Pfizer Deal Roils Its Stock

By RONALD D. WHITE

July 16, 2002 12 AM PT

TIMES STAFF WRITER

Investors hammered the stock of Pfizer Inc. on Monday, driving it down nearly 11% amid concerns over the price and timing of its proposed acquisition of Pharmacia Inc.

But many analysts said the deal made strategic sense and could be expected to trigger a round of mergers as brand-name drug companies consolidate in the face of pressure from cheap generic competition.

Under terms of the deal, Pharmacia shareholders would receive 1.4 shares of Pfizer stock for each of their shares; that would value Pharmacia shares at $40.29 each, a 24% premium above their Friday close of $32.59.

New York-based Pfizer closed at $28.78 on Monday on the New York Stock Exchange, off $3.42, putting the value of the deal at $52.1 billion. Shares of Pharmacia, based in Peapack, N.J., jumped to $39.25, up $6.66, also on the NYSE.

Henry McKinnell, Pfizer’s chief executive, would serve as chairman and CEO of the new company; Fred Hassan, Pharmacia’s chairman and CEO, would be vice chairman and a board member.

Pharmacia, formed by the mergers of Pharmacia of Sweden with Upjohn and Monsanto, also would move ahead with previously announced plans to spin off its remaining 84% ownership of Monsanto to its current shareholders.

“It is becoming increasingly costly to fund the high-risk and long-term research that will be necessary,” McKinnell said in explaining the rationale for the deal in a conference call with investors. “That is occurring while payers and providers are increasingly demanding lower costs.”

Analysts said investors were concerned about the price and the timing of the deal, coming at a time when the stock market has been so volatile and there has been a public outcry against the drug industry’s pricing practices.

Some expressed concern that Pfizer was turning into the New York Yankees of the drug industry, trying to buy whatever it needed to stay on top rather than developing talent--in this case drugs--from within.

“There’s concern about the price, and if they’re going to grow at the rate they say they will, then they shouldn’t have to buy Pharmacia,” Eric Thorne, who helps manage $2 billion at Pfizer shareholder Bryn Mawr Trust Co., told Bloomberg News. “The market’s reading into this that the deal may be masking growth issues.”

Some analysts viewed those as short-term concerns, noting the tremendous research and development money the combined company would have.

As for timing, “the industry is always everyone’s enemy--that isn’t going to change anytime soon,” said Adam Greene, an analyst for Dresdner, Kleinwort & Wasserstein.

The pressure on other drug companies to merge or acquire will be even stronger now, analysts agreed. But the problem those other companies face, according to experts, will come in finding a merger partner or acquisition target that is as good a fit as Pfizer and Pharmacia.

“For the next major merger to occur, you have to figure out where it makes similar strategic sense, said Richard R. Stover, an analyst for Arnhold & S. Bleichroeder who covers both Pfizer and Pharmacia. “Because that’s going to be difficult, I don’t think that this will signal a rash of new consolidations. For companies to join out of weaknesses that have already shown themselves just doesn’t add up.”

Other merger possibilities cited by analysts Monday included Merck & Co. acquiring Schering-Plough and a pairing of Merck and Bristol-Myers Squibb.

But some of the same observers looked less kindly on a possible consolidation of GlaxoSmithKline and Bristol-Myers Squibb, saying both companies had failed to digest the consolidations they had already made as separate companies.

As Stover put it: “It would be a lot like the seventh marriage of a Hollywood actor.”

Observers saw few hurdles from American and European regulators, despite a growing anger toward the brand-name pharmaceutical industry--from politicians, employers, consumers and labor unions--over ever-increasing drug prices and the industry’s unabashed efforts to preserve patent protections.

There is only one product area that might raise regulatory concerns over a monopoly, analysts said, citing Pharmacia’s urinary incontinence drug Detrol and Pfizer’s planned entry, Darifenacin.

Otherwise, observers said, there would be little product overlap. Just as Pfizer acquired Lipitor in its merger with Warner-Lambert two years ago, the combined company would boast blockbuster arthritis medication Celebrex, cancer drug Camptosar and other successful drugs.

Pfizer’s global share of total pharmaceutical sales--currently 8%--would rise to only about 11% if the deal was completed, but a new powerhouse would be created. The merged company would have $40 billion in global sales and a combined research and development budget of $7 billion.

“This creates a company that is almost in a field by itself,” said Berkeley-based health-care expert Peter Boland.

Separately, Pfizer announced that second-quarter earnings rose 7% to $1.96 billion, or 32 cents a share, from $1.83 billion, or 29 cents a share, a year earlier. Revenue rose 5% to $8 billion from $7.6 billion a year earlier.

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Merger of Giants

Pfizer’s proposed $52-billion acquisition of Pharmacia would give the combined company an estimated 14% of the U.S. prescription drug market. Both companies formed through a series of mergers.

Pfizer

1953: Pfizer buys drug maker Roerig, its first major acquisition.

1995: Pfizer acquires SmithKline Beecham’s animal health business.

2000: In a deal valued at $87.4 billion, Pfizer buys Warner-Lambert.

Key products

Benadryl (cold/allergy)

Certs (mint)

Dentyne (gum)

Lipitor (cholesterol control)

Neurontin (epilepsy)

Schick-Wilkinson (shaving products)

Sudafed (cold/allergy)