- The Washington Times - Tuesday, July 16, 2002

NEW YORK (AP) Pfizer Inc. added to its formidable strengths as the pharmaceutical industry's leader with a $60 billion acquisition of Pharmacia Corp. yesterday, pressuring its competitors toward similar mergers at a time of slimmer profits and angry consumers.

The all-stock deal will create a pharmaceutical powerhouse with more than $48 billion in revenues and a research budget of more than $7 billion. With $26.3 billion in pharmaceutical sales, Pfizer is already the world's largest drug company, and its research budget of $5 billion dwarfed the rest of the industry by more than 50 percent. Pharmacia is the ninth-largest drug company, with pharmaceutical revenues of $12 billion.

The merger combined Pfizer's widely recognized prowess for marketing with Pharmacia's drugs in oncology and ophthalmology, where Pfizer does not have a strong presence.

The companies said the merger should provide $2.5 billion in cost saving by 2005, a particularly important point at a time when drug companies are finding it harder to produce new blockbuster medicines and are under growing public and government pressure to hold down prices.

"That this brings cost savings is obvious," said Pfizer Chief Executive Henry McKinnell. "But it creates a company that can grow more than the two companies could separately. It also significantly eliminates risk by expanding the product and market areas of the company."

Pfizer manufacturers blockbusters such as cholesterol-lowering agent Lipitor and erectile-dysfunction drug Viagra, and Pharmacia makes the cancer drug Camptosar, as well as Rogaine hair products and the Nicorette smoking-cessation line.

The companies already jointly market pain reliever Celebrex and its successor drug, Bextra. The two drugs have already been outpacing new prescriptions of the competing product Vioxx, made by Merck & Co.

The deal spells even more trouble for Merck, which has said its 2002 earnings will be flat because of patent expirations and slowing Vioxx sales.

"It puts Merck at a disadvantage, because you are going to see an even more unified approach to marketing the Celebrex and Bextra," said Tim Anderson, an analyst at Prudential Securities.

Merck has said it wants to remain independent, but analysts said that in this environment it may not have a choice.

Combinations of patent expirations, drug delays and manufacturing issues have cast a pall over most drug companies. Some, like Bristol-Myers Squibb Co. and Schering-Plough Corp., are considered especially troubled and could become targets for acquisition if their stocks continue to slide.

"Bristol may not look good at $60, but it is a different picture at $20," said independent analyst Hemant Shah.

Some analysts have suggested that Bristol-Myers' experience in cancer and cardiovascular drugs could complement GlaxoSmithKline PLC's competence in areas such as anti-infection drugs. Merck and Schering could be a good fit because they are already jointly developing a cholesterol-lowering agent. European players such as Novartis AG and Aventis are considered purchasers who might want to expand their presence in the United States.

"Mergers may not lead to more, better products, but if the companies don't do them, they will be far worse off," Mr. Shah said.

As drug revenues slide, companies have even less money to put into research and development to create the products that will revive sales. By cutting costs, they can generate savings that can be applied to research, he said.

Moreover, bigger companies with more products have more bargaining power with states and insurance companies that are increasingly balking at rising drug prices. Many states and insurance companies are using their bargaining power, creating preferred drug lists based in part on pharmaceutical companies' willingness to agree to a reduced price.

The drug companies have less bargaining power: Even combined, Pfizer and Pharmacia will have about 13 percent of the world market for pharmaceuticals, according to IMS Health Inc., a research firm. That relatively low number means analysts don't expect the deal to face major regulatory hurdles, especially because the two companies don't manufacture directly competing drugs. Pharmacia markets a bladder-therapy drug and Pfizer is developing one, but that isn't viewed as a major problem.

Under the deal, Pharmacia shareholders would receive 1.4 shares of Pfizer stock for each share in Pharmacia. That represents $45.08 worth of stock based on Friday's closing Pfizer price and is a 36 percent premium over Pharmacia's closing price of $32.59 a share on Friday.

Yesterday, Pharmacia shares were up $7.32, or 23 percent, to $39.82 a share. The stock was that high three weeks ago, but analysts said that given the market conditions, the price Pfizer is paying is fair, if not spectacular.

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