Glaxo Wellcome Can't Shake Major-Merger Speculation: Spotlight
Bloomberg News
August 9, 1998, 11:53 a.m. ET
Glaxo Wellcome Can't Shake Major-Merger Speculation: Spotlight
London, Aug. 9 (Bloomberg) -- Glaxo Wellcome Plc, the
world's second-biggest drugmaker, is determined never to return
to the days when blockbuster ulcer treatment Zantac generated
nearly half its sales and a majority of profit.
Robert Ingram, the 55-year-old chief executive, doesn't
hesitate when asked where Glaxo, which failed earlier this year
in its effort to merge with rival SmithKline Beecham Plc, would
like to bolster the range of drugs it sells.
''The market we really are not in is cardiovascular,'' he
said, pointing to an area dominated by Merck & Co. and Warner-
Lambert Co. of the U.S. and Zeneca Group Plc of the U.K.
While Ingram didn't say how Glaxo plans to expand into the
$36 billion market for drugs that treat high blood pressure and
other cardiovascular diseases, he and other executives say one
route is to buy or merge with a rival established in the field.
''If others do, we will,'' said Finance Director John Coombe.
Such statements, repeated often last week when Glaxo posted
better-than-expected first-half earnings, raised speculation that
Glaxo is actively looking to dramatically build its share of the
world's $244 billion drug market, where no one company holds more
than a 5 percent share.
While Glaxo is building sales with new drugs to treat AIDS,
central nervous system disorders and respiratory disease, thus
replacing its previous reliance on Zantac, its failed approach to
SmithKline in February reinforced the view that Glaxo may lead a
new round of industry consolidation.
'Open to Idea'
''I would not be at all surprised if Glaxo were to make a
move,'' said Paul Diggle, an analyst with SG Securities. ''They
have clearly stated they are open to the idea.''
Diggle and other analysts compare the evolution of the drug
industry to that of computers or automobiles, where falling trade
barriers and stiff global competition forced dozens of companies
to merge into a handful. Five carmakers, for instance, control
half the world's market.
The consolidation that created major companies like Glaxo
Wellcome, Bristol-Myers Squibb Co., SmithKline Beecham, Hoechst
AG's Hoechst Marion Roussel unit and Novartis AG in the last
decade has slowed in the last year. Analysts attribute that to
higher prices for drugs in the U.S., the world's largest and most
profitable market. Roche Holding AG's $10.2 billion takeover of
Corange Ltd., which included the diagnostics company Boehringer
Mannheim GmbH, was the industry's biggest transaction last year.
However, a squeeze in the U.S. market could trigger another
round of mergers, analysts say. An expanded portfolio in more
therapeutic areas would give Glaxo better grounds to compete in
the U.S. market, where it ranked fourth in 1997 sales, behind
Bristol-Myers, Johnson & Johnson, and Merck.
Maybe Merck?
Some say Merck, the world's largest drugmaker by sales,
would be a workable partner for Glaxo, since Merck has a strong
cardiovascular drugs franchise. While Merck recently said it has
no plan to seek a merger, it will by 2002 lose exclusive rights
to several cardiovascular drugs, including Vasotec and Mevacor,
that contributed $5.3 billion, or 22 percent, of its 1997 sales.
Merck maintains that newer cardiovascular drugs, including
Cozaar, which controls high blood pressure, and Zocor, which cuts
cholesterol, will fill that gap.
However, mergers are a proven way to build product lines, as
Glaxo demonstrated when it bought the Wellcome Group Plc for
$14.8 billion in 1995. That acquisition helped to make Glaxo the
world's biggest AIDS drug maker and overcome the loss of Zantac.
James Culverwell, analyst with Merrill Lynch & Co., called
Merck ''plausible candidate, but Merck appears to be showing no
signs of wanting a deal.''
Others, such as Michael Ward, analyst with BT Alex. Brown,
note that Merck and other face the loss of many best-selling
drugs, forcing them to seek ways to broaden the product lines --
by developing their own drugs, licensing new drugs developed by
other or merging with a company with attractive products.
Also Astra?
Merck isn't the only drugmaker that will lose the exclusive
rights to best-selling products in the next five years. Astra AB
of Sweden, which faces the loss of its patent for the ulcer drug
Prilosec in 2001, said this year it would consider a merger.
Since Glaxo faces no significant patent losses before 2003,
analysts say it will soon be in a strong position to negotiate a
merger with those who do.
Other partners with strong cardiovascular drug franchises
include Bristol-Myers Squibb Co., Pfizer Inc. and American Home
Products Corp. A merger with any of them would put Glaxo close to
an industry goal of 10 percent market share.
A merger with a U.K. partner would be the best option for
Glaxo, analysts said, since transatlantic mergers pose problems
with different accounting rules, dual share listings and other
factors. After talks with SmithKline Beecham failed, Glaxo's most
likely U.K. merger partner is Zeneca, which has vowed to remain
independent.
Stock Listing
In recent years, there have been only two transatlantic drug
industry mergers, SmithKline Beecham and Pharmacia & Upjohn Co.
The principle impediment to such unions has been resolving where
and how the shares are listed, said Don Meltzer, the co-head of
European mergers and acquisitions for Credit Suisse First Boston.
If a merged company is based outside the U.S., as SmithKline
Beecham is, it sells American depositary receipts -- certificates
that represent foreign shares held in trust, usually by a bank --
to U.S. investors.
But ADRs are excluded from some stock indexes, notably the
Standard & Poor's 500, which makes their shares less attractive
to some investors and off-limits to others, such as index-fund
managers. This makes it harder to raise capital for research.
''There are a lot of index funds and a lot of volume,'' said
Meltzer. ''If you aren't part of the index, (index funds) aren't
buying your stock.''
Daimler-Benz AG has proposed to resolve this problem by
issuing a new type of security -- registered ordinary shares --
after it completes its takeover of Chrysler Corp. this year.
Tony Hardy, fund manager for Church Commissioners, which
manages $3 billion for the Church of England, said some Glaxo
shareholders may frown on transnational listings.
Hardy, whose biggest holding is in Glaxo shares, said when
Philadelphia-based SmithKline Beckman Inc. merged with the
Beecham Group Plc in the U.K. in 1989, shares listed in the U.K.
and the U.S. often traded at different prices, a phenomenon he
said was ''unhelpful'' to investors.
He added, however, that he and other shareholders would be
willing to tolerate the phenomenon if it benefited the stock.
''Anything that lengthens and deepens the breadth of new
products would be seen as a plus,'' he said.
--Dane Hamilton in the London newsroom (44-171) 330-7727 /gi/ms |
