Payoff May Clear Way for Drug Merger

American Home Products Corp. has agreed to accept $1.8 billion to abandon a merger agreement with Warner-Lambert Co. after concluding it couldn’t compete with a higher bid from Pfizer Inc., a person familiar with the situation said Sunday.

The boards of Warner-Lambert and Pfizer were voting Sunday to approve Pfizer’s purchase of Warner-Lambert for $89 billion in stock, creating the world’s No. 2 drug maker, people familiar with the situation said. An announcement could come as early as this morning.

The deal would mark the end of a takeover battle that started in November when Warner-Lambert announced a $58.3-billion merger with its New Jersey neighbor American Home Products.

The payment, the largest ever in a broken merger agreement, was to be delivered to American Home today. The money could help attract a new partner for the company, which also failed in two 1998 merger attempts. Since then, American Home has made progress toward settling litigation over its withdrawn fen-phen diet pills and has approval of new drugs, including a sleeping pill.

“The first and most important thing for American Home is to put fen-phen behind it, and this will be a very big help,” said Hemant Shah, an independent analyst. “The $1.8 billion will go a long way in paying off lawsuits.”

American Home is seeking to resolve much of the litigation through a $3.75-billion settlement. The maker of the painkiller Advil and the estrogen-replacement drug Premarin declined to comment on the agreement with Pfizer. Shares of American Home, based in the northern New Jersey suburb of Madison, fell $2.19 to close at $45.50 Friday on the New York Stock Exchange.

Pfizer and Warner-Lambert officials couldn’t be reached for comment Sunday. Shares of Warner-Lambert, based in Morris Plains, N.J., rose $1.06 to close at $94.56 Friday. New York-based Pfizer rose 13 cents to close at $35.75. Pfizer would exchange 2.75 of its shares for each share of Warner-Lambert. The transaction is valued at $89.96 billion in stock and $1.4 billion in debt based on Friday’s closing prices.

Warner-Lambert’s chairman, Lodewijk de Vink, who spurned Pfizer’s unsolicited bid for two months in favor of pursuing a merger with American Home, will step down after the transaction closes, people familiar with the situation said. Pfizer asked him to remain for an indefinite period to assist with integrating the companies, the people said.

American Home, if in fact it has agreed to take the fee and abandon the deal, would avoid a court battle with Warner-Lambert and Pfizer, the people said. The settlement would allow American Home to sell American Cyanamid, its agricultural chemicals unit, and make it more attractive to potential buyers. Analyst estimates of the value of the unit range from $1.5 billion to $3 billion.

American Home and Warner-Lambert agreed to a friendly merger Nov. 4.

Pfizer, which helped build Lipitor into one of the world’s best-selling drugs, has been seen as the likely winner since it touched off the merger battle with its hostile bid in November.

Lipitor, with $3.7 billion in 1999 sales, is on a path to become the world’s best-selling drug in a few years.