Pfizer to Buy Pharmacia For $60 Billion in Stock

Pfizer to Buy Pharmacia For $60 Billion in Stock

(See Corrections & Amplifications item below⁰.)

In the biggest corporate combination in more than a year, Pfizer Inc. agreed to buy Pharmacia Corp. for stock valued at $60 billion, giving what is already the world's biggest drug company full rights to one of the industry's crown jewels, the blockbuster arthritis drug Celebrex.

The deal will create an industry behemoth with over $48 billion in revenue and a research-and-development budget of more than $7 billion. The new combination will be the world's largest drug maker by far and the leading pharmaceutical company by revenue in every major market around the globe.

PHARMACEUTICAL COMBINATION   • Take a look0 at what Pfizer and Pharmacia bring to the table ahead of Pharmacia's acquisition.   • See a chart0 of which pharmaceutical giant might be next in the acquisition race?   • Hassan Brings About a 'Powerhouse'1   • See more on the pharmaceutical industry in the Health Industry Edition2

That any company should strike a deal amid the stock-market turbulence of recent months is surprising. Corporate accounting scandals, plunging share prices and economic uncertainty have made companies reluctant to strike bold "transformational" deals, while several big mergers -- such as AOL-Time Warner -- have faced strong investor criticism. While the Pfizer-Pharmacia deal is seen as practical, it's unclear how investors will react to such a large deal in the uncertain market environment.

The deal comes amid unprecedented pressure on pharmaceutical companies, as the industry struggles with a dry spell in its research labs, fights rising competition from generics makers and wrestles with intense pressure on prices from governments and private buyers around the world. As a result, drug companies are facing slowing or declining revenue and are watching their stocks sink to their lowest level in years.

Under terms of the deal, Pharmacia will proceed with its previously announced plans to spin off its remaining 84% ownership of Monsanto Co. to its current shareholders. After the spinoff, Pharmacia shareholders will receive 1.4 shares of Pfizer stock for each share of Pharmacia, valuing Pharmacia stock at $45.08 per share, representing a 36% premium over Pharmacia's Friday closing price.

In addition to the blockbuster Celebrex, the transaction will join Pfizer's dominant cardiovascular franchise -- including the cholesterol drug Lipitor and the blood pressure pill Norvasc, as well as its Zithromax antibiotic and its epilepsy medicine Neurontin -- with such popular Pharmacia drugs as Xalatan for glaucoma and the cancer drug Camptosar.

People familiar with the transaction expect minimal antitrust problems because the companies have few overlapping products and because Pfizer's global share of total pharmaceutical sales -- currently at 8% -- would rise only to about 11% if the deal is completed. However, one potential antitrust roadblock could be in the area of urinary incontinence, where Detrol, Pharmacia's blockbuster-in-the-making was poised to get competition from Pfizer's Darifenacin, which it expects to submit for Food and Drug Administration approval this year.

The Pfizer-Pharmacia deal is expected to heighten pressure for other companies to consider combinations -- including industry giants Bristol-Myers Squibb Co. and Merck & Co., which have been hard-hit by generic competition as their flagship medicines lose patent protection.

A Pharmacia spokesman and a Pfizer spokeswoman declined to comment.

Pfizer's move, which is largely the brainchild of Pfizer CEO Henry McKinnell, echoes its acquisition two years ago of another of its partners, Warner-Lambert, in a $115 billion deal that gave it full control over the cholesterol-lowering drug, Lipitor. In recent years, big mergers had fallen into disfavor with some industry executives, who note that companies that pursued that tack, such as GlaxoSmithKline PLC and Bristol-Myers Squibb, failed to solve their problems -- particularly in research -- and appeared to be distracted by the merger process.

Pfizer's acquisition of Warner-Lambert, however, is considered one of the success stories to emerge from the raft of drug industry-combinations in the mid-1990s. In that case, Pfizer's acquisition was hostile, so it was free to unilaterally cut Warner-Lambert operations and personnel to make the operations meld smoothly.

As in the Warner-Lambert deal, Pfizer is capturing a blockbuster drug, in this case Celebrex and its follow-on drug, Bextra, both of which it already markets with Pharmacia, a mid-sized drug company based in Peapack, N.J. Buying the company will give Pfizer full control over the Celebrex-Bextra arthritis franchise. The two drugs are expected to have combined sales of $3.75 billion this year.

But growth will be a tall order, given the massive sales base of the new Pfizer. To still be considered a respectable growth company, Pfizer will have to come up with $5 billion or more in new revenue each year. In the past three years, Pfizer has struggled to find replacements for some of its aging blockbusters, launching only two new medicines on the U.S. market that were discovered by company researchers, a schizophrenia treatment called Geodon, with sales of just $150 million in 2001, and Vfend, an antifungal drug approved in May. Its last smash hit was Viagra, launched four years ago.

Despite a strong first quarter, Pfizer warned of a sharp decline in profits for the current quarter, though it affirmed longer-term growth targets. On Monday, Pfizer reported its second-quarter earnings rose amid growth of key prescription drugs.

Industry experts long speculated about a deal between Pfizer and Pharmacia because of the good strategic fit. The two companies have had a partnership since 1998 to market Celebrex, the world's leading arthritis medicine and the No. 7 global drug overall, and have continued that arrangement with Bextra, a second-generation medicine launched in the U.S. this spring.

In Pharmacia, Pfizer is acquiring a relatively strong drug company, with four drugs that have $1 billion-plus sales or potential sales. That could give Pfizer, with eight drugs already at those sales levels, an even dozen blockbusters. Moreover, Pharmacia's major drugs don't face any patent threats for years. Its cancer drug Camptosar is the closest to patent expiration -- in 2007.

Pharmacia said it expects per-share earnings to rise 15% to 17% in the second quarter. Analysts expect double-digit earnings per-share gains for Pharmacia from 2003 to 2006. Pfizer has been looking to expand into the lucrative market for cancer drugs, a strength of Pharmacia's, and also picks up ophthalmology, where Pharmacia's glaucoma treatment Xalatan is already on the verge of $1 billion in annual sales.

Rising Star

Pfizer is also getting Pharmacia's top executive, Fred Hassan, who has emerged as a rising star in the industry, in part because of his turnaround of Pharmacia, which was created through the merger of two weak drug makers, Pharmacia of Sweden and Upjohn Co. of Kalamazoo, Mich. Mr. McKinnell, Pfizer's 59-year-old CEO, will be chief executive and chairman of the combined company. Mr. Hassan, 56, chairman and chief executive of Pharmacia, will become vice chairman of Pfizer and a member of the board, the only Pharmacia board member to sit on the combined drug maker's board.

According to people familiar with the situation, the deal talks began this spring, when Mr. McKinnell approached Mr. Hassan after the two appeared at a meeting of both companies' sales forces in Atlanta to prepare for the Bextra launch. Mr. McKinnell broached the subject of an acquisition, and Mr. Hassan "was very receptive," according to a person close to the situation.

The trading patterns of both stocks helped nurture the deal, since their share prices have been trading roughly in tandem for months. In April, when Pfizer and Pharmacia first started their discussions, both stocks were trading above $40 a share. By summer, however, when the market swooned and accounting troubles started to infect the health-care industry, Pfizer and Pharmacia fell to the low 30s. With both share prices falling at roughly the same rate, the companies could negotiate a share ratio without worrying about one stock swinging wildly out of range.

"It made it easier to hold discussions with the stocks trading in parallel, which is rather rare," said one person close to the discussions.

Pfizer shareholders will own about 77% of the company, with Pharmacia shareholders owning around 23%. The deal, which is expected to close by year-end 2002, is subject to approval by shareholders of both companies and regulators. The deal isn't expected to dilute Pfizer's 2003 adjusted net income and to add about six cents a share to earnings in 2004.

The deal is expected to allow the new Pfizer to cut costs, creating some breathing room to find new drugs. People familiar with the deal expect those savings to amount to $1.4 billion in 2003, with savings growing to $2.5 billion by 2006. As part of the deal, Pfizer is expected to reaffirm its double-digit revenue growth and diluted earnings-per-share growth of at least 15% a year for 2003 and 2004.

Pharmacia shares closed at $32.59, up 42 cents, in 4 p.m. New York Stock Exchange composite trading Friday, while Pfizer fell 40 cents to $32.20, also on the Big Board.

Pfizer, feared and sometimes cursed by rivals for its brashness, hopes the deal will cement its status as the leading company in the global pharmaceutical industry. Ten years ago, most drug-company CEOs decided the rise of managed-care companies and government proposals for universal care meant the end of the large sales forces and huge marketing campaigns. Most executives in the industry predicted that government or managed-care groups would choose which drugs to buy no matter how much salesmen tried to persuade doctors otherwise. Merck & Co. and other companies cut their sales forces and slashed their marketing expenses. Pfizer did just the opposite -- adding salesmen and investing heavily in smart marketers.

Pfizer proved prescient, surpassing everyone else in the industry on the strength of the organization's selling power. Merck eventually acknowledged it had made a mistake and has been steadily adding to its sales and marketing forces since the mid-1990s, playing catch-up ever since. By having a large sales force, Pfizer was also able to license blockbuster drugs from others -- including Lipitor and Celebrex -- and turn them into even larger sellers. Sales of Lipitor, after Pfizer acquired Warner-Lambert, "exploded," a person familiar with this deal said. Pfizer hopes the Pharmacia arthritis franchise would show similar results.

Now Pfizer is doing it again, betting heavily that size is what counts most. The combined company will put even more distance between itself and its rivals in two of the most important parts of the drug business: sales and research. Pfizer expects to spend $5.2 billion on finding and developing drugs this year, already about 20% more than GlaxoSmithKline, the next biggest spender. Add in Pharmacia's $2.2 billion in research spending, and the combined company would have a research budget nearly one-third the size of the National Institutes of Health.

In the war for drug sales, the expanded Pfizer would field 13,000 sales representatives in the U.S. alone, more than any other drug company. A person familiar with Pfizer's plans said the sales force could grow even larger to support new products in the works at both companies.

A Reputation on the Rise

The deal would enhance Mr. McKinnell's status as master-builder within the drug industry. For years, Mr. McKinnell's management prowess and intellect had put him on the short-list of other drug company's executive searches before he assumed the CEO post at Pfizer. Mr. McKinnell, who was raised in British Columbia, Canada, joined Pfizer in 1971 in Tokyo and has been with the company ever since. Nearly half his career was spent in overseas posts, including stints in Hong Kong, Iran and Japan.

His rise mirrors the ascent of Pfizer within the drug industry. In 1990, Pfizer ranked No. 14 among pharmaceuticals makers. The company became No. 1 in May 2000 through the Warner-Lambert acquisition. Pfizer Inc. rewarded Mr. McKinnell, who executed the takeover of Warner-Lambert Co., with the top job at Pfizer in January 2001, when he succeeded William Steere as chief executive.

The deal is expected to get tough scrutiny from antitrust enforcers given its size, according to people familiar with the situation. The transaction will likely be reviewed by the Federal Trade Commission, rather than the Justice Department, because of the agency's expertise in drug-industry mergers.

The FTC is likely to do a market-by-market investigation of the two companies and could seek divestitures or compulsory licensing in areas where the two companies have a combined dominant market share.

Last week the FTC approved the $16 billion buyout of Immunex Corp. by Amgen Inc. but demanded divestitures or licensing agreements in three market areas. The agency is also likely to inspect the two companies' development pipelines for potential overlaps in future product areas.

For Pharmacia, the deal may reflect a realization that to compete effectively, the company had to get bigger fast. Pharmacia had already enlisted Pfizer's brawn with Celebrex to great success and continue the arrangement with Bextra. Next year Pharmacia probably would have had to find a marketing partner again for help with eplerenone, a drug for heart failure and high blood pressure, awaiting FDA approval.

A person familiar with the deal expects that the market will support the combination with Pharmacia, in part because of the credibility Pfizer executives believe they earned by integrating Warner-Lambert. Every drug that Warner-Lambert and Pfizer sold as separate companies had higher sales in the combined company. "The strategic merit is very, very strong," that person said.

Even if Pfizer pulls off its second major deal in such a short span, there's no guarantee that the larger company will be any better equipped to fight off the ails afflicting the entire industry.

Pfizer was advised by Lazard LLC and Bear Stearns & Co. and Pharmacia was advised by Goldman Sachs & Co. Codwalader, Wickersham & Taft provided legal counsel to Pfizer, and Sullivan & Cromwell provided legal counsel to Pharmacia.

Pfizer shares declined 7.3% to €30.10 ($29.80) in morning trading in Frankfurt. Pharmacia shares gained 23% to €40 in Ffankfurt.

-- Gardiner Harris and John Wilke contributed to this article.

Write to Robert Frank at robert.frank@wsj.com⁷ and Scott Hensley at scott.hensley@wsj.com⁸

Corrections & Amplifications:

Cadwalader, Wickersham & Taft provided legal counsel to Pfizer Inc. in its agreement to buy Pharmacia Corp. The above article incorrectly gave the law firm's name as Codwalader, Wickersham & Taft.

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Updated July 15, 2002 11:59 p.m. EDT