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Not all bad news for drugs
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February 24, 1998: 1:36 p.m. ET
H&Q analyst says industry fundamentals good despite merger collapse
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NEW YORK (CNNfn) - News of the overnight cancellation of the planned merger between pharmaceutical giants SmithKline Beecham and Glaxo Wellcome shook the global drug industry Tuesday, with investors pulling away to reevaluate the sector that consolidation fever had lifted over the past weeks.
Among those assessing the situation: Alex Zisson, a drug analyst for Hambrecht & Quist. He joined CNNfn anchor Deborah Marchini on "Before Hours" to discuss possible effects of the merger breakdown. Excerpts of his comments follow:
DEBORAH MARCHINI: U.S. drug stocks are getting hit on the fallout of this failed takeover. Do you think we've seen the entire magnitude of the adjustment?
ALEX ZISSON: Probably, with the possible exception of some takeover stocks that have done really well like Zeneca (ZEN) or maybe Pharmacia & Upjohn (PNU) or Astra (A). But the group has just done phenomenally well this year in the U.S. You have some stocks that are literally up 20 or 30 percent on the year-to-date just in the last six or seven weeks.
MARCHINI: Not a bad return by anybody's standard although the question is, really, how much of this is takeover speculation?
ZISSON: Well, the fundamentals are great, but I think takeover speculation - whether it's for the smaller guys or people like Glaxo (GLX), who could make a lot of money by taking over another company -- has probably fueled it.
MARCHINI: From the reports we're hearing, this deal foundered on personalities and who was going to be in charge, not on the question of financing. If that's the case, why is this an indication that other drug deals might not go through?
ZISSON: Well, I think it just shows how complicated it really is to merge two huge companies where you have CEOs who both like running big companies, and the shocking thing here is it appeared that the management issues were already resolved. In the original press release, they really laid out the structure of the new management. So this is a real shocker.
MARCHINI: You think this deal is dead for good?
ZISSON: Well, nothing is dead for good, but it seems like there's a lot of hostility in the press releases which normally you don't see for a deal that's just on hold. [70Kb WAV] [70Kb AIFF]
MARCHINI: Are there partners out there for either of these two companies?
ZISSON: Well, you know, Glaxo is the number one drug company in the world, or maybe number two. And SmithKline (SBH) is number nine. So, in general, they're both acquirers rather than being [bought] out. There are a lot of smaller companies that could fit the bill, but neither one needs to do anything.
MARCHINI: Tell me how I could make some money. Which smaller companies would you bet might fit the bill and might be targets of takeover action?
ZISSON: A lot of the takeover-type stocks are already trading at big premiums. So at H&Q, we're focused a little more on value names like American Home Products (AHP).
MARCHINI: Let's talk about one stock that did well yesterday for reasons of value -- Merck & Co. (MRK). There was approval of a new asthma drug. I don't know too much about it. Tell me about it and whether it is a significant breakthrough.
ZISSON: Well, it could be. It's a new drug called Singulair. Standard asthma therapy today is with inhalers that you pull out and you take a puff. And this is one of the first new oral pills or tablets that's been launched really for 40-50 years with pretty dramatic benefits - not necessarily in replacing inhalers but as add-on therapy. It prevents the need for rescue medicine, rescue puffs, or nighttime attacks.
MARCHINI: The stock was up something like 5 yesterday. Is that right?
ZISSON: Yeah. Percentage-wise, 125 to 130 is not a huge gain, but people were really worried about patent expirations for Merck, so the more new drugs they roll out, the more excited people get.
MARCHINI: Do they have enough new stuff in the pipeline?
ZISSON: Well, I think so, especially given the valuation. Merck's really trading at a group multiple and there are patent worries but that's two or three years down the road. That's a long time in the drug world.
MARCHINI: All right. Speaking of a long time, let's talk about the really long-term demographic trends. We baby boomers are getting older. Is the drug industry going to become a more important part of the economy? And if I'm going to be exposed to it, where should my money go?
ZISSON: I think that's right. A lot of people are talking about the graying of America and that's the large macro trend. But also, drugs are being used more and more in health care. Drug spending is actually only about 7 percent of all health-care spending, and yet it's probably pretty cost effective by keeping patients out of hospitals and doctors' offices. So I think we'll be seeing more health-care spending, [as well as] more and more drug spending. 
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