ST. LOUIS — Monsanto Co. and rival drug maker Pharmacia & Upjohn Inc. on Sunday agreed to merge in a $26.5-billion stock transaction and sell off part of the agriculture business that helped drag Monsanto's share price down 12% this year.
Monsanto stockholders will exchange each of their shares for a share of the combined company in the transaction, described as a merger of equals without a premium for shareholders. Pharmacia shareholders will receive 1.19 shares for each of their shares, a 1.1% discount, based on Friday prices.
The transaction would create a company with drug sales of more than $9 billion a year, on a par with 11th-ranked Eli Lilly & Co., and a combined research and development budget of $2 billion a year, rivaling industry leader Pfizer Inc.'s $2.8 billion. The combined company would sell part of Monsanto's agriculture unit in an initial public offering.
"Both of these companies have a lot of value that has not been recognized by Wall Street," said Michael Krensavage, an analyst at Brown Bros. Harriman & Co. Still, he said, "I'm not sure that this unlocks that value," noting Pharmacia shares dropped 5.6% on Friday on news the companies were in talks.
The companies said they would have the third-largest sales force in the U.S., an asset in marketing Monsanto's blockbuster arthritis drug Celebrex, which had $1 billion in sales its first 10 months on the market, as well as Pharmacia's glaucoma drug Xalatan and incontinence drug Detrol. They said they expect to cut $600 million in costs by the third year after the transaction closes.
"This gives us a lot of power, and we'll be the fastest-growing pharmaceutical company," said Pharmacia CEO Fred Hassan, who would be chief executive of the combined company, which will have its corporate and pharmaceutical headquarters in Peapack, N.J., Pharmacia's home base. "This is a merger driven from strength."
Monsanto shares rose $1.38 on Friday to close at $41.75 on the New York Stock Exchange after reports the two companies were in merger talks. Pharmacia shares fell $3 to close at $50.25.
Pharmacia has a market value of $27.6 billion at Friday's closing price. Monsanto was worth $25.6 billion.
Pharmaceutical companies have been consolidating to beef up their research and development funding. Aventis, the product of a merger of Germany's Hoechst and France's Rhone-Poulenc, begins trading today as the world's largest drug maker. In the U.S., Pfizer and American Home Products Corp. are vying for Warner-Lambert Co. Either combination would eclipse Aventis.
Hassan helped integrate Sweden's Pharmacia with U.S. drug maker Upjohn Co. after their 1995 merger and earlier was involved with bringing American Cyanamid into American Home. As much as 20% of Monsanto's agricultural unit, which makes genetically altered corn and soybean seeds and the top-selling weed killer Roundup, would be sold via an IPO shortly after the merger closes. The unit will set up its own board and management in St. Louis after the parent companies merge.
Monsanto's shares dropped 12% this year, even though its Celebrex had the most successful introduction in history, because of investor concern about its agriculture business, plagued by a weak farm economy and consumer resistance to bioengineered foods. Some investors were urging Monsanto Chairman and Chief Executive Robert Shapiro to sell or break up the company.
St. Louis-based Monsanto in the last two years has held merger talks with American Home, Novartis and DuPont Co. and told investors it's considering all options to boost its share price.