SmithKline Tries To Prosper Without Partner After Scuttled Mergers
July 09, 1998 12:43 PM
By Michael Reid and Lucy Farndon
LONDON -(Dow Jones)- Two broken merger plans
have British pharmaceuticals maker SmithKline
Beecham PLC thinking it might be better off going it
alone. The company's chief executive is publicly saying
as much, and stock watchers agree the company doesn't
have to have a partner to be a good investment.
Even without a merger, SmithKline's strong product
pipeline should comfort holders, analysts say, and its
shares may even be a safe haven if Britain's economy
heads into recession. The same analysts also expect
SmithKline to continue its long-term outperformance of
its London peers based on earnings potential alone.
Yet some of the big banks are reluctant to tell their
clients to go buy new SmithKline shares, pointing out
that the stock's near-term shine has been dulled
somewhat by its own recent good fortunes. And they
worry that any big gain in SmithKline shares in the days
and weeks ahead will be based on market rumors of
another merger - and thus be fleeting.
SmithKline has spent the past year or so searching for a
suitable mate, flirting first with Glaxo Wellcome PLC,
then with American Home Products Corp. and then
reviving the effort to join up with Glaxo. The Glaxo talks
resulted in a $70 billion merger plan in January that was
scuttled a few weeks later amid unresolvable conflicts in
the executive suite.
The consensus thinking now runs something like this:
SmithKline Beecham is getting expensive, so it isn't for
everybody. But if you already hold it, keep it for what
look like guaranteed gains in the long run.
Indeed, the stock has climbed 22% in the last five
weeks
Among the worriers, some brokers are reconsidering
their "buy" stances purely on value. Wednesday,
Deutsche Morgan Grenfell downgraded SmithKline to
"neutral" from "overweight" because of its recent price
outperformance and set a 730-pence year-end target.
Though growth and defensive shares are likely to be the
best performers if the economy slows, "we (still) feel the
stock no longer offers value to the shareholder," DMG
reasoned.
Another analyst at a European investment house agreed
that SmithKline shares were "looking fully valued," with
a price/earnings ratio now twice the market average. "I
wouldn't encourage a buy," he said.
Yet the price is still comfortably within the stock's
"in-play" range of 740-805 pence seen earlier this year
when SmithKline was talking with American Home and
Glaxo.
There is no denying merger speculation has contributed
greatly to SmithKline's recent market performance. And
despite repeated denials of a Glaxo merger revival by
SmithKline Chief Executive Jan Leschly, market players
continue to hold out hope.
Last month the market even speculated that Leschly
might step aside with a $100 million golden handshake
to smooth the path for a fresh attempt at the Glaxo
marriage. SmithKline's reaction to that rumor was curt:
"It's business as usual. Jan Leschly was at his desk
yesterday ... and he's planning to be there today. He has
no plans to resign," the company said at the time.
Nevertheless, the bid rumors have persisted, and this
week there has been talk in London of a possible tie-up
with U.S. drug giant Merck & Co. (MRK).
SmithKline wouldn't comment specifically on the Merck
rumor, but a spokesman said Thursday that "it is highly
unlikely that the company will be involved in a merger."
"A merger with Merck is extremely unlikely," said the
analyst at the European investment bank.
He said the speculation has been fueled by Merck's exit
of two joint ventures, which left it with a lot of cash: the
$2.6 billion sale of its 50% stake in DuPont Merck
Pharmaceutical Co. to DuPont Co. (DD) and the exit of
the Astra Merck Inc. joint venture with Sweden's Astra
AB (A) that is guaranteed to bring Merck billions more.
But the unnamed analyst still doesn't think SmithKline is
the one for Merck.
That doesn't mean there isn't something still afoot at
SmithKline, though. Some company watchers are
looking for an alliance rather than outright merger.
"(SmithKline) has been in play twice that the market
knows of, with AHP then with Glaxo, so clearly it is
looking for some kind of strategic alliance," said Martin
Evans, head of research at brokerage Sutherlands Ltd.
"As health-care costs rise, one way to maintain earnings
growth at historically high levels is to be highly
aggressive in looking to cut costs," Evans added. "The
best way to do that is through a merger, where
companies can pool their (research and development)."
Even if the U.K. company doesn't pool its R&D with
another's, it should still be able to get new drugs and
treatments to market.
"The product pipeline is clearly attractive," Sutherland's
Evans said.
The company recently described its pipeline as "deep,
diversified and innovative."
Sales of some new products, such as Parkinson's
disease treatment ReQuip and heart drug Coreg, have
been more sluggish than anticipated.
But diabetes treatment Avandia - currently in late stage,
or Phase III, trials - is expected to offset these hiccups.
Analysts reckon the drug stands a good chance of
getting to market and generating peak sales of over two
billion pounds. The drug belongs to a new class of
diabetes drugs that reduces blood sugar by enhancing
the body's sensitivity to insulin.
-By Michael Reid; 44-171-832-8163; mreid@ap.org
-By Lucy Farndon; 44-171-832-9643;
lfarndon@ap.org
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