British drug giants join rush to merge

"I think that eventually about six to 10 companies will own the pharmaceutical market."

--- HEMANT SHAH, industry analyst

By BRUCE STANLEY

The Associated Press

LONDON --- Glaxo Wellcome's planned acquisition of rival drugmaker SmithKline Beecham would do more than create the world's largest pharmaceutical company.

The deal, announced Monday and worth about $76 billion in stock, is a clear sign that the merger trend now reshaping other industries is accelerating in the still-fragmented drug business.

Just last week, Pfizer emerged as the likely winner in a battle with American Home Products for U.S. drugmaker Warner-Lambert, while Monsanto is in the process of merging with Pharmacia and Upjohn. Industry analysts predict other blue-chip names, including Eli Lilly, Schering Plough, Novartis, Bristol-Myers Squibb and even merger- averse Merck, won't be far behind.

"I think that eventually about six to 10 companies will own the pharmaceutical market," said Hemant Shah, an independent industry analyst based in Warren, N.J.

That is a far cry from the mosaic of firms currently vying for a few cents of each dollar consumers spend on medicines.

Compared to other industries, the pharmaceutical business still has many competitors. The combined Glaxo and SmithKline would control just 7.3 percent of global sales, although individual companies dominate treatments for several specific conditions such as allergies and high cholesterol.

Analysts say consolidations are gathering momentum because drugmakers are pinched between the ballooning costs of developing new drugs and the demands of investors and shareholders that they deliver double-digit growth in profits.

"To succeed in this industry, you must be top-tier, and preferably, you must have market leadership," Glaxo Wellcome chairman Sir Richard Sykes told a news conference.

Glaxo Wellcome and SmithKline Beecham said their union would yield $1.6 billion in annual savings after three years. They said job cuts were expected, but they still were deciding where to make them.

The two British-based companies plan to keep their corporate headquarters in London but open a new operational headquarters in or near New York.

SmithKline currently has a research and development unit in Philadelphia and a nonprescription drug business in Pittsburgh. Glaxo's American operations are headquartered in Research Triangle Park, N.C.

Their union comes two years after previous merger talks collapsed in a fight over which executives would run the company.

The apparent success of Pfizer's hostile bid for Warner-Lambert gave new impetus to the idea, said Kevin Wilson, an industry analyst at Salomon Smith Barney in London.

"Pfizer-Warner-Lambert has acted as a catalyst," he said.

Glaxo SmithKline would have worldwide pharmaceutical sales of an estimated $24.9 billion, based on 1998 annual figures. But a combined Pfizer-Warner-Lambert would be close behind with a 6.7 percent market share, and it would be gaining fast, Wilson said.

American Home Products --- the apparent loser in the fight for Warner-Lambert --- has failed three times to combine with other drug companies and looks like an increasingly attractive takeover target for a European company aiming to expand its U.S. pharmaceuticals business, said Andy Penman, an analyst at London brokerage Greig Middleton.

Even Merck, which has publicly sworn off mergers in the past, might have its hand forced if it wants to keep up with more financially powerful rivals.

"There's no question that Merck is the best in the business in terms of developing new drugs, but it's going to be very difficult to compete when there are companies with R and D budgets that are twice that of Merck," said Shah, the New Jersey-based analyst.

Glaxo's strength lies in its top anti-migraine drug, Imitrex, and in treatments for asthma and viral infections, including HIV.

SmithKline's top products include the antibiotic Augmentin, the antidepressant Paxil and a new diabetes drug, Avandia. It also has a strong vaccines business.

But both firms are feeling pressure because their top drugs are facing expiration of their patents, allowing cheaper generics into the market.

Glaxo's leading ulcer drug Zantac lost its patent protection in 1997, and SmithKline's lucrative Augmentin will lose its patent in 2002.

Merge

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