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Pharmacia Is Feeling Woozy


When Fred Hassan struck a deal in late 1999 to merge his drug company, then called Pharmacia & Upjohn (PHA), with pharmaceutical and agricultural player Monsanto Co. (MON), there were plenty of skeptics. So Hassan hit the road, making the hard sell to shareholders who liked Monsanto's G.D. Searle & Co. drug unit but were wary of Monsanto's controversial biotech seed business. Management vowed that the combined company--now called Pharmacia Corp.--would quickly become an industry powerhouse, with earnings growth in excess of 20%. In the end, investors bought into Hassan's vision, and the deal closed in April, 2000.

Now it looks as if the skeptics were right to doubt Hassan's pitch. Since the deal closed, the company has had a series of disappointments, including nagging problems with its core pharmaceutical business, that has caused it to underperform many of its rivals. Approval of two new drugs has been unexpectedly delayed by the Food & Drug Administration. The growth of Pharmacia's top product, arthritis drug Celebrex, with $3.1 billion in annual sales, has stalled, partly over concerns that it, along with similar drugs, may raise the risk of heart attacks. And sales from Pharmacia's second-best seller, sleeping pill Ambien, revert this year to the drug's developer under a licensing agreement. The result: Company sales, excluding its remaining 85% stake in Monsanto's ag business, probably will climb just 4% this year, to $14.4 billion, says Deutsche Banc Alex. Brown analyst Barbara A. Ryan. She expects income from continuing operations to rise a paltry 6%, to $2 billion.

The gap between where Pharmacia is and what was promised two years ago has seriously damaged Hassan's credibility with investors. In early 2000, shortly before the Monsanto deal closed, Pharmacia told investors that earnings per share that year would be $1.55 to $1.62. They ended up at $1.45, partly because of new rules that were issued for revenue-recognition accounting. Then the company projected earnings growth, including the ag business, of 20% to 25% in 2001. Wall Street considered it a failure when Pharmacia just hit 20%. As a result, since the Monsanto deal closed, Pharmacia's stock price has fallen 12.5%, vs. an 8.6% gain for the American Stock Exchange's pharmaceutical index. Some institutional shareholders now think Pharmacia could be a takeover target. "Either they execute on their own or somebody will execute for them," says Dr. John R. Borzilleri, a portfolio manager at State Street Research & Management Co., which had 6.6 million shares at the end of 2001.

Hassan concedes that he could have done a better job communicating with investors. But he insists that Pharmacia's future will be bright as concerns about Celebrex wane and new drugs roll out. "Going forward," he says, "we are confident aboutour ability to deliver good numbers." The planned spin-off this fall of the rest of Monsanto, which Hassan acquired mainly for G.D. Searle's drug portfolio, will certainly help. New products are imperative, though, if Pharmacia is to make up for a big slice of revenue it will lose this year from Ambien. Under terms of a previous licensing agreement, the rights to the $902 million insomnia drug revert to developer Sanofi-Synth?labo in April.

And some of Pharmacia's most promising new launches could face tough going. Chief among them is Bextra, a follow-up to Celebrex. Bextra officially hits the market in the second week of April. Both belong to the class of painkillers known as Cox-2 drugs. But a paper in the Journal of the American Medical Association last August suggested that Cox-2 drugs could raise the risk of heart attacks. That has stalled Celebrex's growth and could hurt Bextra. Some doctors already fear giving such drugs to patients with heart problems. "Physicians have to be a little wary about it," says Dr. Dwight R. Robinson, clinical director of the division of rheumatology at Massachusetts General Hospital in Boston. "You can't look patients in the eye and reassure them that [these concerns] are nothing."

Hassan disputes any interpretation of the data that connects Celebrex with heart problems. In fact, the JAMA authors concede there is no proof of a problem yet. Carrie S. Cox, president of Pharmacia's prescription-drug business, says Bextra will be aimed at patients who have flare-ups of severe arthritic pain, while Celebrex will be targeted to patients who suffer less severe, chronic aches and inflammation. There is a catch, however. The FDA has not approved Bextra for acute pain. That could limit the drug's use in patients with problems such as sprains or strains. Raymond James Associates analyst Michael Krensavage says it could be tougher to position Bextra as more potent than Celebrex, since Celebrex is approved for use in acute pain.

The FDA's stance on Bextra was disappointing, the company concedes. But Hassan insists the drug will be a big seller because it was approved specifically for severe arthritis pain. "Bextra is a very powerful product, and doctors are going to hear that from their patients very quickly," he argues. In fact, Pharmacia got a recent boost thanks to a setback at rival Merck & Co. Merck pulled the application for its next-generation Cox-2, Arcoxia, in March, saying it wants time to submit more data. That's one less worry for Pharmacia.

The company does have other drugs in the pipeline. Eplerenone, a promising hypertension drug, seems set to launch next year. But two supposedly imminent launches--the injectable painkiller parecoxib, and Xalcom, a glaucoma drug--have been held up at the FDA. The agency is seeking more data before it signs off on them.

But even if all those products come through, Pharmacia could still be a takeover target. Ironically, that's because of some good news: The company faces no imminent patent expirations on its largest products, as do rivals such as Merck (MRK) and Bristol-Myers Squibb Co. (BMY) That makes Pharmacia attractive to bigger rivals and could help put it into play, reasons T. Rowe Price portfolio manager Dr. Kris H. Jenner. Most of the takeover speculation on Wall Street centers on whether Pfizer Inc. (PFE), Pharmacia's marketing partner on Celebrex, might make a run at the company. Pfizer CEO Henry A. McKinnell says his company doesn't need a deal. Others wonder if Pharmacia might hook up with Wyeth (WYE), formerly American Home Products Corp., which tried to do a deal with Monsanto before Pharmacia did.

Hassan insists that Pharmacia is well positioned to thrive on its own. And he declines to comment on any deal speculation. "We are happy with our business model," he says. Now he needs to convince disappointed investors to hang in there while he works on making that model a success. By Amy Barrett in Philadelphia


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