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Pfizer puts squeeze on rivals with Pharmacia deal

Pfizer Inc pulled further ahead of its rivals on Monday by agreeing to acquire Pharmacia Corp, putting pressure on other drug firms to follow suit with their own acquisitions.

"We are going to see a new wave of consolidation. There are many conversations taking place right now, and this is going to accelerate some of those," said Philippe Guy, global head of healthcare with Boston Consulting Group in Paris.

The $400-billion-a-year global pharmaceutical industry is facing tough times as a drought in new products coming out of R&D pipelines combines with unprecedented competition from cut-price generics.

Pfizer, however, has fared better than most, allowing it to take advantage of currently low valuations to snap up a collection of prize assets in Pharmacia, including full rights to top-selling arthritis drug Celebrex which it already co-markets.

Pfizer will pay for Pharmacia in stock in a deal initially valued at $60 billion. That price tag dropped to around $51 billion as Pfizer stock took a tumble in early New York trade.

The combined company will have a global market share of 10-11 per cent, analysts calculate -- nearly half as much again as nearest rival, GlaxoSmithKline Plc, which has a share of under seven per cent.

That will give the new group overwhelming marketing clout, with about 13,000 sales representatives in the key US market, as well as a daunting R&D budget of $7 billion a year.

"It puts tremendous pressure on companies like GlaxoSmithKline, who will be wondering what the hell to do," said Jonathan De Pass, head of London-based pharmaceutical consultancy Evaluate.

FIRST TO JUMP

Eric Bernhardt, a fund manager and healthcare sector analyst at Clariden Bank in Zurich, said Pfizer had jumped first but others were likely to follow.

"In the world of pharmaceuticals where you really need new products to continue growth, this is the way forward," he said.

"Everybody was waiting for someone else to make the first move, and now Pfizer has done it. Now everybody has to go over their books again."

In the United States, Bristol-Myers Squibb Co and Schering-Plough Corp are seen as takeover targets for healthier rivals, with Merck & Co Inc a frontrunner among potential predators.

Possible European tie-ups include Novartis AG buying Swiss neighbour Roche Holding AG, GlaxoSmithKline merging with AstraZeneca Plc or Franco-German Aventis SA linking with either Bayer AG or Sanofi-Synthelabo, analysts said.

Michael King of WestLB Panmure said deals between companies in the same country were most likely, given the potential for cost savings.

Drug company executives have made no secret of the need for critical mass to stay ahead in an increasingly cut-throat business.

Novartis chairman and chief executive Daniel Vasella said the Pfizer-Pharmacia deal made sense, adding it would lower his firm's threshold for possible strategic deals.

"Pfizer's move is very logical and in some ways could even be predicted in an industry which is continuing and will continue to consolidate," he told Reuters.

COUNTERBID UNLIKELY

A counterbid for Pharmacia is considered unlikely. Analysts believe Pfizer will be able to extract unique benefits from the deal not available to rivals, given its existing co-marketing arrangement with Pharmacia on Celebrex.

The combination of Pfizer and Pharmacia is also viewed as a good fit, and no major regulatory hurdles are expected.

"Whilst there may be a few areas of interest for the anti-trust regulators -- particularly in urology -- and there are likely to be a number of products divested, there seems little reason why this acquisition will run into problems," analysts at UBS Warburg said in a note.

The brokerage said the Pfizer-Pharmacia deal would set a "new standard" in the industry, throwing down the gauntlet to smaller companies that will never be able to reach the same size organically, providing an incentive for more M&A.

Many of today's leading drug groups were created by mega-mergers in the late 1990s that are now finally bedding down, giving management the capacity to contemplate further deals, according to Boston Consulting's Guy.

"The last wave of acquisitions have been digested to some extent and therefore companies are more ready to embrace another deal," he said.

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