Glaxo, SmithKline Agree to Merge
$76 Billion Deal Would Create the World's Largest Drug Company
By T. R. Reid and Ariana Eunjung Cha
The marriage of Glaxo Wellcome PLC and SmithKline Beecham PLC would produce a new giant to be called Glaxo SmithKline, with $25 billion in annual sales and a stock market capitalization of $189 billion. With a product line ranging from drugs such as Zantac (for ulcers) and Relenza (for flu) to Nicorette gum and Aquafresh toothpaste, the new company would be a "real drug powerhouse," SmithKline chief executive Jan Leschly said yesterday.
If the $75.7 billion stock deal goes through--a likely prospect, since stockholders have pushed for it, and both boards approved it unanimously over the weekend--Glaxo SmithKline would be the biggest drug company in the world and the No. 1 seller of prescription drugs in the United States, the world's largest pharmaceutical market.
The new company would be significantly larger than France's Aventis SA, now the largest drugmaker, formed last year by the merger of Rhone-Poulenc SA and Hoechst AG. It would even be bigger than the company that would be created if Pfizer Inc.'s attempt to take over Warner-Lambert Co. is successful. Both Pfizer and Warner-Lambert said last week that they were negotiating a possible merger.
As their names suggest, Glaxo Wellcome and SmithKline Beecham are both products of earlier mergers. The two British firms reportedly came close to merging in 1998, but the deal fell apart, reportedly because of a dispute over whose chairman would run the show. Leschly, one of the combatants then, is due to retire this spring, and that eventuality may have revived the merger talks.
In any case, the companies said, a merger is necessary because research and marketing in the drug industry have become so costly that only the huge can compete.
"It is inevitable that consolidation has to take place within this industry," said Sir Richard Sykes, the Glaxo Wellcome chairman, who will take the title "nonexecutive chairman" of the new company. With the costs involved in molecular genetics and efforts to understand the human genome, he explained, "there is a direct relationship between what you spend on research and what you get out in sales."
Analysts said the Glaxo-SmithKline Beecham agreement is a signal that the pharmaceutical giants are finally recognizing that biotechnology is the future of medicine.
In the past, large pharmaceutical companies were basically chemical factories. Researchers synthesized tens of thousands of molecules and tested each of them in the hopes that one would be able to help control disease symptoms.
"Drugs were discovered by serendipity," said Viren Mehta, an analyst with Mehta Partners. "It was a crude science."
Today, advances in scientists' understanding of the human genome--the blueprint for life--means in theory that companies can first pinpoint what causes a disease and then manipulate genes to cure patients.
But many big pharmaceutical companies have just recently entered this field and now lag far behind those of their upstart competitors, analyst say. In 1998, for instance, big pharmaceutical companies developed only one of the six biotechnology drugs approved by the U.S. Food and Drug Administration; the rest were made by companies such as MedImmune Inc. of Gaithersburg and biotechnology grandfather Genentech Inc. of South San Francisco, Calif.
The merger is a chance for Glaxo to combine its expertise in diseases such as AIDS with SmithKline Beecham's aggressive efforts in pharmacogenomics, a science that attempts to tailor drugs to individuals. With their combined resources and capital, analysts say, the giants will be able to purchase the expensive computer equipment necessary to sequence DNA and compete in this field.
"Scale is necessary for these large companies to be able to participate in the new science, and consolidation provides that," Mehta said.
Mehta added that he believes the big industry mergers will in the long-term benefit biotech upstarts, such as Rockville-based Human Genome Science Inc., which have made a business out of partnerships with large pharmaceutical companies. As a result of consolidation, the larger companies will have more money to devote to such enterprises, Mehta predicted.
"We will outspend the industry" on research and development, said Jean-Pierre Garnier, SmithKline's chief operating officer, who will take over day-to-day management of the combined company.
To keep the favor of financial analysts, the company will also have to produce what Sykes called "synergies"--a term often associated with "mass layoffs" following a merger. Britain's Manufacturing, Science and Finance Union estimated that the combined Glaxo SmithKline would lay off up to 15,000 of its 110,000 employees around the world.
Yesterday, Garnier would only say "we haven't clearly established the number of job eliminations." But he said the merger would produce $1.7 billion in cost savings in the first three years.
Both Glaxo and SmithKline are based in Britain; the nationality of the new company will be less easy to discern. The combined company will have a main address in Britain, but will set up an "operational headquarters" in the United States. SmithKline at present has research operations in the Philadelphia area, and Glaxo maintains labs in North Carolina. But the new headquarters is likely to be in the New York suburbs, Sykes said.
The management ranks will be equally borderless. Garnier, the designated chief executive, was born in France, lives in the United States, and calls himself a "citizen of the world." Tadataka Yamada, who will head research, was born in Japan and educated in the United States. John Coombe, who will serve as chief financial officer, is British but will presumably move to the new U.S. headquarters.
Executives in both companies said the deal is a "merger of equals," but the transaction could also be viewed as a takeover by Glaxo, the larger firm. Glaxo Wellcome stockholders will receive about 59 percent of the shares in the new Glaxo SmithKline.
In trading in London yesterday the stock of both companies fell slightly. This may have been an instance of the familiar pattern "buy on rumor, sell on news." Both stocks had risen sharply Friday, when rumors of the merger raced through the market.
Correspondent T.R. Reid reported from London and staff writer Ariana Eunjung Cha from Washington.
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