A $7 Billion Passport?

In his bid to transform German chemical maker Hoechst into a global player, CEO Jurgen Dormann knows that a personal touch sometimes helps. In China last December, the lanky 55-year-old hosted an elaborate party for an unhappy minister stinging from an earlier Hoechst snub--and walked away with millions in unexpected deals.

But Dormann also knows how to play hardball. On Feb 28, after months of on-again, off-again negotiations, he offered Dow Chemical Co. $7.2 billion for Marion Merrell Dow Inc., its struggling drug unit. That's well below the $7.7 billion Dow paid for MMD in 1989. Although Hoechst desperately wants MMD, Dormann is betting that Dow is even more anxious to unload it.

GROWTH FACTOR. Dormann has plenty to lose if Dow rejects the deal. Since taking over as chairman in early 1994, the longtime Hoechst executive has launched an aggressive remake of the sluggish giant--and MMD is the centerpiece of his strategy to expand in the high-margin drug business. Although skeptics say it could be years before a deal for the poorly performing MMD pays off, Dormann appears to have little choice. Today, drugs bring roughly 25% of Hoechst's $35.5 billion sales--but almost half its estimated $1.82 billion operating income. Yet with less than 1% of the $57 billion American market, the world's largest, Hoechst gets a paltry 6.3% of its drug sales in the U.S. (charts, page 91). Dormann knows Hoechst cannot be a global player without a better position. "Our answer to this challenge is to fill the gap in the U.S.," Dormann says. Both Dow and MMD declined to comment.

Hoechst certainly needs some help. Though it is Europe's largest drugmaker, it has slipped from fourth to seventh worldwide. It has developed few strong new drugs in recent years, while high labor costs, heavy bureaucracy, and European recession have hit earnings. At 10%, it has one of the worst operating margins of the top 20 drugmakers. "Hoechst is a bit of a stumbling giant," says Barrie James, CEO of Basel-based Pharma Strategy Consulting.

But is MMD the solution to what ails Hoechst? A deal would vault it to third place globally, with about $9.3 billion in sales, behind the pending merger of Britain's Glaxo and Wellcome, and U.S. giant Merck. But although MMD's sales rose 9% in 1994, to $3.1 billion, net income slipped 11%, to $438 million. The cause: While MMD had a string of hits in the 1980s--including hypertension drug Cardizem and antihistamine Seldane--they've gone off-patent and are rapidly losing share. And MMD appears to have few promising new products coming. Dow, disappointed with MMD's returns and lacking any synergy, has been trying to sell for a year. But for Hoechst, a play for Marion is "more of desperation than a carefully calculated strategic move," argues Arvind H. Desai, an analyst with pharmaceutical investment research firm Mehta & Isaly.

Dormann and Jean-Pierre Godard, head of Hoechst's pharmaceutical division, dispute that they're buying a laggard. "We see more in the Marion pipeline than most analysts," says Dormann. Godard claims MMD's Cincinnati research facility has promising work under way in respiratory-tract diseases; success there would add to Hoechst's global portfolio. And although Hoechst does research on Alzheimer's at its small U.S. lab, it lacks critical mass. Combining that work with MMD research into other central nervous system diseases would benefit both, Godard says.

That payoff would be years in coming--if it ever arrives. In the meantime, Dormann is scrambling to position Hoechst as one of a handful of high-volume drugmakers powerful enough to deal directly with health-maintenance organizations and hospitals in the managed-care era. To do so, Hoechst needs a top-notch sales force--and that's where MMD comes in today. Despite recent results, industry observers say MMD has a strong sales network with tight ties to powerful HMOs. What it lacks are new drugs to market--and that means it would function as a vehicle for Hoechst to sell its drugs in the U.S.

With its tiny sales arm, Hoechst's hit European drugs have floundered in the U.S. Its best-selling Claforan antibiotic, for example, sells roughly $500 million worldwide but peanuts in the U.S. "All of Hoechst's products could be much stronger in the U.S., and sales support from MMD virtually assures that they will be," says Neil Sweig, a Ladenburg Thalmann & Co analyst.

Dormann is also speeding efforts to revamp R&D. Integrating Hoechst's independent German and French operations, for example, should cut $345 million in costs and trim drug development time 30% by 1997. That should help end Hoechst's own recent dry spell. Petra Zamagna, an analyst with Deutsche Bank Research in Frankfurt, says Hoechst should release new drugs for

dementia, Alzheimer's, heart disease, rheumatoid arthritis, and schizophrenia by 1997. While the U.S. markets for anti-arthritics and heart medicines are crowded, but there is demand for Alzheimer's and schizophrenia treatments. "If Hoechst had big new drugs there, they could be highly successful," says analyst Desai.

But Godard needs managers who can deal with U.S. regulators. In the past, Hoechst has first won European drug approvals, then repeated costly approvals with the Food & Drug Administration. That means it waits years after launching new drugs in Europe to bring them to the U.S.--if at all.

With MMD, Godard says Hoechst expects to slash time and costs by seeking U.S. and European approval concurrently. "In the future, we want to have a common development plan," he says. And industry rivals agree that MMD would fit better under Hoechst than at Dow. Although 58-year-old CEO Fred W. Lyons Jr. may retire if there's a deal, Chief Operating Officer Richard J. Markham, 43, a former Merck executive well versed in managed care, would likely step up. "Markham's young, he's inventive, he's thoughtful," says a top exec at one big drugmaker. "I'm not interested in having another real competitor, but this is a good move for Hoechst."

The bid for MMD is just part of a big shakeup Dormann is pushing through the top-heavy company. Soon after taking over in April, Dormann picked global executives to oversee an aggressive restructuring. Led by the then head of Hoechst Celanese, American Ernest H. Drew--since promoted to Hoechst's Frankfurt management board--they introduced a streamlined structure in January. Business units have been slashed from 120 to 30, and each now operates globally, cutting across national and functional lines.

TRIAD. Dormann has also divided businesses into three categories: high-growth, requiring heavy investment; midrange, where Hoechst will hold share; and cash cows that can be divested. Dormann plans to sell Hoechst's $1.06 billion cosmetics unit and a small methanol business. Dormann expects the asset sales to calm market fears that he'll issue debt or new stock to pay for MMD. Since rumors of the deal hit last September, Hoechst's stock has fallen 14%, to $218. But with free cash flow of $1.4 billion and billions expected from divestitures, Dormann says new stock is out of the question.

One thing Dormann doesn't plan is to up his offer: It's a sore point for Hoechst, which stumbled badly in its first U.S. drug move. It paid a hefty $546 million for 51% of generic-drug maker Copley Pharmaceuticals Inc. in 1993. Copley's value has since slid due to lawsuits claiming that tainted batches of its Albuterol asthma drug have led to deaths. Despite the problems, Dormann remains convinced that Hoechst must up its U.S presence. "We're a little bit late, but not too late," he says. With due diligence now under way and the two sides hammering out the divvying up of jobs, analysts expect the deal to go through. If Dow does say yes, Dormann will find out if his timing is better this time.

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