A Big Pill To Swallow At American HomeJoseph Weber
Around American Home Products Corp.'s headquarters, CEO John R. Stafford is known as something of a tightwad. Former colleagues say he charts the performance of senior managers and awards the bonuses personally. He insists on signing off on outlays as small as $5,000. And yet this parsimonious lawyer is throwing caution to the winds: On Aug. 2, he offered a breathtaking $8.5 billion in cash for American Cyanamid Co., a money-losing, midsize rival drugmaker with uncertain prospects.
Why the sudden generosity? Stafford won't discuss his bid. But the unsolicited $95-a-share offer--50% more than Cyanamid's preoffer price--reflects an industrywide fear of being left out of the consolidation wave reshaping drugmakers. Indeed, just two years ago, Stafford paid $660 million for 65% of biotech hotshot Genetics Institute Inc. "[Companies] that are big [and] have not been doing anything, are starting to get nervous that they will be at a disadvantage in the marketplace," says Norman C. Selby, a consultant at McKinsey & Co.
CUPBOARD IS BARE? Just why American Home has chosen Cyanamid, however, is confounding some observers on Wall Street. American Home, which has $8.3 billion in annual revenues, is short on innovative drugs. But Cyanamid, which has a problem with shrinking medical sales, boasts no blockbuster drugs either, and it has little in its research and development pipeline that seems to promise big returns. Overall, Cyanamid lost $1.1 billion last year on sales of $4.2 billion, mainly because of write-offs for restructuring. If the takeover comes off--and some analysts are predicting it will spark a bidding war--independent drug analyst Hemant K. Shah argues that the two companies will simply "struggle together instead of separately."
Several of Cyanamid's operations are facing tough prospects. The profitability of its vaccine business, one of its more creative arms, will be under attack this fall, as the Clinton Administration boosts government purchases of vaccines. A generic-drug business is growing, but it offers only razor-thin margins because of the fierce competition it faces. And its drugs include a clutch of modest-selling cancer, antibiotic, and arthritis medicines whose sales are feeling pressure from managed-care buyers. In the over-the-counter market, Cyanamid's main asset is the Centrum vitamin line, which American Home could add to its cabinet of such aging brand names as Advil, Anacin, and Dristan.
But Stafford seems as much interested in bulking up as in anything else. If he sells off Cyanamid's agricultural- chemical interests and other nonmedical businesses, which bring in $2 billion a year in sales, he would be left with an operation with annual medical revenues of $2 billion. Add that to American Home's $8.3 billion in sales, and the company would rank No.4: Merck, Glaxo Holdings, and Bristol-Myers Squibb are larger. By cutting costs--perhaps taking aim especially at some $600 million a year in R&D expenses at Cyanamid--Stafford could fatten his bottom line for the short run. "They would combine their efforts and get rid of the excesses from R&D," says Arvind Desai, an analyst at Mehta & Isaly.
SLIM PICKINGS. But would that be enough? Winners in the drug business will clearly need, in addition to size and innovative products, some major distribution clout--and adding Cyanamid won't help much there. Meanwhile, adding distribution muscle inspired Merck's $6.6 billion purchase of Medco Containment Services last fall, SmithKline Beecham PLC's recent $2.3 billion buyout of Diversified Pharmaceutical Services, and Eli Lilly's pending $4 billion acquisition of the PCS unit of McKesson.
With the major distribution company targets taken, American Home may well have left itself little choice but to snap up a drugmaker such as Cyanamid. Why it didn't go for a rival with more in its product line and laboratories--say Schering-Plough Corp. or Warner-Lambert Co.--is a riddle. Of course, such prizes might cost more: Schering's market capitalization is about $13 billion and Warner's tops $9 billion. Stafford's fiscal caution may explain his choice of Cyanamid, but it will leave the other prizes to someone else.
TRYING TIMES FOR DRUGMAKERS
American Home's bid for Cyanamid could touch off a takeover wave among drug companies.
GLAXO HOLDINGS Overdependent on Zantac, Glaxo needs an acquisition to juice up its $7.6 billion in sales.
PFIZER Pfizer has eschewed big acquisitions. But with a mighty $7.5 billion in sales, it might jump in.
SMITHKLINE BEECHAM This outfit is being hurt by competition for its Tagamet ulcer medicine. That could turn the $9.1 billion giant into an acquirer.
MARION MERRELL DOW With just $2.8 billion a year in sales, it's vulnerable.
UPJOHN Upjohn, with $3.7 billion in sales, is losing the patent on most of its key drugs. New CEO John Zabriskie may be forced to sell.
WARNER-LAMBERT This $5.8 billion company's growth prospects have been dampened by rising generic competition.