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Executive Summary

Fisons' $ 460 mil. purchase of Pennwalt's pharmaceutical operation gives the British firm critical marketing mass in the U.S. for its growing allergy line, as well as respiratory product depth with the addition of Pennwalt's prescription cough/cold line. A combined 400-person detail force resulting from the addition of 168 Pennwalt sales reps will facilitate better coverage of the U.S. allergy market and provide a ready outlet for two cromolyn sodium analogs now in the Fisons pipeline, nedocromil (Tilade) and minocromil. Pennwalt's Penntuss and Tussionex prescription cough/cold brands are a logical marketing fit with Fisons' cromolyn sodium line of allergy products. These include Intal, an asthma inhaler, Nasalcrom solution for allergic rhinitis, and Opticrom, a 4% solution for eye-related allergies. Although marketed in the U.S. since the 1970s, cromolyn sodium has been slow to catch on as a first-line treatment for the prevention of allergies. According to a 1987 report prepared by the SRI consulting firm, cromolyn sodium is the allergy market leader in Japan, with sales topping $ 100 mil., and is widely prescribed in Europe. U.S. physicians, on the other hand, have tended to focus on treatment of symptoms rather than prophylaxis. As further evidence of its commitment to the U.S. market, Fisons plans to move its U.S. operations from Bedford, Mass. to Pennwalt's Rochester, New York headquarters, where approximately 1,000 individuals are now employed. About 45% of Fisons' $ 1.3 bil. corporate volume in 1987, or approximately $ 585 mil., was generated in North America. The figure includes sales of pharmaceuticals, horticultural products and scientific equipment in the U.S., Canada and Mexico. The acquisition of Pennwalt drug business, announced in-principle on Aug. 18, gives Fisons R&D and manufacturing capability in North America along with an established OTC business and a specialty packaging company, Pharmasol, acquired by Pennwalt early in 1987. Fisons has no OTC business in the U.S., but markets OTC products in Australia and the United Kingdom. The company called the Pennwalt acquisition "an excellent fit for Fisons, reinforcing its success in the U.S. pharmaceuticals market and accelerating its growth plans." One of Fisons' most promising products in development is an aerosol form of pentamidine, Pneumopent, which is currently in Phase III study for the treatment and prevention of Pneumocystis carinii pneumonia. In conjunction with Mount Sinai Hospital, Fisons is in a race with LymphoMed to finish clinicals and submit an NDA to FDA. Because both products carry orphan designations, the first to be approved will receive seven years exclusive marketing. The expanded Fisons/Pennwalt sales force could be a big plus in marketing aerosol pentamidine; because of its delivery system and improved side effect profile, Pneumopent's market should extend beyond I.V. pentamidine's second-line use in hospitals and clinics. However, Fisons is not expanding its U.S. presence at bargain basement prices. While the $ 460 mil. price represents less than four times Pennwalt's 1987 drug sales, it is 23 times the division's 1987 operating earnings of $ 20 mil. On the surface, the price appears higher than that paid recently by another British firm eager to expand its U.S. base: Boots purchased flint Labs from Baxter in 1986 for $ 555 mil., or nine times sales and 17 times operating earnings, a price considered steep at the time ("The Pink Sheet" Aug. 11, 1986, p. 3). With the 1987 sales of $ 129.3 mil., Pennwalt's pharmaceutical operation is one of the few small to medium size brandname drug businesses remaining in the U.S. About $ 68 mil. came from prescription product sales and nearly $ 48 mil. from OTCs. The company's drug business was up only marginally over the approximately $ 125 mil. reported for 1986. Approximately $ 13 mil. was generated by Pennwalt's Pharmasol subsidiary, which develops and manufactures aerosol products on a contract basis. Pharmasol's expertise in metered-dose aerosol development is a plus for Fisons, whose Intal is formulated for metered dose inhaler delivery. Pennwalt's largest prescription product is Tussionex, which had sales of nearly $ 13 mil. in 1987, or approximately 20% of prescription volume. The hydrocodone/chlorpheniramine combination product was jointed in 1985 by Penntuss, a 12-hour, controlled release codeine/chlorpheniramine antitussive. Sales of Penntuss were $ 4.2 mil. in 1987, Pennwalt said. One of Pennwalt's most recent prescription launches is Microx, a low-dose metolazone product that cleared FDA in the fall of 1987. Micros, a more bioavailable version of the company's higher dose diuretic/antihypertensive Zaroxolyn, has a low side effect profile and a price advantage over other branded antihypertensives, according to the company. Pennwalt also markets a third cardio-vascular compound, the antihypertensive Hylorel (guanadrel), which recently has taken a backseat to Microx in the company's marketing and promotional efforts. Other Pennwalt prescription products include: Adapin (doxepin), an anxiolytic/antidepressant; Biphetamine (amphetamine), a stimulant used in controlling hyperactive behavior in children; Ionamin (phentermine), an appetite suppressant; and K-Norm, controlled release potassium chloride. In the OTC area, Pennwalt's (ITALICS)Allerest and Sinarest brands complement the company's prescription cough/cold line. Other well-known OTC trademarks include the Desenex line of antifungal products, Cruex jock itch powder and cream, CaldeCort .5% cortisone anti-itch cream and spray, Caldesene medicated ointment and powder and the Americaine line of topical anesthetics. The Pennwalt OTC franchise offers Fisons quick entry into the U.S. market and a potential outlet for OTC products now being sold overseas. However, should Fisons decide to focus exclusively on the U.S. prescription market, Pennwalt's OTC brands would be an attractive divestiture. For Pennwalt, the divestiture is the tangible beginning of a two-month effort to restructure operations. The company's retaining Goldman Sachs in June to explore the sale of the drug unit coincided with a takeover threat posed by the arbitrage firm Centaur Partners ("The Pink Sheet" June 20, T&G-1). "The sale of the Pennwalt Pharmaceutical Group to Fisons will meet one of the major objectives of the company's strategic plan which we publicly announced in June," Pennwalt chairman Edwin Tuttle stated in an Aug. 18 press release. "The management of the company intends to recommend to the Board of directors various alternatives to pass the proceeds of these transactions on to its shareholders. these include a special dividend and/or stock repurchase program." Pharmaceutical products accounted for about 11% of the company's $ 1.1 bil. 1987 corporate volume, making Pennwalt relatively small in relation to other U.S. chemical producers. Earlier in the decade, Pennwalt had high hopes for its drug business based on the Pennkinetics controlled release system. However, the OTC products that employed the system enjoyed only minimal market success. Pennwalt is also planning a sale of its precision equipment operation. The pharmaceutical divestiture, which requires Fisons' shareholder approval, is expected to close "within the next two to three months," Pennwalt said.

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