American Home, Warner-Lambert Surge on Merger Talk

Warner-Lambert (WLA Quote) and American Home Products (AHP Quote) confirmed Wednesday that they are discussing a merger that would vault the pharmaceutical companies into the top echelon of the industry.

The confirmation comes after The Wall Street Journal reported Wednesday that the companies are considering a $65 billion merger that could be announced as soon as Thursday. Officials for the companies would say only that they are exploring a business arrangement. They declined to comment further.

Wall Street reacted enthusiastically in midmorning trading, bidding up shares of both companies as well as the broader drug sector. American Home rose 3 7/8 to 54 1/4, while Warner jumped 3 13/16 to 82. [American Home closed up 5 9/16 to 55 15/16, while Warner closed up 5 5/8 to 83 13/16.]

A merger -- which would be the biggest in the industry's history, supplanting the mid-1990s deal among Swiss giants Sandoz and Ciba that created Novartis -- would continue a decadelong trend of drugmakers uniting to cut costs as they tackle complex diseases such as cancer and the AIDS virus, analysts say.

"Pharmaceutical companies have to spend a lot more money for work that is far more risky," said Hemant Shah, an independent pharmaceutical analyst. "The only way they can make that investment and continue growing earnings is to find savings." Shah rates Warner-Lambert buy and American Home neutral.

The deal may have sparked hopes of additional consolidation among drug stocks as well: Merck (MRK Quote) was up 2 1/4 to 80 5/16, Pfizer (PFE Quote) was up 7/8 to 39, Bristol-Myers Squibb (BMY Quote) was up 1 5/8 to 76 3/8 and Johnson & Johnson (JNJ Quote) was up 2 to 104 1/2. [Merck closed up 1 1/8 to 79 1/8; Pfizer closed up 3/8 to 38 1/2; Bristol-Myers Squibb closed up 1 3/8 to 76 1/8 while Johnson & Johnson closed up 1 3/4 to 104 1/4.]

But the failure of two earlier deals involving American Home -- a proposed linkup with SmithKline Beecham (SBH Quote) and a planned merger with Monsanto (MTC Quote) -- should remind investors that this story is far from over.

Several factors could cause an agreement to implode; notably, difficulties could develop out of American Home's recent problems from a handful of lawsuits related to diet drugs known as fen-phen. If the companies can come together on an agreement, which Shaw said remains uncertain, the combined company would rank with the major pharmaceutical operations, such as Bristol-Myers Squibb and Pfizer.

"This is a merger of equals," Shah said. "However, my gut feeling is that Warner's management would have a greater say."

Both Warner and American Home produce products known well to consumers. Warner, based in Morris Plains, N.J., makes Certs breath mints while American Home, which has its headquarters in Madison, N.J., produces Advil and Chap Stick.