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Drug firms facing stress
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February 24, 1998: 2:21 p.m. ET
FTC investigation into mergers is latest news to pressure the drug sector
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NEW YORK (CNNfn) - Word that two large mergers in the drug sector face antitrust challenges from the U.S. Federal Trade Commission threatens to dampen investor enthusiasm over the pharmaceutical sector's merger activity.
McKesson Corp.'s (MCK) $1.79 billion planned acquisition of AmeriSource Health Corp. (AAS) and Cardinal Health Inc.'s (CAH) proposed $2.62 billion deal with Bergen Brunswig Corp. (BBC), both announced last summer, have triggered concerns among regulators.
An investigation by the FTC has found that the mergers, which would create two drug wholesalers with 70 percent of the market, could hurt competition.
Because of that, some at the agency are saying the mergers should be challenged. The FTC would not comment on when it would decide whether to take action on the recommendations.
The possible action is more bad news for pharmaceuticals shares, which face renewed selling pressure since SmithKline Beecham PLC and Glaxo Wellcome Plc Monday called off their proposed $70 billion merger that would have created the world's largest pharmaceuticals company. The companies cited "insurmountable differences."
Stocks of the two companies were sharply lower in afternoon trading Tuesday, with SmithKline shares (SBH) losing 6 to 60 and Glaxo (GLX) off 7-3/8 to 55-1/16.
It was the second time in about a month that SmithKline had walked away from a deal. Previously, it had been in talks with American Home Products (AHP) before deciding to pursue Glaxo.
But SmithKline may not be through with plans for a merger, said pharmaceuticals analyst Peter Cartwright of Williams de Broe. He said SmithKline, despite its strong sales of $11 billion last year, still is looking to make gains on competitors like Glaxo, and that could buoy SmithKline's stock.
"The pressure on SmithKline is clearly greater and, indeed, their actions have to show that," said Cartwright. "I expect the market will still work on the assumption that SmithKline will do a deal in the not-too-distant future."
SmithKline, however, said it has no plans to resume talks with the jilted American Home Products.
Neither company will be crippled by the failure of the merger negotiations. The strong fundamentals of SmithKline and Glaxo Wellcome were underlined by Standard & Poor's Tuesday. S&P affirmed its long-term corporate credit and senior unsecured ratings of both pharmaceuticals.
"While both groups will now not benefit from a significant improvement of a combined group's business position in conjunction with the conservative financing of the previously proposed transaction, both groups' ratings will now revert to their strong ratings enjoyed prior to the announcement of their merger discussions," it said.
The strong core businesses of the companies may not be enough to keep investors interested, however. After news of the merger talks arose, drug sector shares pushed higher on anticipation of a flurry of merger activity. But analysts point out that the cancellations of some mergers and shaky prospects of others may challenge that investor optimism.
Glaxo develops and manufactures a wide range of gastro-intestinal and respiratory medicines, among other products. Its best-known products include Zantac, an anti-ulcer drug, and its herpes-fighting medicine Zovirax.
SmithKline manufactures brand-name over-the-counter medicines, including the popular Geritol vitamin supplements, Contac cold and flu remedy and Tums antacid.
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