ANALYSTS SEE DRUG FIRMS CONTINUING TO CONSOLIDATE

ANALYSTS SEE DRUG FIRMS CONTINUING TO CONSOLIDATE

Pharmaceuticals companies will see continued merger and takeover activity over the next year or two, as the industry in the United States and overseas moves toward greater consolidation, analysts say.

This week's proposed merger between The Upjohn Co. and Sweden's Pharmacia AB - as well as the hostile bid by France's Rhone-Poulenc Rorer for the Britain's Fison's PLC - highlights an industry that needs to become more streamlined if several of its major players are to survive, analysts say.Jack Lamberton at Nat West Securities Corp. said the proposed Upjohn- Pharmacia merger "validates our thesis that hostile takeover activity will maintain a high level of consolidation activity within the industry."

Recent years have seen increased merger activity. Notable examples include The Dow Chemical Co., which merged its pharmaceutical business with Marion Merrell. The new company Marion Merrell Dow was subsequently taken over by Germany's Hoechst AG in July.

DuPont realigned its pharmaceutical operations, while Eli Lilly and Co. and Merck and Co. have both bought pharmaceutical operations, analysts noted.

"In the past few years, virtually every company has been analyzing . . . and deciding how they can best succeed; going forward with different types of acquisitions of marketing alliances," said Kenneth Nover, senior vice president and pharmaceutical analyst at A.G. Edwards.

"On a macro basis it would appear that there should have been and there will be additional mergers," he said. "Virtually every (pharmaceutical) company has looked at these issues."

Analysts say the main reason behind the need to merge within the drug industry, both in the United States and overseas, was a swift turnabout in earnings over the past two years and continued overcapacity in the industry.

NatWest's Mr. Lamberton said the Rhone-Poulenc hostile bid for Fison's was the third such bid in the last 12 months, "after many years of only friendly mergers in the world drug industry."

He said the bid adds "almost $3 billion to the over $50 billion in horizontal and vertical acquisition activity in the world drug industry over the last two years."

If consummated, the Rhone-Poulenc-Fison's deal would be the sixth major world drug company merger in the last 15 months, Mr. Lamberton said.

A.G. Edwards' Mr. Nover pointed to the slowing earnings growth in 1993 and 1994 after a period of consistently reliable earnings from the late 1980s onward as the major factor triggering the rush to merge.

Mr. Nover said average earnings per share growth of around 15 percent from the late 1980s subsequently fell to between 3 percent and 5 percent in 1993 and 1994.

He said the drug companies "were looking to get their growth back up. Some were hit more directly because of product lines, competition, patent considerations and some were driven to take pretty extreme actions."

NatWest's Mr. Lamberton said American Home Products' hostile bid last summer for American Cyanamid was "an inflection point of major proportions" for the U.S. drug industry.

Prior to this, consolidation had been prevented by "intransigent target managements," Mr. Lamberton said. American Cyanamid ultimately agreed to be bought by American Home Products.