Winners and Losers in the American Home, Warner-Lambert Deal

Let's assume that American Home (AHP Quote) and Warner-Lambert (WLA Quote) get their deal done.

OK, big assumption, given American Home CEO Jack Stafford's track record. Under his watch, two widely discussed possible mergers -- first with limey pillmaker SmithKline Beecham (SBH Quote) and then with Midwestern "visionary" Monsanto (MTC Quote) -- have fallen apart.

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But if American Home and Warner do stay together, Wall Street will love it. For the tyro investors out there: You can tell because the stocks are up.

Also, listen to people like ING Baring analyst Jim Flynn: "It's very nice for everybody in almost every way. I see very few drawbacks to this." (He rates Warner-Lambert a strong buy and American Home a buy; his firm hasn't performed recent underwriting for either.)

What's more, a major U.S. drug merger would change things for many other companies. So here's a look at the winners and losers.

Winners

American Home: These guys appear to be the buyer here. And that's kind of nice for them. They would get Lipitor, the Liquid Plumr for the arteries that doubles as the greatest drug on the planet. That means insurance for what seems like a nice pipeline that might not always meet expectations. Stafford's bunch adds a faster-growing company to the fold as well.

Plus, it's been a brutal year and a half for AHP, full of stagnant growth, earnings disappointments, recalls, failed mergers and Redux liability suits. "After the year they went through, they were ready for a deal," says a New York money manager who's long both stocks. A merger would give American Home something fun to talk about.

Warner-Lambert: Let's face it: Warner is a one-product company. Sure, it has Neurontin, an epilepsy drug, but that's going off patent in a few years. And it has AIDS drug Viracept, but the protease-inhibitor market is going away. Also, diabetes pill Rezulin has got a couple of problems, too.

But Lipitor, which should have sales of over $3.5 billion this year, rising to an estimated $7 billion in 2003, is by far the most dominant component of sales and revenue. That dependence makes a company vulnerable. In merging with American Home, Warner gets a pipeline and a cushion if Lipitor slows down.

Lodewijk de Vink: The Warner chairman and CEO is said to be in line to become the CEO of New Drug Co., while Stafford will become the chairman. But "if Jack Stafford looks to retire, Lodewijk becomes the chairman and CEO of a very powerful company in a few years," says Flynn at ING Baring.

Forest Laboratories (FRX Quote): Warner co-promotes the hot new antidepressant Celexa with Forest. Upon a change of control, the terms of the deal might change. Or Forest might get the rights back to the drug. It's off to a fast start and could be an attractive addition to another big drug company. "Or the combined entity could buy Forest. It's very good for them," says a Boston money manager long all three companies. A Forest official couldn't be reached to comment.

Shareholders: The stocks were up Wednesday. Neither of these companies is merging from weakness, it appears. That could mean something new for drug investors: A company that outperforms in the years after a merger. Investors estimate that New Drug Co. could show average annual earnings growth of around 17% to 18% over the next four years. That's after adding in the expected cost savings.

And the new company would be vaulted into the top tier of global drug companies, along with Glaxo Wellcome (GLX Quote), Merck (MRK Quote), Pfizer (PFE Quote) and Bristol-Myers Squibb (BMY Quote). Only Pfizer, with its 19% estimated growth rate, would be stronger. The other three are in the low teens.

Losers

Shareholders: 'Course, the shareholders could easily end up losing, too. The Street always loves mergers and often is disappointed. For one, the merger could easily fall apart. AHP's Stafford is a cost-cutting specialist, and Warner has been going through some flush years, which often means a bit of profligacy. Maybe people at Warner won't want to give that up. Also, the obesity drug settlement involving American Home reached last month might be a hitch, too. "If too many people opt out of the settlement, the deal can't happen," says the Boston fund manager.

Zocor: Merck's anticholesterol drug competes with Lipitor, which is now sold by Pfizer and Warner. Add American Home's sales force to the Lipitor sales efforts, and Zocor's growth could be in jeopardy.

And that isn't really good for Merck as a whole. So, does this force Merck's hand and make it find a merger partner? Does the company sign up a co-promotion partner for the drug that it hopes will replace Zocor as its growth engine, painkiller Vioxx?

Eli Lilly (LLY Quote) and Schering-Plough (SGP Quote): Both companies are hyperdependent on one gigantic drug that is slowly winding down: Prozac and Claritin, respectively. Both companies will have market caps of about half the big boys'. Can they survive alone?

Biotech companies: Big pharma has been making biotech investors real happy lately. The big drugmakers have cherry-picked a bunch of companies, and both American Home and Warner have been participants. American Home bought Genetics Institute way back when and has a majority piece of Immunex (IMNX Quote). Warner bought Agouron earlier this year. But now, if pharma firms turn their sights on one another, biotechs may actually have to make money and grow like the rest of the world (except for the Net).

"If this thing goes through, big pharma will first and foremost look to boost market share," says Sven Borho of New York buy-sider Orbimed, which owns Warner-Lambert but not American Home. "And you can't do that with biotechs."

But biotechs may keep buying smaller biotechs, which could keep consolidation going, he says.