Pfizer/Warner-Lambert Savings Would Be Akin To Acquiring Another Zoloft

A Pfizer/Warner-Lambert combination would achieve $1.6 bil. in cost savings by 2002, Pfizer declared.

Synergies from the merger would be equivalent to Pfizer acquiring a product with profits similar to its anti-depressant Zoloft. With sales of $2.03 bil. in 1999, Zoloft (sertraline) is currently Pfizer's number two product.

To achieve these savings with the Warner-Lambert acquisition, Pfizer is "looking for reduction in marketing and research on the order of 6% of total spending in the first year," Pfizer President and Chief Operating Officer Henry McKinnell, PhD, told securities analysts during a Feb. 7 teleconference announcing the merger.

In "the manufacturing area - cost of sales - we are looking for...also about 6% out of pharmaceutical cost of sales; and in total, 15% or more out of general administration," McKinnell added.

Minimal savings will come from the company's consumer health operations and its other non-pharmaceuticals businesses, Pfizer said.

"This level of numbers doesn't sound intimidating. Frankly, we might even do better," McKinnell maintained. "These numbers do add up to the $1.2 bil. we need in the first year, which would make it accretive, and the $1.6 bil. through cost avoidance in the second full year," he continued. The transaction is expected to close mid-year, and the company anticipates achieving $200 mil. in savings in 2000.

Pfizer noted during the conference call that the combined company would market seven drugs that generate revenues of $1 bil. or more: Pfizer's calcium channel blocker Norvasc, anti-infective agents Zithromax and Diflucan, Viagra for erectile dysfunction, Zoloft for the treatment of depression, Searle/Pfizer's COX-2 Celebrex, and the cholesterol lowering agent Lipitor, currently co-promoted by Pfizer under an agreement with Warner-Lambert.

With the exception of gaining full control of Lipitor (atorvastatin), Pfizer's list of billion dollar drugs would remain unaffected by the merger.

Warner-Lambert has agreed to complete a merger with Pfizer valued at approximately $90 bil., thus ending the takeover struggle Pfizer launched in November when Warner-Lambert and American Home Products announced intentions to complete a merger of equals.

With the AmericanWarner proposal potentially disrupting Pfizer's claim of Lipitor, rights to the product, which is expected to top $5 bil. in 2000, have been at the center of the merger dispute.

Under a co-promotion agreement with Warner-Lambert, Pfizer has been receiving nearly 50% of Lipitor profits. The company's share, however, was scheduled to decline beginning in 2002 (¹ (Also see "Pfizer Lipitor Profitability Among Items In Dispute In Warner-Lambert Bid" - Pink Sheet, 22 Nov, 1999.)).

When Pfizer first made its hostile bid, Warner-Lambert maintained that AHP would be a better partner despite the premium price offered by Pfizer.

Defending its plans to merge with AHP, Warner-Lambert had expressed concern regarding the dependence on one product a Pfizer/Warner-Lambert combination would create. The AmericanWarner combination, on the other hand, would reduce the company's reliance on Lipitor, Warner-Lambert maintained.

Warner-Lambert also suggested, initially, that it understood Pfizer's intentions as being motivated primarily by greed for Lipitor profits.

Pfizer maintains that its takeover bid was a "pragmatic response to an unusual situation."

Warner-Lambert markets four products that generated over $500 mil. in 1999: Neurontin, Rezulin, Viracept and Accupril. Sales of two of these four products, however, are likely to decline in the upcoming year: the basic Neurontin patent expires in 2001 and Rezulin use has been limited to second-line combination therapy following reports of serious liver injury.

The acquisition of Warner-Lambert could, however, offer significant contributions to Pfizer's development programs in anti-psychotic and metabolic disease therapies.

One of Warner-Lambert's highest profile R&D projects is pregabalin, the successor product to its anti-epileptic Neurontin (gabapentin). Warner-Lambert is pursuing indications for pregabalin in the treatment of psychotic disorders and pain in addition to epilepsy.

Zenarestat, in development for the treatment of diabetic complications, is another Warner-Lambert development project that could contribute substantially to the Pfizer pipeline. Pfizer is currently developing an inhaled insulin product with Aventis, which is in Phase III.

Under the amended merger proposal, Pfizer would exchange 2.75 shares of its stock for each outstanding share of Warner-Lambert, valuing Warner-Lambert shares at $98.31, based on Feb. 4 closing prices.

The exchange represents a 34% premium over the average closing price of Warner-Lambert during October, prior to any merger announcements. Pfizer initially proposed a 2.5 for 1 stock swap valuing the deal at approximately $82.4 bil.

AHP will receive $1.8 bil. in break-up fees, and has agreed to forego a "poison pill" option which would have prevented Pfizer from using pooling of interest accounting in a merger with Warner-Lambert.

Steere would remain Chairman and CEO after the merger. McKinnell, who is Steere's heir apparent, would also retain his position. A "transition planning team" is to be co-chaired by McKinnell and Warner-Lambert President-Pharmaceuticals Anthony Wild, PhD. Warner-Lambert CEO Lodewijk de Vink will leave the company upon completion of the merger.

Eight independent directors from Warner-Lambert's board would join Pfizer and three members of the Warner-Lambert management team would "join Pfizer's corporate management team," Pfizer said.

The combined company anticipates compound annual earnings growth of 25% over three years and revenue growth of 13%. Annual revenues are expected to be approximately $28 bil., with $21 bil. in prescription pharmaceutical sales.

The merged company would be the number one pharmaceutical company in the U.S., with a market cap in excess of $230 bil. The proposed Glaxo-SmithKline combination would be ranked number one worldwide, but Pfizer/Warner-Lambert's growth predictions indicate that it could soon overtake Glaxo-SmithKline's number one position.

Corporate headquarters would remain at Pfizer's New York City location. The consumer health products division would be located at Warner-Lambert's Morris Plains, N.J. site.

Pfizer plans to retain Warner-Lambert's Ann Arbor, Mich. research & development site upon completion of the merger.

At an analysts briefing in November, CEO William Steere noted that Pfizer had "been having internal discussions about a fourth research campus," and with a merger, Warner-Lambert "in fact would be [that] fourth research campus."

Sens. DeWine (R-Ohio) and Kohl (D-Wisc.) sent a letter to the Department of Justice and Federal Trade Commission the day the Pfizer/Warner-Lambert agreement was announced, requesting the agencies look carefully at recently proposed pharmaceutical mergers, and the way in which consolidation will affect the industry as a whole.

"We urge you to consider this trend when you examine the Pfizer/Warner-Lambert merger, and we likewise urge that you evaluate the" Pharmacia & Upjohn/Monsanto and Glaxo Wellcome/SmithKline Beecham "mergers in the context of this latest deal," the Senators wrote.

"Maintaining strong competition in the pharmaceutical industry is of crucial importance to controlling health care costs and to ensuring that innovation continues to take place in this critical industry."