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MONSANTO BUYING SEARLE FOR $2.7 BIL.: CHEMICAL COMPANY SWALLOWS ALL, NUTRASWEET AND OTCs, TO GET ACCESS TO DRUG SALES FORCE AND R&D

Executive Summary

Monsanto developed a taste for NutraSweet and OTC drugs during its long look at Searle. After nine months of openly stated interest in Searle's Rx drug business exclusively, Monsanto gulped and swallowed the whole mix with a $2.7 bil. cash offer. If Monsanto is buying more than it originally bargained for, the purchase may eventually be made more palatable by what appears to be the potential for a net savings in the deal of about $100 mil. for the chemical company. Last January, when the bidding for the various parts of Searle reached one climax, the assumed price for the whole business was estimated at about $3.2 bil. Monsanto is now getting the whole operation for $2.7 bil., or $500 mil. less. However, Searle is $400 mil. poorer in cash reserves, based on the March repurchase of a block of stock from the Searle family. Monsanto's bid works out to $65 per share, about the going price rumored in January, but below the initial $75 per share the Searle family interests were reportedly seeking when the firm went on the auction block last fall. Searle paid the family members $51.75 per share in the March stock repurchase deal. Monsanto publicly acknowledged its interest in purchasing the Searle drug business at an analysts meeting last November. At that time, however, Monsanto President and CEO Richard Mahoney indicated that his company had no interest in purchasing all of Searle. The reluctance of Monsanto to purchase the entire Searle operation earlier this year suggests that the company may have plans to spin off Searle's consumer products and NutraSweet components and retain its original target, the pharmaceutical division with its 600-man sales force. Monsanto says it is going to sell its oil and gas interests to pay for the Searle purchase. While it is in a divesting mood, it could try to reinitiate the Searle partitioning plan from earlier this year. The advantage to Monsanto negotiating the partition is that the deals will not have to be parallel -- - any problems with one part won't hold up the whole package. Companies that were understood to have an interest in Searle's NutraSweet business include Angus Chemicals, Pfizer and Procter & Gamble. Pfizer also said it was interested in the Searle consumer products division, which markets OTC standbys such as Dramamine and Metamucil. Searle's marketing strength and the research and development synergies with Monsanto's nascent R&D program are apparently the most attractive elements of the deal for Monsanto. Although its key products such as Aldactone and Norpace have matured and came off patent, Searle has maintained and increased its Rx detail force now numbering over 600 sales personnel. Searle Chairman Donald Rumsfeld has further been emphasizing R&D spending. Last year, Searle's R&D budget was about $120 mil., up 15% from the previous year. One R&D fit between Searle and Monsanto is in the biotechnology area. Among the wave of industry-academic research agreements which occurred at the start of the 1980s, Monsanto's tie to biotechnology research at Washington University in St. Louis was one of the most significant in terms of funding. Searle has also been involved in biotechnology research, which is conducted both in the U.S. and at a facility in the U.K. According to Monsanto's Mahoney, the Searle purchase will allow Monsanto "to greatly accelerate the commercialization of new products currently being investigated in research programs within Monsanto and in our joint agreements with Washington and Oxford Universities." Of the $370 mil. that Monsanto spent on R&D in 1984, approximately 47% or $173.9 mil. was spent in the company's life sciences division. Given Searle's 1984 expenditure of roughly $120 mil., the combined total would place Monsanto among the largest U.S. pharmaceutical firms in terms of R&D spending at almost $300 mil. annually. Monsanto currently has no NDAs pending, and the company recently suffered a setback when it suspended Phase II clinical trials for its anti-senility product Sulocton (suloctidil). That drug, which is approved in Europe, was acquired when Monsanto purchased the Belgian firm Continental Pharma last January. Two other Monsanto drugs, carbitimer, an anticancer agent, and milacemide, an anti-epileptic agent, are presently in early clinicals. While Searle's Rx drug business has been lagging, the company has high hopes for its prostaglandin antiulcer drug Cytotec (misoprostol). The company filed an NDA for Cytotec in May 1984, Searle's first NDA filing for a major drug in almost 12 years. An NDA is also pending for the firm's prostaglandin vaginal suppository, Cergem (gemeprost). Searle also has two drugs in Phase III clinicals, betaxolol, a beta blocker/antihypertensive agent, and progabide, an anti-convulsant/antiepileptic. Both are licensed from foreign companies. The access to the Searle detail force not only creates an opportunity to market drugs in the Monsanto and Searle pipelines, but also enhances Monsanto's capability to license drugs developed by foreign firms for marketing in the U.S. Given Monsanto's ability to manufacture bulk chemicals, the company might be well positioned to take advantage of opportunities in the production and marketing of generic drugs. Monsanto's drug management team, headed by Charles Faden, comes from the brand/research side of the industry. However, the generic drug profits may look attractive to a chemical business familiar with commodity margins. Under the terms of the agreement, Monsanto will make a cash tender offer "as promptly as practicable" for all outstanding shares of Searle's common stock. According to a joint press release, the offer is not conditioned on any minimum number of shares tendered, as any shares not purchased in the offer will be exchanged for $65 in cash in a merger in which Searle will become wholly-owned Monsanto subsidiary. The release noted that certain Searle family members and trusts owning approximately 20% of the company's outstanding common stock have granted Monsanto an option to purchase these shares for $65 each and have agreed to tender their shares as part of the offer. The companies said that Searle has granted Monsanto an option to purchase approximately 7.75 mil. shares of Searle's authorized but unissued common stock at the $65 per share price. If exercised, these options would give Monsanto approximately 32% of the outstanding shares, according to the release. The acquisition is the second by a major chemcial company of a pharmaceutical operation in five years. "Searle's skills in developing and marketing pharmaceuticals and OTC medications, together with its excellent research capabilities, rapidly advance Monsanto's timetable for becoming an important factor in the health care industry," Mahoney said.

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