Posted by Therese B. on January 17, 2000 at 14:08:14:
Glaxo, SmithKline to tie
U.K. firms plan merger to create world's largest drug maker, worth $177B
January 17, 2000: 7:28 a.m. ET
LONDON (CNNfn) - Giant British pharmaceutical companies SmithKline Beecham and Glaxo Wellcome agreed to merge Monday in a stock swap worth $72 billion that would create the world's largest drug maker.
Two years ago, merger talks between the two companies fell apart over management differences. But success in the latest round of negotiations reflects the increased pressure on drug makers to exploit what analysts term a "biotechnology revolution" in developing the next generation of leading pharmaceutical products.
SmithKline shareholders, who will end up with 41.25 percent of the new company, are being offered 0.4552 shares in the new company for each of their SmithKline shares. Glaxo investors will swap their shares on a one-for-one basis and will own 58.75 percent of the combined company. The new company, to be called Glaxo SmithKline, will list its stock in London and New York.
"This is a good deal, creating a powerhouse of a company," commented analyst Stewart Adkins of Lehman Brothers.
"This is all about freeing up resources to compete with the leading American companies in marketing and R&D," he added, citing Pfizer as an example of a company that is rapidly increasing its research and development spending.
The merger would create a company worth 108 billion pounds ($177 billion), with combined 1998 sales of 15 billion pounds and a 7.3 percent share of global pharmaceutical sales. It would have strong positions in such key areas as asthma, HIV and diabetes treatments, as well as antibiotics and anti-cancer drugs.
Glaxo SmithKline will have almost 20 drugs with annual revenues of more than 250 million pounds apiece. The company's two leading compounds by sales - both developed by SmithKline -- are Seroxat/Paxil, an anti-depressant, closely followed by Augmentin, which combats infection. Glaxo's best seller, according to 1998 figures the companies released Monday, remains ulcer treatment Zantac, formerly the world's top-selling drug but now no longer protected by patent. Analysts said Zantac is likely to be well down in the rankings for 1999.
The tie-up is the latest of a series of mergers in the global pharmaceutical business, in which companies have become increasingly eager to unite to fund ever higher levels of research and development. The combination would be far bigger than the current world leader, Aventis, formed by Rhone-Poulenc's merger last year with Hoechst, as well as the company Pfizer (PFE) will create if it succeeds in its hostile offer for Warner-Lambert (WLA). That bid is designed to break up Warner's attempt to merge with American Home. Pharmacia & Upjohn (PNU) and Monsanto (MTC) also recently announced plans to merge, and last year Britain's Zeneca and Sweden's Astra joined forces to form AstraZeneca (AZN), currently ranked world No. 2.
"This must put everybody else under pressure," said a London-based analyst who spoke on condition of anonymity. "This company will have almost unparalleled marketing power."
Adkins of Lehman Brothers agreed that more deals are likely to follow: "All the remaining players with aspirations to be in division one must be considering their response."
Glaxo and SmithKline said their combination would generate annual cost savings of 1 billion pounds after the third year, of which 25 percent will be reinvested in research and development. The joint company's annual R&D budget will be approximately 2.4 billion pounds.
Job cuts in the 107,000-strong combined workforce are "inevitable" the company said, although it's too early to say how many jobs will go, and where.
The new company will be headquartered in London but have a new operational base in the United States.
A big obstacle to a smooth merger will be removed when SmithKline chief executive Jan Leschly steps down in April. Animosity between Leschly and Glaxo executive chairman Richard Sykes was the main hurdle to an earlier pact.
This time, the companies have come to an agreement on a management structure, with Glaxo's Sykes taking the role of non-executive chairman at the new company, and the chief executive's slot going to Jean-Pierre Garnier, the chief executive-in-waiting at SmithKline.
The new board will be evenly split between ex-Glaxo and SmithKline members, and analysts told CNNfn.com that the chances of the deal failing this time round because of management incompatibility are "fractional".
Glaxo has a market value of 64 billion pounds, while SmithKline's capitalization is over 43 billion pounds.
In the six months ended June 30, Glaxo reported sales of 4.1 billion pounds, up 6 percent, and a 7 percent increase in pretax earnings to 1.33 billion pounds.
In the same period, SmithKline's sales rose 11 percent to 4.2 billion pounds and pretax earnings rose 16 percent to 928 pence a share.
Glaxo and SmithKline are likely to face regulatory scrutiny in the event of a merger. However, analysts said although regulators may require some asset disposals, "they won't be dealbreakers".
The new company will rival BP Amoco (BPA) for the title of Britain's largest company.
After sharp rises in their respective stock prices Friday when the talks were confirmed, investors were less impressed Monday, with Glaxo (GLXO) stock slid 4 percent to 1,744 pence in midday London trade, and SmithKline (SB-) dropping 73 percent to 786 pence. Analysts attributed the falls to the fact that the companies failed to come up with any additional positive surprises including job cuts and future earnings growth.