Despite Three Failed Attempts, AHP Still in Merger Ball Game - TheStreet

American Home Products

(AHP)

finds itself in the uncomfortably familiar position of being jilted at the merger altar yet again, for the third time in the past two years.

Its prospective merger partner,

Warner-Lambert

(WLA)

, instead announced Monday that it had agreed to be taken over by

Pfizer

(PFE) - Get Report

in a deal

valued at $90 billion.

Previous deals with both

SmithKline Beecham

(SBH) - Get Report

and

Monsanto

(MTC) - Get Report

also fell through.

Still, analysts say that in the consolidating drug industry, American Home may well finally succeed in finding a partner. They note that among the company's appeals is its strong lineup of new products.

Big Settlement

For now, at least, American Home may have to be satisfied with the $1.8 billion breakup fee it will receive from Pfizer and Warner-Lambert for ending its merger agreement.

Some analysts had speculated that American Home would gain an additional consolation prize, like rights to future or existing products or lines of business. That, however, did not happen because "we decided to avoid the uncertainty and costs associated with lengthy litigation," said an American Home spokesman, Lowell Weiner.

Still, "they got nothing from their previous merger

deals," said Jeffrey Kraws, an analyst at

Gruntal & Co.

He rates American Home an outperform, his firm's highest rating, and his company has done no underwriting for the company.

Shares of American Home, based in Madison, N.J., rose 2 3/16, or 5%, to 47 11/16 by late afternoon Monday. (Shares closed up 2 15/16, or 6.5%, at 48 7/16.)

Possible Partners

Although Kraw says "American Home can still stand on its own," he expects another deal to be in the offing. "Given the size and research-and-development budget of the Pfizer/Warner-Lambert merger, it's obviously clear from the R&D side that bigger has a better chance of getting things to the marketplace because of sheer mass." Pfizer and Warner-Lambert estimate that the combined company will have an R&D budget of $4.7 billion.

Possible deals mentioned for American Home include a merger with either Switzerland's

Novartis

(NVTSY)

or Pharmacia, the entity to be

formed by

Pharmacia & Upjohn

(PNU)

and Monsanto. Among the names that have also surfaced are other European companies, including

Bayer AG

(BAYZY)

of Germany and

Roche Holding

(ROHHY)

of Switzerland, as well as erstwhile

bidder

Procter & Gamble

(PG) - Get Report

, which had talked in January about acquiring both American Home and Warner-Lambert.

Pharmacia agreed to merge with Monsanto in December, despite apparent dissatisfaction from shareholders that could block an eventual deal, some analysts say. "There are cost-cutting opportunities," Steve Gerber, an analyst at

CIBC World Markets

, says of a possible American Home/Pharmacia tie-up. "And there's very little overlap in existing product offerings and research synergies." He rates American Home a buy and his firm has done no underwriting for the company.

Roche Holdings and Novartis would be considered especially strong contenders if they chose to bid for American Home because they have access to large stores of cash, putting them in a strong position to offer cash-and-stock or all-cash deals. In mid-January, Novartis was reported to be considering entering into a deal with a U.S. pharmaceutical company like American Home.

"Novartis, like many European-based companies, has no sizable presence in the largest drug market in the world, the U.S.," Gerber said. "It's also struggling with its new drug product pipeline, while AHP is enjoying a profound rebound, especially in the biotech area where Novartis is deficient."

Strengths of the Company

Analysts say American Home has a lot to recommend itself, especially because its drug pipeline is acknowledged to be very strong. AHP "represents one of the few acceleration stories in the pharmaceutical industry thanks to a number of important new products that should drive double-digit EPS

earnings per share growth over the next several years," Barbara Ryan, an analyst at

Deutsche Banc Alex. Brown

, wrote in a recent report. Ryan rates American Home a strong buy and her firm has not done underwriting for the company.

In addition, American Home faces limited patent exposure over the next few years. "Although there is no patent on Premarin, given

Food and Drug Administration

guidelines and past decisions, we do not expect generic competition in the near term," Ryan wrote. Premarin, a hormone replacement therapy drug, is the company's largest-selling drug, with $2.05 million in worldwide sales in the fourth quarter of 1999.

American Home's 54% ownership stake in biopharmaceutical company

Immunex

(IMNX)

is also a hidden asset. That's currently valued at $14 billion, or $10 a share of American Home.

American Home also announced Monday that it will sell its

Cyanamid Agricultural Products

business by the end of the year. Cyanamid develops and markets crop-protection products for the agricultural, specialty and consumer markets. It has retained

Morgan Stanley Dean Witter

as its financial adviser for the proposed transaction.

"The agricultural business sales declined last year due to a number of issues plaguing the industry," said Weiner, the American Home spokesman. "This will enable us to focus on our core businesses of pharmaceuticals and health care."

Agriculture products contributed about 6.5%, or about 11 cents a share, of net income in 1999. "If the ag-chem business is sold, American Home may experience modest dilution to earnings," Joseph Riccardo, an analyst at

Bear Stearns

, wrote in a research report. "However, its EPS growth rate will accelerate due to the faster growing pharmaceutical business occupying a larger share of the business. Any dilutive effect could be partially offset by income associated with the break-up fee, multiple expansion warranted for reduced risk due to ag-chem being out of the business mix and for faster earnings growth." Riccardo rates American Home a buy and his firm has served as an adviser to the company in the past.

Diet-Drug Factor

But before another merger partner comes along, American Home may first need to settle all its legal disputes involving its diet pills. The company faces a number of class-action lawsuits and individual suits because of side effects from the fen-phen diet drug combination and Redux.

In

October, American Home agreed to pay $3.75 billion to settle lawsuits filed by patients with possible heart valve problems. Another $1 billion was set aside to deal with other claims. Some analysts think American Home will use the money from the breakup fee to pay for the settlements.

"Once that issue is behind them, they will be a much more suitable partner," Kraw said. "There's been a lot of fear

because of this issue and that's why people backed away."