searle drug division recently agreed to collaborate with pharmaceutical giant Pfizer Corp. to promote and distribute Searle’s new arthritis drugs, starting with Celebra, expected on the market next year.

For its part, American Home also has promising products in the final stages of testing, including a vaccine for preventing ear infections in children, a rheumatoid arthritis drug called Enbrel, and Rapamune, for patients whose bodies reject organ transplants.

By hooking up with American Home, Reding said, Monsanto would vault to No. 4 from also-ran status in the global market for pharmaceuticals.

Monsanto also brings to American Home a strong position in agricultural biotech. Its Roundup Ready herbicide-tolerant crops have taken market share away from rivals, including American Home’s American Cyanamid Co.

Calling it a “merger of equals,” the two firms announced an unusual, and potentially problematic, arrangement in which their chief executive officers would work as co-chairmen and co-CEOs. The combined venture would get a new name. The 22-member board of directors would be divided equally between representatives from both companies.

At American Home, based in Madison, N.J., Chief Executive John R. “Jack” Stafford, 60, is known for his sharp-penciled, bottom-line orientation and cost disciplines. He impressed investment analysts by smoothly assimilating chemical maker American Cyanamid, purchased in 1994 for $9.7 billion.

In February, American Home discussed a merger with SmithKline Beecham PLC, a British drug maker, but SmithKline backed out in favor of talks with Glaxo Wellcome PLC. Those talks also unraveled.

Since then, American Home had held informal discussions with other companies. The merger discussions with Monsanto began several months ago, Stafford said in a news conference.

Monsanto, too, had been pursuing a corporate marriage, most recently with chief rival DuPont Co. According to Forbes magazine, Shapiro held off on buying DeKalb Genetics and Delta & Pine Land because DuPont already owns 20% of Pioneer Hi-Bred International, the nation’s leading seed company. A DuPont-Monsanto combo could have raised antitrust issues.

The union with American Home could too, Monsanto’s Reding acknowledged. But he said the company views any possible antitrust concerns as “manageable.”

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American Home brings potentially serious liabilities to the union, including lawsuits filed by thousands of diet pill users that analysts say could cost the company as much as $3 billion in settlements. The so-called fen-phen drugs were withdrawn in August after studies showed that they might damage heart valves.

Analysts speculated that other bidders might emerge, given that the price included no premium for Monsanto holders, who would have to take a long view to see any value to the deal.

“Such strategic initiatives have to be thought of as long term,” said Viren Mehta, with Mehta Partners, a biopharmaceutical investment house in New York.

The corporate headquarters of the merged entities would be in Madison. The agricultural business would be based in St. Louis; the pharmaceutical business in Radnor, Pa., and the consumer health care and nutrition businesses in Chicago.

The companies would have a combined work force of 83,000. Some layoffs are anticipated, but the companies declined to speculate on numbers.