Only hours after American Home Products Corp. and Warner-Lambert Co. announced a merger that would create the world's largest drugmaker, the current number two company, Pfizer Inc., jumped into the fray with an $82.4 billion offer to buy Warner-Lambert.
The flurry of offers and dealmaking is regarded by analysts as the beginning of a wave of consolidation that they predict will sweep through the highly fragmented pharmaceutical industry.
Around the globe, drug companies are facing similar problems: too few truly new products in the pipeline, expiring patents on current products, and inefficiencies in research, manufacturing and sales.
In addition, in the United States there is worry about what might happen to drug prices if the government's Medicare program is expended to include prescription drugs.
"The industry is not in the greatest of shape overall. Mergers make more sense" in these circumstances, said Herman Saftlas, senior pharmaceutical analyst at Standard & Poor's Corp. in New York.
Pfizer's offer--of 2 1/2 shares of Pfizer stock, or about $96.40, for each Warner-Lambert share--clearly tops the $72 billion value of Warner's merger with American Home Products. But Warner-Lambert agreed to pay American Home a $2 billion breakup fee if the deal comes apart. Pfizer filed suit yesterday seeking to invalidate that fee.
American Home Products and Warner-Lambert had no immediate comment on the Pfizer offer.
"This combination would create the strongest, most dynamic pharmaceutical company in the world," Pfizer Chairman William C. Steere Jr. said. The merged companies would have revenue of $28 billion and a market capitalization of more than $200 billion.
Steere pointed to the expanded product line that the resulting company would have, along with vast research and development capacity and a strong global presence. In addition, the merged companies would realize extensive cost savings and efficiencies, he said.
"What you're seeing is a business where putting two companies together does give you some benefits immediately on the cost side," said Brian Stansky of T. Rowe Price Associates Inc., the Baltimore-based mutual fund group.
Pfizer and Warner-Lambert are already connected via a revenue-sharing agreement on Lipitor, Warner-Lambert's blockbuster cholesterol-reducing drug, Stansky said. Drugmakers often do such deals in which the smaller company, in this case Warner-Lambert, feels it needs more marketing clout.
Lipitor has succeeded beyond anyone's expectations--it is on a pace to generate $4 billion in revenue this year--so that Pfizer will owe something back to Warner to comply with terms of the deal. Such equalizers are called "quids" in the industry.
Thus when Warner and American Home began talking, Pfizer saw valuable assets going into play and had to decide whether it wanted to get involved, Stansky said.
"Pfizer isn't only looking at it from standpoint of the [revenue sharing], but also the quids that are owed," he said. A merger "would simplify their life."
If Pfizer succeeds in nabbing Warner, it would mark the third unsuccessful merger effort by American Home. Negotiations last year with Monsanto Co. and SmithKline Beecham PLC were fruitless.
Analysts said American Home has become a more attractive partner recently, however. It has settled litigation over two diet drugs it produced, and it has a relatively full pipeline of new products, including a sleep aid called Sonata.
"They're in play. Something will happen," said one analyst, who speculated that "Warner-Lambert would probably prefer to do the American Home transaction as of today" because, among other things, the managements of the two companies are a "generational fit." Under the proposed deal, American Home's chairman, John R. Stafford, 62, is expected to become chairman of the merged firm, and Warner-Lambert chief Lodewijk J.R. de Vink, 54, would be chief executive and succeed Stafford in the near future.
Other mergers are likely in the industry, analysts said. SmithKline and Glaxo Wellcome PLC are again the subject of merger speculation, as is Monsanto, which owns G.D. Searle & Co.