Updated from 2:57 p.m. EST
The battle between
American Home Products
took another twist Friday as the name of a fourth pharmaceuticals company --
Pharmacia & Upjohn
-- entered the fray.
American Home quickly denied a report in the
that it recently approached Pharmacia about a possible merger if American Home's $60.6 billion bid for Warner-Lambert fails.
"Regardless of rumors reported by the press, I can assure you that we are not and have not been in discussions either formally or informally with P&U regarding an alternative business combination," said John Stafford, chairman, president and chief executive of American Home, in a statement.
American Home is competing with Pfizer, which has made a hostile bid for Warner-Lambert, now valued at $72.7 billion.
Still, some people on Wall Street believe that an American Home-Pharmacia merger would make more sense than American Home's bid for Warner-Lambert.
"American Home is foolish to contemplate outbidding Pfizer for Warner-Lambert," said Helen Wu, a fund manager at
SG Cowen Asset Management
. After all, Warner-Lambert is trading at a price/earnings multiple of 36 times 2000 earnings, while the average drug company is trading at a multiple below 30.
Wu, who manages a pharmaceutical fund, does not hold investments in American Home, Pfizer, Pharmacia or Warner-Lambert, calling them too risky at this time because of the unsettlement over the possible mergers.
Moreover, American Home and Pharmacia are trading at more similar multiples, with American Home trading at 24 times 2000 earnings and Pharmacia trading at 26 times. And American Home, with a market capitalization of $62.1 billion, is double the size of Pharmacia, which has a market cap of $27.3 billion. On the other hand, Pfizer is trading at a multiple of 34 times 2000 earnings.
"It's also a smaller company and more likely target, an hors d'oeuvre in the land of full meals," said analyst Steven Tighe of Merrill Lynch. Tighe rates Pharmacia an accumulate and his firm has done underwriting for the company. He declined to discuss possible mergers of any of the four pharmaceutical companies because Merrill Lynch is advising Pfizer on its takeover attempt of Warner-Lambert.
A fit is also natural because Pharmacia's chief executive, Fred Hassan, joined from American Home two years ago, according to Wu.
Wu is rooting for an American Home-Pharmacia merger. "If Warner-Lambert were left to Pfizer, there would then be enough consolidation in the industry that all the rest out there would be racing to do deals," she said, adding that companies like
would have to make moves to consolidate or be left behind.
Tighe notes that Pharmacia is a company with considerable strengths. "It has a very strong management team that's turned the organization around and it's a very predictable company in terms of earnings growth," he said.
At the same time, the company enjoys a stable base of earnings. Only $56 million, or 2.2%, of Pharmacia's $2.5 billion in pharmaceutical revenues are exposed to patent exposure through December 2003, Tighe said.
One of the key elements in the takeover fight has been control of
, a successful cholesterol-lowering drug. Worldwide sales for next year are projected at $5 billion for the drug, which is marketed jointly by Warner-Lambert and Pfizer. Warner-Lambert has asked the
Delaware Court of Chancery
to allow it to terminate its Lipitor venture with Pfizer. If that happened, Lipitor would benefit American Home if it acquired Warner-Lambert.
But Wu noted that Lipitor could soon face an important competitor. Earlier this week,
said clinical trials of its new cholesterol-lowering drug, known as
, showed it reduced harmful cholesterol better than any existing product.
For Wu, that raised a further question about American Home's bid for Warner-Lambert. "Why pay a ridiculous valuation for a company when you can already look on the horizon and see problems cropping up?" Wu asked.
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 has offered only 1.49 of its shares.
In trading Friday afternoon, American Home was up 11/8, or 2%, to 47 1/2; Warner-Lambert was up 1 1/4, or 2%, to 83 1/16; Pfizer was up 1/4, or 1%, to 34; and Pharmacia was up 1 3/16, or 2%, to 52 5/8. (American Home finished up 1 7/16, or 3%, to 47 13/16; Warner-Lambert settled up 1 1/4, or 2%, to 83; Pfizer finished down 1/8 to 33 5/8; and Pharmacia ended up 1 5/8, or 3%, to 53.)
Separately, Chancellor William Chandler of the Delaware Court of Chancery on Wednesday denied part of Pfizer's request for information in the suit it filed against Warner-Lambert last month, asking for an expedited review of the case to block the merger between American Home and Warner-Lambert.
Oral arguments for the case begin Jan. 24, 2000.
In the letter to attorneys in the case
Pfizer Inc. v. Warner-Lambert Co., et al.
, Chandler said Warner-Lambert does not have to produce documents relating to legal advice received by its board. Nor does the company have to produce time-sensitive information related to the takeover, including "delicate financial information, defensive strategies, and potential responses to hostile bids."
Pfizer did not return a call for comment.
It's not a surprise that Pfizer was denied access to very confidential financial information or legal advice it's received with regards to the merger, said analyst Linda Varoli of
. And, "after the ice thaws, which I don't see happening anytime in the near future, Pfizer may get the information after agreeing to sign a confidentiality agreement," she added. "There is always give and take in these situations." Merger Insight does not give recommendations or do underwriting.