Ahp Warner: No Panacea, But...

A merger would at least help them stay competitive

It's not exactly a match made in heaven. In fact, the Nov. 3 news that American Home Products Corp. and Warner-Lambert Co. were finalizing a merger is really about two companies pinning their hopes on a marriage of convenience.

With a $3.8 billion settlement that clears up most of its legal liabilities stemming from sales of diet drugs, AHP is finally free of the baggage that made it an unattractive mate. Now, AHP clearly needs to bulk up to compete in the consolidating global pharmaceuticals business. Chief Executive John R. Stafford tried to consummate deals with SmithKline Beecham PLC and Monsanto Co. Warner-Lambert, enjoying robust growth from its $3.6 billion cholesterol-lowering drug Lipitor, may look like a great catch. But it needs a deal, too, because it doesn't have a lot of new products in its drug pipeline.

R&D MUSCLE. If the talks result in an agreement, as appears imminent, the trick will be to make this marriage work over the long haul. There will be some obvious benefits to the combination. For one thing, the new company, which would be spending close to $3 billion a year in research and development, would have the muscle to invest in the expensive technologies needed to compete in today's drug business. And it helps that AHP already has many promising drugs in its pipeline, including a vaccine for infections like pneumonia. At the same time, the two companies have a drugstore full of over-the-counter brands, including Listerine, Chap Stick, Sudafed, and Preparation H.

Then there are also the usual consolidation savings. Deutsche Banc Alex. Brown analyst Barbara A. Ryan figures the combined company could cut $655 million, after tax, out of costs in 2000. At the same time, the almost $70 billion deal could solve the issue of who will succeed the 62-year-old Stafford. Most analysts expect Stafford to serve as the combined company's chairman with Warner's Lodewijk J.R. de Vink landing the CEO job.

But the challenges for a combined AHP/Warner-Lambert would be considerable. For one thing, there's the potential for a culture clash similar to the one that plagued the early months of the Pharmacia & Upjohn merger. In this case, AHP executives are known as ruthless cost-cutters. While managers at Warner-Lambert are far from spendthrifts, they may prefer to use a scalpel rather than an ax when it comes to budgets.

At the same time, industry experts point out that the companies have very different product lines: AHP is strong in vaccines and women's health products such as hormone replacement therapy Premarin, while Warner-Lambert enjoys a strong cardiovascular franchise. So the merger doesn't produce any major new leverage in any particular drug market. Analysts argue that specialization and focus will become more important, not less, as the industry continues to consolidate. "It's unclear how they'll build mass and scale considering they are strong in very different therapeutic classes," says Stephen S. Tang, national director of A.T. Kearney Inc.'s health-care consulting practice.

Still, if Stafford and de Vink pull off a deal, the sheer bulk of the new company will certainly put pressure on their competitors. Eli Lilly & Co., which has seen falling sales for its flagship antidepressant Prozac, could face pressure to find a partner, Brown Brothers Harriman & Co. analyst Michael Krensavage says. And other midsize players such as Schering-Plough, Monsanto, and Pharmacia & Upjohn are also seen as potential merger plays. Monsanto's shares, for example, jumped more than 10% on the news of the possible AHP-Warner merger. At the same time, analysts say talks between Glaxo Wellcome PLC and SmithKline, which faltered in part because of personality clashes at the top, may resume if Smith-Kline CEO Jan Leschly steps down before his planned Sept., 2000 retirement date.

"This could trigger more consolidation," says Dr. John Borzilleri, a pharmaceutical analyst at State Street Research & Management Co., which holds AHP and Warner-Lambert stock. "Almost anybody is a candidate because nobody has a clear blockbuster in late-stage development at this point." That's why even companies who would prefer to remain solo may be forced at least to start dating.

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