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American Home Enters Talks With SmithKline

Pharmaceuticals: A deal, valued at nearly $60 billion, would be the biggest corporate merger ever.


U.S. and British drug giants American Home Products Corp. and SmithKline Beecham said Tuesday they are in talks that could lead to the largest corporate merger in history, uniting in one medicine cabinet the maker of Robitussin and Advil with the producer of Geritol and Tums.

In a graphic illustration of the enormity of the global health-care industry, the deal has a potential value of nearly $60 billion, topping the current merger record-holder, WorldCom Inc., which acquired MCI Communications in 1997 for $37 billion.

The deal would create the world's largest maker of prescription and over-the-counter drug products--at least for now.

Industry analysts expect still more giant mergers among drug makers as the pharmaceutical industry responds to cost pressures from managed-care insurers, government buyers and escalating drug-research costs.

"This makes a lot of sense," said Steven Gerber, an analyst with CIBC Oppenheimer & Co. "These are two companies with very little product overlap, yet with similar philosophies and operating styles."

News of the talks drove up the share prices of the nation's largest drug makers as Wall Street anticipated another round of mergers similar to the flurry of deals that swept the industry in 1995 and 1996.

American Home shares soared $13.56 to close at $94.25; SmithKline rose $2.56 to close at $59.56. Among other drug stocks, Merck leaped $5.75 to close at $115.50, and Warner Lambert surged $9.13 to close at $138.25. All trade on the New York Stock Exchange.

More mergers "are inevitable," said Joel Hay, a pharmaceutical economist at USC. "This is an amazingly unconcentrated industry if you compare it to automobiles, steel or consumer electronics. There are still about 20 major drug companies worldwide."

Indeed, if American Home and SmithKline merged--an event that analysts consider highly likely after the companies' disclosure of merger talks--the combined drug makers would have only 5% of the $280-billion worldwide pharmaceutical market, analysts said. The two companies had combined sales of $26.4 billion in 1996.

In separate statements, American Home and SmithKline said there is no guarantee their discussion will lead to a deal. Spokesmen for both firms declined to elaborate on the statements.

Analysts said the merger would likely result in thousands of layoffs as the combined company would seek to cut hundreds of millions of dollars in expenses by eliminating duplication in manufacturing, marketing, administration and research jobs.

But the new company could be a powerful competitive force in drug research. The two companies now are among the top spenders in pharmaceutical research as a percentage of revenue, and both have strong biotechnology research programs, analysts said. SmithKline is considered to have the stronger research operation of the two firms.

The companies would have a powerful product line for antibiotics and drugs to treat heart disease, central nervous system disorders and arthritis. Both also have strong vaccine programs. London-based SmithKline's consumer products line includes Geritol vitamins, Aquafresh toothpaste and the Nicoderm anti-smoking patch. It is also the maker of the antidepressant Paxil.

American Home, based in Madison, N.J., produces a broad range of over-the-counter products such as Advil, Anacin, Dristan and Robitussin. The company also makes Premarin, an estrogen-replacement pill that is the nation's most-prescribed drug, with annual sales of $1 billion.

Any merger discussions are certain to involve questions about the potential legal liability American Home faces as a maker of two diet drugs banned by the Food and Drug Administration last year after they were linked to health dangers. American Home made fenfluramine, a drug that was widely used with another drug called phentermine, in the weight-loss drug known as "fen-phen." Researchers at the Mayo Clinic linked fenfluramine to possibly severe heart-valve damage.

Analysts have estimated that American Home and other diet-drug makers could face billions of dollars in damages as a result of massive class-action litigation. SmithKline, a maker of phentermine, is also named in some of the suits.

American Home also faces tens of thousands of lawsuits from women who claim the company failed to adequately warn them about the side-effects of its Norplant contraceptive product.

A few analysts warned Tuesday that the fen-phen litigation could make a merger deal risky. But others said SmithKline's interest in American Home could signal either that the litigation threat has been overblown--or that by combining, the firms would be better able to weather any damage.

"Generally, drug companies have been able to withstand these liability issues," said Alex Zisson, an analyst at Hambrecht & Quist.

It wasn't clear how a merger between American Home and SmithKline would be structured, but analysts said they believed it would be termed a "merger of equals."

Based on Tuesday's stock prices, American Home is valued at nearly $60 billion, while SmithKline has a value of more than $63 billion.

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