Pfizer Moves to Have Warner-Lambert's Board Removed

Updated from 1:39 p.m. EST

Pfizer (PFE) sought Tuesday to throw out the board of Warner-Lambert (WLA) as it pursues its hostile bid for the drug company.

Pfizer is starting the process of soliciting shareholder votes to remove and replace Warner-Lambert's board as it tries to convince the shareholders of its rival to agree to a Pfizer takeover.

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It also filed a complaint in the Delaware Court of Chancery against Warner-Lambert, its directors and American Home Products (AHP), asking for an expedited review of the case to block a proposed $72 billion merger between those two companies. Earlier this month, Pfizer made a hostile $80 billion bid for Warner-Lambert, just hours after Warner-Lambert and American Home Products had announced their plan to merge. If the expedited review is granted, the judge could make a decision in four to six weeks.

The aggressive moves by Pfizer underscore the importance of Lipitor, a successful cholesterol-lowering drug, to its revenue stream. The drug has projected worldwide sales of $5 billion next year and is marketed jointly by Pfizer and Warner-Lambert. On Monday, however, Warner-Lambert threatened to end the joint marketing agreement.

The chances of Pfizer winning the lawsuit are not high, according to Tom Burnett, the founder and president of Merger Insight, a research service for institutional investors. "The Delaware courts give boards lots of room. Pfizer cannot rely on winning the lawsuit. Pfizer can't just rely on strong products and a healthy stock price and winning the lawsuit (in order to successfully merge with Warner-Lambert). It needs to be able to get the Warner-Lambert shareholders to vote out the board," he said. His firm does not rate companies and does not participate in underwriting.

Pfizer met with Wall Street analysts on Tuesday to emphasize the health of the company and presented a compelling case for a Pfizer and Warner-Lambert merger. "They made a good argument economically for the deal," said Helen Wu, a fund manager with SG Cowen Asset Management.

Pfizer committed to 24% pro forma earnings per share growth for the next three years, while American Home Products only committed to 20%, Wu said. Pfizer also committed to 43% return on equity while American Home Products only committed to 34%. "By any financial measure, they've promised more," she added.

Despite the financial strength of the Pfizer deal, Warner-Lambert's 54-year-old chairman, president and chief executive, Lodewijk J.R. de Vink, who only took over in May, may reject the bid because he is loath to step down. "He is relatively young and wants to run a big company," Wu said.

As part of its deal with American Home, Warner-Lambert agreed to pay $1.8 billion if the merger did not go through. Pfizer said again that it would not pay the break-up fee if it is successful in its takeover bid.

Paying the $1.8 billion fee would cut into Pfizer's projected cost savings from a Warner-Lambert acquisition. Analysts estimate that over a three- to five-year period, the cost savings of two pharmaceutical companies joining would be approximately a quarter of operating expenses.

Pfizer wants Warner-Lambert for its drugs. Though Pfizer displayed a decent phase two pipeline of forthcoming drugs, it usually takes over two years to get phase two products to market. Warner-Lambert's Lipitor and Neurontin drugs are already approved now and growing rapidly, ably filling Pfizer's two-year gap in revenue stream.

An acquisition of Warner-Lambert by either Pfizer or American Home would create the world's largest pharmaceutical company. Though Pfizer is offering more money in its all-stock bid, Pfizer shares are down 12% since the beginning of November. Pfizer has offered 2.5 of its shares for every Warner-Lambert share. Meanwhile, American Home Products has offered only 1.49 of its shares.

"Pfizer's principal job now is to get its stock up," said Hemant Shah, an independent analyst. "The value of their offer depends on the value of their stock."

Pfizer stock was down 5/16, or 1%, to 34 11/16, while Warner-Lambert was down 2%, or 2 1/8, to 90 5/8 and American Home Products was down 3%, or 1 13/16, to 54 1/16. (Pfizer closed down 1 1/16 to 33 15/16, Warner-Lambert finished down 1 7/8 to 90 7/8 while American Home finished down 7/8 to 55.)

As for Pfizer's continued fall in light of today's meeting, Shah commented, "Investors are now responding to the worst case scenario -- what happens if the bid fails and Pfizer loses Lipitor?" He added, "They have to get Warner-Lambert now, at any cost."

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