If American Home Products guessed right, bigger will be better for healthcare suppliers in the years ahead.
Its sweetened offer for rival drugmaker American Cyanamid Co. was accepted last week. If completed, the merger will create the world's fourth-largest prescription-drug company. It will have $5.6 billion in annual pharmaceutical sales and $7 billion in sales of a variety of other products.
Madison, N.J.-based American Home will pay $101 per share, or $9.7 billion, for Wayne, N.J.-based American Cyanamid. It originally bid $95 per share, or $8.5 billion (Aug. 8, p. 12). The offer expires Sept. 14. The merger requires the approval of federal regulators.
The agreement triggered talk of more giant mergers to come in the already rapidly consolidating drug industry. In a variety of ways, drug companies are trying to respond to price pressures and the rise of managed care. Many are discussing agreements to supply health plans with a broad array of drugs for a capitated payment.
"This is one of the biggest acquisitions I've ever seen," said Teri Louden, a Nashville, Tenn.-based consultant to drug manufacturers. "That tells you something about where the industry is headed. To capitate, you have to be big. You have to be really big."
Yet, the sweeping consolidation troubles some observers because it potentially increases drug companies' influence over purchasing decisions.
It also is possible that American Home will fail to combine the two operations effectively. Then, the merger will spell disaster for American Home and confusion for its customers, Ms. Louden said.
Wall Street, however, appears to back the deal. Shares of American Cyanamid rose $2.13 to close at $96.13 on the New York Stock Exchange Aug. 17, the day of the agreement. Shares of American Home, also traded on the NYSE, rose 38 cents to close at $59.25.