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Drug firms close to mega deal
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November 4, 1999: 12:27 a.m. ET
American Home at it again, mulling pact with Warner-Lambert worth about $65B in stock
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NEW YORK (CNNfn) - American Home Products Corp. and Warner-Lambert Co. are merging in the biggest deal in the pharmaceutical industry, worth a reported $65 billion.
The two companies announced in the early-morning hours Thursday that they would link to create a new company called AmericanWarner.
Under the terms of the deal, American Home shareholders will receive shares in the new company on a one-for-one basis. Warner-Lambert shareholders will receive 1.4919 shares in the new company for each of their shares.
The deal between the No. 5 and No. 7 U.S. pharmaceutical companies in sales ranks as one of the biggest corporate combinations in history and, analysts say, could spur more deals in the consolidating drug sector.
The merger folds under a single corporate roof many top-selling prescription drugs, including American Home's estrogen drug Premarin and Warner-Lambert's cholesterol drug Lipitor, as well as the over-the-counter painkillers Advil and Anacin, Dentyne gum, Certs mints and Listerine mouthwash.
Drug-sector analysts and fund managers said the deal would make a good fit by opening the door to new efficiencies. American Home adds a solid candy and consumer products business, while Warner-Lambert wants to reduce its dependency on a single blockbuster drug - Lipitor.
American Home is no stranger to deal-making, having unveiled mergers with two other companies over the past two years - only to back away over who would run the show.
Madison, N.J.-based American Home got close with the chemicals powerhouse Monsanto (MTC) and fellow drug firm SmithKline Beecham (SBH), but those deals collapsed after the companies couldn't agree who would be in charge. Those issues may have already been resolved with Warner-Lambert, however.
John Stafford, American Home's chairman would become chairman of the combined firm, while Warner-Lambert's chairman, Lodewijk J.R. de Vink, would be its chief executive.
Word of the possible merger pushed both stocks sharply higher Wednesday. Warner-Lambert (WLA) rose 5-5/8 to 83-13/16, topping its 52-week high of 82; American Home, whose stock has been lagging, jumped 5-7/16 to 55-13/16. Other major drug stocks also rose on the news.
AHP stock performance over the past year
American Home, whose shareholders recently adopted a takeover defense policy, has been seen as a buyout target given the company's recent product and legal setbacks and financial woes in its agricultural business.
American Home has been under the strain of thousands of lawsuits connected with the "fen-phen" diet drug combination. The company took a $3.75 billion charge in the recently ended third quarter to pay for a settlement last month. It also reported a $195 million charge for the restructuring of its Cyanamid agriculture products business.
Warner-Lambert stock has rebounded
in recent months
The possible merger has been rumored for at least a month, independent pharmaceutical analyst Hemant Shah said. "I don't think it's a done deal," he said. "There are still a couple of big hurdles which need to be resolved."
The biggest issue is uncertainty over the fen-phen cases, Shah said. While a settlement was viewed as paving the way toward American Home stepping up merger discussions, a federal judge hasn't yet ruled on whether the settlement can go forward, and it's unknown how many plaintiffs will accept the deal, Shah said.
American Home was forced to pull the weight-loss pills from the market in 1997 amid links to heart valve damage and other health problems.
Excluding drugs ordered by mail, Warner Lambert has risen to become the nation's eighth-largest drug vendor with some $2.62 billion in sales for the first six months of 1999. That's just slightly ahead of No. 9 American Home, at $2.57 billion during that span.
Yossi Lipsker, a health-care analyst with Phoenix Funds, which holds between 4 million and 5 million shares of Warner-Lambert, said Wednesday that a deal is smart because Warner-Lambert is trying to reduce its dependence on one hot-selling drug. Meshing with American Home would help it better diversify its overall product portfolio.
"De Vink doesn't want to find five years from now that 80 percent of sales are Lipitor," he said. Analysts said that Lipitor accounted for more than 30 percent of sales in the third quarter.
Lipsker and other analysts said that reliance on a hot product is increasingly common: rival Schering-Plough has the hot-selling anti-allergy drug Claritin, and Eli Lilly makes antidepressant Prozac.
The combined company will have an estimated market capitalization of about $133 billion, based on Wednesday's closing prices. No. 1 U.S. drug maker Merck & Co. (MRK) has a market capitalization of about $183 billion. 
-- from staff and wire reports
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