The market turned up its nose yesterday at the proposed merger of Monsanto Co. and rival drug company Pharmacia & Upjohn Inc., sending the shares of both companies tumbling a day after they agreed to a $27 billion stock swap deal.

"It's obvious from the stock price behavior that investors are disappointed," said D. Larry Smith, an industry analyst with Sutro & Co. Pharmacia & Upjohn stock fell 6.5 percent to close at $47.12 1/2, and Monsanto shares fell more than 12 percent to close at $36.62 1/2.

The problem, said analysts, is that the proposed transaction doesn't overcome one of Monsanto's principal problems when it comes to attracting investments--its controversial agricultural chemicals business.

"Any association with agricultural chemicals or with agricultural biotechnology in today's world is tantamount to disaster in the eyes of the pharmaceutical analytical community," said Paul T. Leming of ING Barings.

Monsanto's agricultural unit makes genetically altered corn and soybean seeds and the extraordinarily successful weedkiller Roundup. Its genetically altered products have been the focus of protests by farmers and consumers, especially in Europe, but also, more recently, at the World Trade Organization meeting in Seattle. Monsanto's stock has suffered as it has become the eye of the storm over genetically altered plants, falling 18 percent this year.

Under the proposed merger of the companies, Pharmacia & Upjohn share owners would receive 1.19 shares of the new, unnamed enterprise while each Monsanto share prior to the combination would represent a single share in the new company. The company would be headed by Fred Hassan, the current chief executive of Pharmacia & Upjohn, while Monsanto chief executive Robert B. Shapiro would be the nonexecutive chairman for 18 months, succeeded by Hassan.

The agricultural business would be organized as a separate entity with an initial public stock offerring of about 20 percent of its business, but it was the part that would remain in stockholder hands that apparently dragged down the companies' share prices. Selling off the entire agricultural chemicals business within two years after the merger would create a tax liability for shareholders, analysts said.

"In the longer term, this deal certainly paves the way for the new combined entity to divorce itself entirely from agricultural chemicals," Leming said. "But from a pharmaceuticals standpoint, two years is too long to be in the agriculture business."

The Monsanto that exists now is the brainchild of Shapiro, who took over as chairman in 1995 with the idea of creating a "life sciences" corporation that would include agricultural chemicals, pharmaceuticals and nutritional products. In September 1997, Monsanto spun off its chemical business, creating a separate company called Solutia Inc.

Yesterday Shapiro and Hassan emphasized the strength of the combined pharmaceutical company that would be created by the merger, noting that it would have an array of popular products, including the arthritis treatment Celebrex, and a research and development budget of more than $2 billion. The company would also have a strong sales force in the huge U.S. market for drugs.

"It's hard to find the value creation that Shapiro is talking about creating in this deal," said Theodore S. Semegran, an analyst with Brown Brothers Harriman. "It doesn't have a lot of synergies on the pharmaceutical end."

As for the life sciences concept, "it's clearly something investors in the market in the present time are not only not embracing, they're arguing against it fairly strenuously," Leming said. "It was a great idea, just not the best timing in the world."


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