Pharmacia & Upjohn Financial Flexibility

Newly-created Swedish/American Pharmacia & Upjohn Inc, which becomes the ninth largest pharmaceutical company worldwide with what would have been combined sales of nearly $7 billion last year (Marketletters passim), looks like a good investment opportunity to analysts Jami Rubin and Glenn Novarro at Schroder Wertheim, who have upgraded their rating on the group.

The analysts forecast rapid earnings per share growth of 16% compounded annually over the next three years, compared to flat EPS for Upjohn and mid-single digit growth for Pharmacia, driven by $500 million in annual cost savings by 1997/8.

Beyond the cost-cutting story, the analysts say Pharmacia & Upjohn's low debt-to-capital ratio of 9% provides it with one of the most underleveraged balance sheets in the industry. This added muscle gives its management the opportunity to consider a major acquisition - of the scale of $9-$10 billion - or to pursue a substantial share repurchase program. In a statement from the company, chairman Jan Ekberg and president and chief executive John Zabriskie note that the merger is "a starting point," and they do not intend to remain in ninth position. The analysts add that if management capitalizes on these opportunities, mid-teens growth could be extended beyond 1998.