Pharmaceutical companies, once immune to hostile takeovers, suddenly seem more vulnerable in the wake of the stock market crash and the sharp decline in the value of the dollar.
Financial analysts and investors are re-evaluating the drug industry in light of recent takeover bids. They're finding bargains among the battered pharmaceutical stocks and, perhaps, other takeover candidates.Three weeks ago F. Hoffmann-La Roche & Co., a Swiss drug firm, offered $4.2 billion to acquire Sterling Drug Inc. of New York. Hoffmann-La Roche later upped the bid to $4.65 billion, but Eastman Kodak Co. stepped in Friday and signed a deal to buy Sterling for $5.1 billion.
Last week, American Home Products Corp. apparently won a three-way bidding contest for A.H. Robins Co. with an offer valued at nearly $3.2 billion.
To be sure, the nation's best-known corporate raiders still aren't lining up to swallow drug firms. But the two pending deals have provided Wall Street with new yardsticks for estimating the value of other drug stocks.
In light of the prices that have been offered for Sterling and Robins,
drug stocks appear undervalued. Michael A. Martorelli, an analyst who covers the industry for Janney Montgomery Scott in Philadelphia, said he has had to increase his estimates on the value of drug companies with better sales and earnings than Sterling and Robins.
Kodak's bid for Sterling equals more than two times Sterling's sales and around 25 times earnings, based on recent analysts' estimates. At the same time, the shares of such companies as Pfizer Inc. and SmithKline Beckman Corp. are selling for about 1.6 times sales and about 12 times earnings.
"In the near term, drug stocks are going to continue to move on takeover speculation," said Rita Freedman, a financial analyst who follows the group for Provident National Bank in Philadelphia.
She said prospective buyers are likely to come from abroad because the decline in the value of the dollar has made assets in the United States less expensive for foreign firms. Differences in accounting also work to the advantage of foreign companies, she said.
Generally, foreign firms don't have to write off as an expense large amounts of "good will" - the amount paid in a takeover in excess of the physical value of a company's assets - and don't have to suffer the resulting decrease in reported profits.
Drug companies appear cheap, Mr. Martorelli said, "especially to the Europeans, who look at long-term value."
Among the U.S. drugmakers, Rorer Group Inc. of Fort Washington, Pa., appears on almost everyone's list of possible takeover candidates. Rorer is large enough to appeal to companies seeking an entry to the drug business but small enough to be affordable. The market value of Rorer stock is about $1 billion.
Though Rorer often has declared its intention to remain independent, analysts think the company is particularly vulnerable since it apparently lost the bidding contest for Robins. If Rorer had been able to emerge with Robins, the deal would have increased the price of the combined company and boosted its debt.
Even if additional takeovers fail to materialize, the analysts are finding plenty of other reasons to recommend drug stocks.
Traditionally, drug issues have provided investors a relatively safe haven during times of economic uncertainty. These firms "have been resistant to recessions in the past," Mr. Martorelli said, and he expects them to continue to outperform the market during downturns.
When the economy has softened in the past, people have continued to place a high priority on spending for health care. In addition, a large percentage of medical bills are passed along to insurance companies and other third-party payers, making those expenditures less vulnerable to recessionary belt- tightening.
Usually drug companies can continue to generate higher profits despite weakness in the overall economy because their fortunes are influenced more by the development of new products and by currency exchange rates than by economic activity.