Sunday, February 06, 2000
P&G's prescription for growth: buyouts
But drug industry is a new ballgame
BY RANDY TUCKER
The Cincinnati Enquirer
Durk I. Jager seems to think drugs may be the best remedy for Procter & Gamble's corporate condition, which has improved but still is not as healthy as the company's president and chief executive would like.
Some analysts agree that a piece of the high-growth, high-margin prescription drug business could be just what the doctor ordered to help P&G feel better about meeting its growth goals under its latest restructuring, dubbed Organization 2005.
However, investors rebuffed P&G's attempt last month to acquire drugmakers Warner-Lambert and American Home Products by driving the Cincinnati packaged-goods giant's share price down and forcing Mr. Jager away from the bargaining table.
Nevertheless, some experts predict Mr. Jager won't stay away from the table for long because he still hasn't satisfied his appetite for a bigger slice of the drug business.
"They (P&G) have essentially shown their hand,” said analyst Lyle Schonberger, who follows the company for Olde Discount Corp. in Detroit. "I'm sure you haven't heard the last from them in this arena.”
It's easy to see why that might be the case: Most big drug companies are simply faster growing and more profitable than P&G.
In terms of product sales, it would take the combined U.S. sales of three of P&G's most recognized brands — Crest, Tide and Pampers — to equal annual revenues for the nation's top-selling prescription drug, Prilosec.
With sales of $3.16 billion last year, the anti-ulcerant made by Astra Zeneca was just one of a number of billion-dollar drugs that helped boost sales growth in the pharmaceutical industry by an average of about 12 percent, according to industry analysts.
By comparison, P&G is still working to meet its sales goals of 6 percent to 8 percent annual growth.
William Steele, managing director at Banc of America Securities, said P&G's play for the two drug companies may indicate that the company is struggling to increase revenues internally and is looking outside the company for help.
P&G already has set the precedent with the $265 million purchase last August of Minneapolis-based Recovery Engineering and the $2.3 billion buyout of premium pet-food maker Iams Co. of suburban Dayton, Ohio — P&G's largest acquisition ever.
But buying a major drug company would be a different story for P&G, which has a small presence in the industry. The company sold about $600 million of drugs in the last fiscal year, which accounted for 1.6 percent of its $38 billion in annual revenue.
The estimated value of P&G's proposed buyout of Warner-Lambert and American Home — about $140 billion.
But even at that price, Mr. Jager indicated he would not rule out another possible megamerger, including with a drug company.
Said Mr. Steele: “I don't believe that they have something else immediately in their pipeline. But it would appear they are committed to the prescription drug business. They're going to re-evaluate their options. If they remain committed, options are: grow it internally, which they've been doing pretty nicely, joint ventures and mergers.”
While P&G might still be interested in making a bid for a drug company, Warner-Lambert and American Home are probably out of the picture, analysts say.
One reason is that Warner-Lambert probably won't be around in its current form to entertain another offer from P&G.
The drug company, whose product list includes the best-selling cholesterol drug, Lipitor, was reportedly close last week to a takeover by Pfizer Inc.
Pfizer, which co-markets Lipitor, made an unsolicited $78 billion bid for Warner- Lambert before it approached P&G about a possible merger — widely regarded as a move by Warner-Lambert to seek “white knight” protection from Pfizer's hostile bid.
The unfriendly offer came after Warner-Lambert agreed to a $58 billion merger with American Home on Nov. 4.
Warner-Lambert and Pfizer are to appear in court Feb. 14 to argue whether Pfizer's hostile bid violated its co-marketing agreement with Warner-Lambert.
But industry insiders say Pfizer and Warner-Lambert, which have held talks recently, have decided to put aside their differences, and could reach an agreement before their court date.
That would leave American Home as the only remaining drug company that was involved in the P&G merger talks.
American Home, unlike Warner-Lambert, might still be around if P&G were to bid for another drug company. But industry watchers say it's unlikely that P&G would want to carry the company's excess baggage, which includes current and pending lawsuits stemming from the company's Fen-Phen diet drugs.
In a recent case, American Home agreed to pay $10 million to $20 million to settle a lawsuit brought by the family of a Massachusetts woman who died of a rare lung disease linked to the diet drugs.
That's one of the largest Fen-Phen settlements on record and probably raises the monetary bar for settling future Fen-Phen cases and the liability that P&G would assume if it bought American Home.
But Warner-Lambert and American Home aren't the only partners P&G could invite to dance in the estimated half-trillion dollar worldwide prescription drug market.
Bristol-Myers Squibb, for one, the New York City-based company best-known as the maker of Excedrin and Bufferin analgesics, has been mentioned by analysts as a possible P&G takeover target.
Bristol-Myers is the world's fifth-largest drug company. It derives nearly 70 percent of its sales from pharmaceuticals, particularly anti-cancer, cardiovascular and anti-infective treatments.
Indianapolis-based Eli Lilly, who's well-known Prozac antidepressant was the third-best-selling prescription drug in the U.S. last year with $2.04 billion in sales, has also been mentioned as a possible merger partner.
Although both companies are fundamentally sound, with numerous new drugs in their pipelines, many analysts believe they will eventually have to seek out a partner or partners to compete against the global powerhouses formed by recent drug mergers.
Those mergers include the marriage last month of Glaxo Wellcome PLC and SmithKline Beecham PLC, which resulted in the formation of a single pharmaceutical company with combined annual sales of $25 billion and a market value of $189 billion.
Drug mergers have helped most of the companies involved boost profits and gain a larger presence in the U.S. market, which accounts for more than $100 billion in prescription drug sales and is the world's largest and most profitable market by far.
In order to keep up, smaller companies will have to find ways to cut costs, expand research and development operations and — most importantly — introduce blockbuster new drugs.
That's where P&G could come in.
Only the largest companies will have the resources to develop such blockbuster drugs, and P&G — the largest consumer-goods company in the United States — certainly meets that criteria.
P&G spends about $1.7 billion a year to come up with new products, such as its latest introductions of Swiffer electrostatic cleaning cloths, the Dryel home dry-cleaning kit and Febreze fabric freshener.
But P&G's research expenditures are a small fraction of revenues, about 4.5 percent, which means there is room for increased spending — perhaps on drugs.
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