It came with all the familiar rhetoric that swirls about the merger of giant firms. The new company would be the largest of its kind. Spend more money than ever on research and technology. Lead the way in the introduction of new products.

So went the announcement last Monday that Glaxo Wellcome PLC and SmithKline Beecham PLC would become a single pharmaceutical company with combined global sales of $25 billion a year and a market capitalization of $189 billion.

Glaxo Chairman Sir Richard Sykes described the new firm glowingly as "a global powerhouse."

The marriage of the two British firms, set to take effect this summer, is about more than research on new wonder drugs, however. It is a milestone in a long string of consolidations in the global pharmaceutical industry, mergers aimed at pleasing investors, sustaining a streak of remarkable profits and gaining a bigger presence in the lucrative U.S. market.

More than two dozen drug companies have merged in recent years, including Astra AB and Zeneca Group PLC, and Rhone Poulenc Rorer Inc. and Hoechst AG. After American Home Products Corp. and Warner-Lambert Co. announced late last year that they were talking, Pfizer Inc. jumped in with a larger offer for Warner-Lambert. And now Procter & Gamble Co. is considering whether to join the bidding war.

Health-care analyst Hemant Shah believes the number of major drug companies will decline from about 35 now to a dozen or fewer over the next decade, extending a pattern of consolidation that began in the mid-1980s when there were about 80 companies.

That's because Wall Street will continue to demand that they maintain the sorts of profits they're making now, something the giant companies can only deliver by producing "blockbuster drugs"--those that earn $1 billion or more, he said. Only the largest companies can afford to develop such drugs.

But to placate investors, the companies have to pad the bottom line by finding efficiencies. "The only way to do that is through consolidations," said Shah, an analyst at HKS & Co. "It's going to accelerate. Now the consolidation is going to involve big giants."

The American market for prescription drugs is the world's largest. Jean-Pierre Garnier, chief executive-designate of the the new Glaxo SmithKline, said he will move the combined company's operational headquarters to the United States. He said both companies are proud of their British roots. "But a world-class competitor cannot operate all its functions from a market that represents only 6 percent of its existence."

Since 1990, prescription drug sales in the American market have skyrocketed from about $38 billion a year to more than $100 billion, far exceeding the growth in other parts of the world, according to IMS Health. Profit margins are great here, too, because the United States is the only industrialized country without some form of price controls.

The American market is also the only one that permits pharmaceutical companies to market directly to the consumer. Television and print advertising of drugs has jumped to more than $1 billion a year since the Food and Drug Administration relaxed its rules in 1997. And surveys have found that the most heavily advertised drugs are the ones that show the greatest increase in sales.

A British research group projected last year that the increase in U.S. sales would continue, because of the marketing, the popularity of "lifestyle drugs" such as Viagra, the aging population and the increased use of drugs as a cost-effective alternative to other treatments such as surgery.

"All the music has been playing here in the U.S. That is one of the big drivers," according to Sven Borho, an analyst for OrbiMed Advisors. "They are desperate to get a bigger and bigger piece of the U.S."

Industry officials say the mergers give the companies the deeper financial resources they need to develop new drugs. The combined firms also yield savings by eliminating redundancies, they add. For example, officials at Glaxo Wellcome and SmithKline Beecham--which have about half their sales in the United States--estimate they will save about $1.7 billion in annual pretax cost after the third year.

Critics worry the new giant companies will gain undue influence with regulators, Congress and the marketplace. They say consumers are shortchanged because the companies focus their attention--sometimes obsessively--on boosting profits and keeping investors happy, with little thought of passing savings along. Some complain that the recent surge in direct-to-consumer marketing prompts individuals to buy expensive drugs they may not need.

"In this market, it really is consumer versus Wall Street," said Kevin Schulman, director of the Center for Clinical and Genetic Economics at the Duke Clinical Research Institute in North Carolina. "And if it's good for Wall Street, it's coming out of the consumer's pocket."

The brand-name pharmaceutical giants are "trying to move to take a larger role in the transformation of the health-care delivery system," Schulman added. "The companies are deciding they can't implement these new technologies and discoveries unless they have broader access to policymakers and the public, and more sway."

At Blue Cross Blue Shield, which insures almost 75 million people, officials fret about the impact of mergers on drug expenditures. Throughout the 1990s, they and other insurers struggled to keep up with the introduction of new, expensive and heavily marketed drugs that help boost the average cost per prescription from $27 in 1993 to $38 in 1998, the most recent data available.

The fear is that larger companies will hang on to their profits, rather than passing along savings to consumers and insurers, said Scott Serota, Blue Cross's acting president and chief executive.

He also expressed growing unease about the impact of direct-to-consumer advertising. In many cases, he said, the ads are creating unreasonable expectations and putting strain on visits to doctors' offices. "Those ads have created a different dynamic between physicians and patients," Serota said. "Patients are not in a position to know if those pharmaceuticals are appropriate. . . . That is problematic to us."

The wave of mergers comes at a delicate time for the industry, which has come under fire for the large profits it has registered in recent years. Industry officials are trying to finesse their way through a thicket of new state and federal proposals for price controls and other measures that could have long-lasting impact on pharmaceutical profits.

Most pressing is a Clinton administration proposal for a new prescription-drug benefit for Medicare recipients. The administration estimates that about a third of the nation's 39 million Medicare recipients receive no drug coverage to help offset annual price increases of 10 percent or more. Democrats in Congress have joined that effort and Republicans say they recognize the popularity of the idea and are searching for ways to address it.

After resisting such proposals for months, industry officials softened their position recently. Television ads that complained about keeping the government "out of my medicine cabinet" have been replaced with more conciliatory messages about seeking a solution to the problem.

Alan F. Holmer, president and chief executive of the Pharmaceutical Research and Manufacturers of America, the main trade association for the prescription drug industry, said his members need to maintain a strong voice in Washington because the stakes are very high.

The drug industry needs to preserve the nearly unfettered environment it has enjoyed in the United States, he said, including the freedom to set prices. Otherwise spending on research and development will plummet, leading to fewer new drugs for patients. "When price controls are imposed, the lights in the laboratories go out," Holmer said in an interview.

According to industry estimates, annual spending on research and development increased from $6.8 billion a decade ago to more than $20 billion now.

"This industry does have a very big stake in what happens," said Meredith Art, a spokeswoman for the Pharmaceutical Research and Manufacturers of America, or PhRMA. She estimated that it takes the companies about $500 million and at least a dozen years to develop a new drug. "Drug development is very time consuming, risky and costly."

To expand their markets and fend off unwanted regulations, pharmaceutical companies have become one of Washington's most generous special-interest groups.

The industry donated more than $13 million to Congress in the 1997-98 election cycle, most of it to the GOP, according to the databases maintained by the Center for Responsive Politics. Its spending on Washington lobbyists reached almost $74 million in 1998, more than any other industry except insurance, the center found.

Glaxo Wellcome spent $3.8 million on lobbyists and SmithKline Beecham spent $2.6 million in 1997, the first year the data about lobbyists was available. The totals were slightly lower in 1998.

In 1996, Glaxo Wellcome hired 50 freelance lobbyists to assist five full-time lobbyists in lobbying on a bill to "reform" the FDA by speeding up the drug approval process, according to the Center for Public Integrity, which tracks campaign finances.

Spending on politics pales in comparison to the industry's spending on marketing. Besides the increase in direct-to-consumer advertising in the past few years, drug companies continue to spend heavily on selling their brands to the physicians who write the prescriptions. The money spent on visits to doctors rose 22 percent in 1998, to $3.4 billion, according to IMS Health.

Mike Krensavage, an analyst at Brown Brothers Harriman & Co., said the new Glaxo SmithKline will be a clear leader of the industry. But bigger isn't always better for consumers, he said.

To please investors, the company will have to develop blockbuster drugs. In some cases, that's going to require the heavy promotion of expensive, highly refined medication that individual patients may not really need. "They're hunting mice with bazookas," Krensavage said. "They have tremendous marketing clout."

Sidney M. Wolfe, director of the Health Research Group at Public Citizen, an advocacy group, said he worries about the impact of "an unprecedented amount of centralization" in the industry.

He believes the cost savings touted by Glaxo Wellcome and SmithKline Beecham will never be passed on to consumers. "Quite the opposite. There have been an unprecedented number of drugs that have been introduced at prices that would have been unimaginable before."

Some analysts described the coupling of Glaxo Wellcome and SmithKline Beecham as a defensive measure or as a way to bolster their stock prices. But in announcing the deal, company officials focused on the potential the merger would create for breakthroughs in the laboratory and in sales.

Officials said the merger would give the company, to be known as Glaxo SmithKline, a 7.3 percent share of the world's market for prescription drugs. While that may not seem like a large proportion, it will be far more than the closest competitor, AstraZeneca, which has a 4.6 percent share.

Glaxo SmithKline would lead in several categories of drugs, including anti-infectives, respiratory treatments and vaccines. It also would have the largest research and development budget--more than $3.5 billion a year--and a combined sales force of 7,200.

Glaxo also would benefit from SmithKline's over-the-counter drug-marketing savvy, at a time when the companies plan to blitz consumers with new ads and promotions. It has been second only to Schering-Plough Corp. lately in spending on direct-to-consumer marketing. From August to January, it spent almost $140 million pitching drugs such as Flovent, an asthma drug, and Valtrex, which treats herpes, according to IMS Health.

"With this merger we are bringing together two world-class organizations with complimentary technologies and scientific knowledge," said Glaxo's Sykes. He said he is excited about the prospect of selling more drugs on the Internet and about developing more gene-based drugs, which he called "a field of gold."

If the new company delivers on its promises, Serota, the chief at Blue Cross Blue Shield, will be among the first to applaud. But for now, he's waiting to see what the impact will be. "It has the potential to be a plus," Serota said of the merger. "But the evidence is in the execution."

Popular Pills

Here are the top-selling drugs in the United States in 1999:

1. Prilosec (anti-ulcerant)

Astra Zeneca; $3.16 billion

2. Prozac (antidepressant)

Eli Lilly; $2.04 billion

3. Lipitor (cholesterol reducer) Parke-Davis; $2.13 billion

4. Zocor (cholesterol reducer) Merck; $1.53 billion

5. Epogen (for kidney failure)

Amgen; $1.63 billion

Source: IMS Health