Why the urge to merge? On the surface, the pharmaceutical business has never been healthier. The $335 billion global industry is growing smartly at 8 percent a year, and aging baby boomers will send those numbers higher. But beneath that demography lie some troubling trends. Managed care is putting a squeeze on profits; proposals to expand Medicare to cover prescription drugs could do the same. Patent protection on some of the industry’s biggest drugs–Prozac, Vasotec, Claritin–expire in the next five years. And as companies spend billions creating blockbusters like Viagra, they need bigger R&D budgets to absorb larger risks. Says Dr. Joseph Zammit-Lucia, an industry consultant: “It’s like the oil-exploration business… where you have more failures for every success.”
Despite a dip in its stock this year, Pfizer has been on a tear in recent years, thanks largely to Viagra; as a result, it eschewed the merger games earlier in the decade. Most observers say this bid is driven by Pfizer’s desire to own Lipitor, Warner-Lambert’s hot new cholesterol-fighter, which could become the most successful drug ever. Pfizer already gets a share of those revenues through a joint marketing arrangement, but a Warner-American Home deal may imperil Pfizer’s share. Warner-Lambert’s top brass has rebuffed Pfizer’s bid, saying its original deal “remains in the best long-term interests of our shareholders.” Critics see a less noble rationale: Pfizer would likely ax most of Warner-Lambert’s top execs in a merger, but American Home says it plans to keep them.
For now, the fight moves toward the Delaware courts. Pfizer claims the terms of its rivals’ deal are illegal. Namely, Warner-Lambert and American Home have agreed that if either side breaks off the merger, the spurned suitor gets a $2 billion fee. (Have Gwyneth Paltrow’s boyfriends considered this tactic?) They’ve also taken steps so no one but American Home can buy Warner-Lambert using “pooling of interests” accounting, the technique Wall Street favors because it prevents future earnings from being reduced by the cost of the merger. Experts say the courts probably won’t consider Pfizer’s suit until next year. Despite the standoff, the companies could still choose negotiation over litigation. Either way, the economics favor Pfizer’s richer bid, says Brown Brothers Harriman analyst Michael Krensavage. Until the mess is sorted out, executives can utilize a perk unique to their industry: free samples of Valium.
