July 22, 2002
Volume 80, Number 29
CENEAR 80 29 p. 9
ISSN 0009-2347


BUSINESS

PFIZER CAPTURES PHARMACIA
Creation of industry giant is expected to spur more consolidation

ANN THAYER

Pfizer will acquire Pharmacia in a deal announced at $60 billion. The acquisition, expected to be completed before year’s end, will create the drug industry’s largest company, with $48 billion in annual revenues and more than $7 billion in R&D spending. It will have a market share of about 11%, according to IMS Health, placing it well ahead of its nearest competitors.

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ROBIN WEINER/MEDIALINK WIRE PIX/GETTY IMAGES
“It is increasingly costly to fund the high-risk and long-term research required to develop pharmaceutical products,” Pfizer Chairman and CEO Henry A. McKinnell Jr. says in explaining the move. “At the same time, payers and providers want high value and affordable medicines.

“With Pharmacia, we will have the products, pipeline, scale, and financial flexibility to extend our leadership,” he continues. Over the next few years, Pfizer anticipates annual growth of 11% in revenues and 14% in net income, excluding merger costs.

Pfizer clearly has raised the competitive stakes and thus the possibility of another wave of consolidation. “The new Pfizer will break away from the pack, with most of the rest of the top 10 having market shares less than half its size,” says Denise Anderson of the investment bank Julius Baer.

Number-two-ranked GlaxoSmithKline, with a 7% market share, is expected to come under pressure to find a partner. Both it and Novartis are rumored to be looking, especially after Novartis took a 21% stake in Roche last year. Likely targets include the troubled Bristol-Myers Squibb, and smaller operations such as Bayer’s drug unit and France’s Sanofi-Synthelabo.

Although Pharmacia ranks among the top 10, it’s been hard for smaller firms like it to compete. “We simply did not have sufficient resources to fully leverage the growth of our current products while at the same time funding the development of our pipeline,” says Chairman and CEO Fred Hassan. He will serve as Pfizer vice chairman for at least a year.

The combined companies will have 120 new compounds in development and plan on filing 20 new-drug applications over five years. They have largely complementary product and patent portfolios, and thus anticipate few antitrust concerns.

Pfizer was involved in the last consolidation wave with its hostile $115 billion takeover of Warner-Lambert in 2000. Pharmacia acquired Monsanto, and Glaxo Wellcome joined with SmithKline Beecham around that time. Just a few years before, mergers created AstraZeneca, Novartis, Aventis, and Pharmacia itself.

Pfizer’s pursuit of Warner-Lambert was motivated by a major product—the cholesterol-lowering drug Lipitor, which now has annual sales of more than $7 billion. With the purchase of Pharmacia comes Celebrex—the leading COX-2 inhibiting anti-inflammatory, with sales of over $3 billion. The two firms already comarket Celebrex and have even agreed that, in the unlikely event another firm steps in and acquires Pharmacia, decision-making on the COX-2 portfolio would revert to Pfizer.

And, like the Warner-Lambert purchase, which will yield $1.8 billion in cost savings this year, the new deal is expected to generate significant savings—$2.5 billion by 2005. Decisions have not yet been made on employee and spending cuts.

Before it can complete the deal, Pharmacia will spin off its 84% stake in its Monsanto agricultural products business to shareholders on Aug. 13. Monsanto will take with it liability that may arise from its former chemicals unit Solutia related to PCB contamination (C&EN, March 4, page 12).

Although fluctuating stock prices have altered the value of the deal since it was announced on July 15, Pfizer will exchange 1.4 of its shares for each Pharmacia share. Its original offer was a 44% premium over Pharmacia’s recent average stock price.



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