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Glaxo, SmithKline to merge

LONDON: Glaxo Wellcome Plc and SmithKline Beecham Plc said on Monday they had agreed to merge to form the world's biggest pharmaceuticals group worth 114 billion pounds ($187 billion).

The two British companies - which tried and failed to merge two years ago - said the deal would give them the scientific and financial clout to be the most efficient drug discovery and marketing machine in the industry.

But shares in both firms fell back on disappointment that projected cost savings were not greater.

The new company, to be known as Glaxo SmithKline, will have a market share of 7.3 percent, well ahead of its nearest rivals. It will be headquartered in London but largely run from a new operational base in the United States.

The merger is structured as an offer by Glaxo for SmithKline, with 0.4552 new shares swapped for each SmithKline share, valuing the transaction at 46.5 billion pounds at Friday's closing prices.

Glaxo shareholders will own 58.75 percent and SmithKline investors 41.25 percent of the new group. The merger is expected to become effective in the summer.

Jean-Pierre Garnier, currently number two at SmithKline, takes the key role of chief executive while Glaxo head Richard Sykes will be non-executive chairman.

Glaxo's John Coombe will be finance director and SmithKline's Tadataka Yamada head of research.

Robert Ingram, currently Glaxo chief executive, will become chief operating officer and president of pharmaceuticals, while Glaxo R&D head James Niedel takes on the role of chief science and technology officer.

"The new organisation...will be at the forefront of an industry which will continue to undergo rapid scientific and economic change," Sykes said.

SHARES FALL AS COST SAVINGS DISAPPOINT

Investors had welcomed the deal when the two companies confirmed they were in talks on Friday but shares in both fell as estimated cost savings proved lower than expected and management gave no forecasts of future earnings growth.

The two firms said they expected to achieve annual cost savings of 1.0 billion pounds before tax within three years, of which 250 million will be reinvested in research. Before the announcement, analysts had pencilled in savings of around 1.2 billion.

The total cost of achieving these savings will be 1.1 billion pounds.

By 1213 GMT Glaxo was down 3.7 percent at 17.50 pounds, while SmithKline was off 6.7 percent at 790 pence, in line with the value of the Glaxo offer.

"I think there is an overall disappointment on level of cost savings," said Oliver Trefgarne, industry analyst with Nomura.

Paul Diggle of SG Securities, who has a "buy" on both stocks, agreed but added the merger was about more than cutting costs and added he still expected significant earnings enhancement going forward.

He sees earnings growth of 13 percent in the current year rising to nearly 20 percent in the next two before falling back to 14-15 percent in 2003 as cost savings work their way through.

Merrill Lynch analysts said they were forecasting earnings growth of 15-20 percent but added that feedback from the companies' meeting with analysts suggested growth could be lower than initially expected.

Garnier told reporters he foresaw no major regulatory hurdles either in Europe or the US, given the limited product overlap between the two groups which have combined annual sales of 15 billion pounds and a research budget of 2.4 billion.

"It is too early to speculate what the FTC (US Federal Trade Commission) and the European Commission will demand of the new company but that should not be a major obstacle to the completion of the merger," he said.

The planned merger will bring together mainly complementary product lines, including treatments for major diseases such as asthma, diabetes, AIDS and depression, plus consumer products such as Aquafresh toothpaste.

LIMITED PRODUCT OVERLAP

Areas of overlap where the new group may be forced to make disposals include herpes treatment, anti-nausea products used in cancer treatment and diabetes, where Glaxo has a drug in development competing with SmithKline's Avandia.

Garnier denied there were any immediate plans to sell SmithKline's nutritional drinks business which includes Ribena, Lucozade and Horlicks.

The companies said some jobs losses were inevitable but there no plans to close any R&D centres.

However, British unions fear the tie-up will mean up to 15,000 job losses worldwide out of a workforce of 107,000 and they are worried about the shift of operations to the US

"Staff have been kept completely in the dark and we need to now know how a company whose chief executive is going to live in the United States is going to have the same commitment to a company that has traditionally been the jewel in the British pharmaceutical crown," Roger Lyons, general secretary of the MSF union, told BBC television.

Based on Friday's close, Glaxo was capitalised at around 66 billion pounds and SmithKline at about 48 billion.

In terms of market value, the new combination will compete with BP Amoco Plc, currently worth around 108 billion pounds, for the position of Britain's largest company.

FURTHER M&A SEEN IN DRUGS SECTOR

The merger comes at a time of rapid consolidation in the still fragmented pharmaceutical industry as companies seek to spread the mounting costs of finding, developing and marketing new medicines.

Pharmacia & Upjohn Inc and Monsanto Co. recently announced merger plans while Pfizer Inc. is attempting to take over Warner-Lambert Co.

Sykes said the birth of Glaxo SmithKline would accelerate the need for competitors to do deals. "It is going to change the landscape and more consolidation will take place," he said.

And he left open the possibility that Glaxo SmithKline would itself return as a predator in the fast-changing industry, commenting: "We certainly will be very cognisant of what is going on in the environment around us."

In February 1998, a planned merger between Glaxo and SmithKline foundered because of a clash between Glaxo Executive Chairman Richard Sykes and SmithKline Chief Executive Jan Leschly over who would run the group.

Since then Leschly has announced plans to retire in April 2000, while Sykes is contemplating a role in academia after he reaches the age of 60 in 2002.

SmithKline Beecham is being advised by Morgan Stanley while Goldman Sachs is working for Glaxo.-Reuters