Here's what WSJ had to say this morning. Notice the emphasis on drug discovery (SBH had a $125 million deal with HGSI):
SmithKline-Glaxo Deal Driven
By the Hunt for Human Genes
By ELYSE TANOUYE and ROBERT LANGRETH
Staff Reporters of THE WALL STREET JOURNAL
If the largest corporate marriage ever is completed in the next few weeks,
as expected, it will be the result of a profound revolution in human biology:
the successful hunt for human genes.
The international pharmaceutical industry was roiled by the announcement
late Friday that two British drug giants, SmithKline Beecham PLC and
Glaxo Wellcome PLC, are deep in merger talks to create the world's
largest drug maker. It would have annual sales of more than $25 billion,
topping those of its closest rivals, Merck & Co. and Novartis AG.
The proposed deal is tentatively valued at
between $65 billion and $70 billion, almost
twice the size of WorldCom Inc.'s planned
takeover of MCI Communications Corp.
Glaxo shareholders would get 59.5% of the
merged company, while SmithKline
shareholders would receive 40.5%.
The talks, only seven days old, scuttled
months of intense merger discussions between
SmithKline and American Home Products
Corp. of Madison, N.J., that came to light
two weeks ago. Early Monday in London,
SmithKline said it had terminated talks with
American Home.
A Glaxo-SmithKline merger would create a
behemoth with a research-and-development
budget of more than $3.3 billion, nearly twice
Merck's. It would put pressure on others in the business to consider
corporate combinations that only a few weeks ago seemed far-fetched.
In contrast to drug megamergers in the early 1990s that were driven by
gray-suited executives seeking to cut costs, this time it is the guys in the
white lab coats calling the shots. An explosion in scientific breakthroughs
has suddenly created vast research opportunities that are overwhelming
drug companies' budgets and management expertise. New gene-sleuthing
technology, when combined with high-speed, computerized chemistry, is
producing countless tempting leads for treating illnesses ranging from
AIDS to cancer, from heart disease to depression.
Gene hunting "is yielding a cornucopia the likes of which the drug industry
has never seen," says William Haseltine, chief executive of Human
Genome Sciences Inc., a leading gene-discovery company with which
SmithKline has collaborated.
Through that company and SmithKline's computerized gene-discovery
efforts, SmithKline is unmasking thousands of these new biological targets.
But the bounty brings with it some major management problems. "The
whole [pace of discovery] is exciting," Jan Leschly, its chief executive,
mused in an interview last year. But "it's like kids in the candy shop --
there are too many targets... . Now the question is, can we afford to do all
this?"
Much as in the early days of the personal computer or Internet,
pharmaceutical executives see that the new technology has the potential to
change the industry but are uncertain how to exploit it. They fear that if
they don't move quickly to create drugs based on the lab advances, they
could be left behind or, worse, locked out by patent rights granted to
competitors. But research budgets are already strained. Where, executives
wonder, do they find the money and manpower to grapple with the
onslaught of science?
The answer, for SmithKline and Glaxo, is to join forces. While the
57-year-old Mr. Leschly, a flamboyant Danish-born marketer and former
pro tennis player, and Sir Richard Sykes, Glaxo's cerebral 55-year-old
British scientist-turned-CEO, have little in common personally, they share
a vision of how drugs will be discovered in the 21st century.
Top Drug Companies
Company
Global Market Share
Merck
4.6%
Glaxo Wellcome
4.6
Novartis
4.3
Bristol-Myers Squibb
3.7
Johnson & Johnson
3.5
Pfizer
3.3
American Home Products
3.3
Roche Holdings
3.1
SmithKline Beecham
2.9
Hoescht
2.9
Note: Figures include prescription drugs
only.
Source: Mehta Partners
If the merger goes through, Sir Richard will be executive chairman and Mr.
Leschly chief executive, the companies have decided. Thus, one issue that
often hangs up mergers is already solved.
Both executives declined to be interviewed because of the talks'
preliminary nature. But in an interview last year, Sir Richard said his goal at
Glaxo was to "reskill" the company's R&D operation. In contrast to drug
discovery through trial-and-error screening of chemicals for medicinal
activity, "the future is in molecular genetics, cell biology and all the modern
sciences," he said.
The likelihood of this huge merger abruptly forces competitors to rethink
their positions. Executives say investment bankers are besieging them with
scenarios. For one thing, Wall Street is rife with talk that Warner-Lambert
Co., Schering-Plough Corp. or Pharmacia & Upjohn Inc. may be
hard-pressed to continue to go it alone. And bigger companies, such as
Pfizer Inc. and Bristol-Myers Squibb Co. -- as well as the jilted American
Home -- are being pelted with bankers" acquisition ideas.
Merck's chairman, Raymond Gilmartin, in an interview Sunday, reiterated
his unwillingness to seek a big corporate partner. "A merger of any
consequence would be a real distraction," he said. Still, a top Merck
scientist, Thomas Caskey, notes that a Glaxo-SmithKline alliance poses a
"considerable threat" to Merck's and other companies' gene-based efforts
-- efforts that, he adds, will "revolutionize" the race to find new drugs over
the next three to five years.
Until now, mergers in the industry were driven by the pressure of
managed-care companies to force drug makers to reduce prices. That
challenge turned out to be short-lived, as drug-industry sales and profits
have flourished in recent years, thanks to a host of medicines initiated in
the late 1980s and now reaching the marketplace. Yet even as
drug-company marketers revel in the good times brought by the new
medicines, their counterparts in research have struggled to make the leap
into the new drug-discovery era.
This pressure started a few years ago when a pioneering scientist named J.
Craig Venter began to develop and commercialize a way of identifying
genes far faster than previous manual processes. Drug companies can use
genes and the proteins they produce to decipher a disease's biochemical
pathway, thus identifying so-called drug targets -- sites where drugs could
intervene. The result, potentially, is new, more potent and safer medicines.
And beyond that, since a company can patent a newfound gene, it can
demand royalties on drugs that emerge from others' research using the
gene.
SmithKline was the first to jump on this "genomics" technology in a big
way, paying $125 million in 1993 to Human Genome Sciences, a
Rockville, Md., biotechnology company created to commercialize Dr.
Venter's new gene-hunting techniques. While other companies dismissed
the investment as unnecessary or risky, SmithKline raced to identify and
file hundreds of patents for the genes emerging from HGS. Soon, the
investment looked smart, and competitors such as Merck were investing
heavily in their own gene-search efforts. Others contracted with
biotechnology firms that specialize in producing the genetic data.
Though SmithKline had a few years' lead, it soon found itself drowning in a
sea of scientific information. It began to license out some of its discoveries
to reduce the overload.
Meanwhile, another technological
breakthrough was sweeping the industry:
automated chemistry. Where once drug
companies hired chemists to create drugs one
at a time, robots and computer chips now
make new chemicals by the thousands each
day. Drug companies can then test those
chemicals against the newly uncovered
gene-based targets.
"We are in the middle of a revolution where
biology meets chips," SmithKline's Mr.
Leschly said last year. Glaxo jumped on this
trend early by buying a pioneer of automated
chemistry, Affymax NV.
Some industry experts believe that together,
gene-based drug discovery and the new robot
chemistry will transform pharmaceutical
research as thoroughly as the assembly line
did auto making.
Others express caution, arguing that while
giant research budgets and investments in new
technology help, they are no substitute for
focused managers and creative scientists. "It
isn't size that determines the productivity of a
research lab but innovations of individual
researchers, and the ability to look into the
future and see which ideas will win," says P. Roy Vagelos, the former
Merck chairman. At Merck, breakthrough drugs were discovered
because individual researchers or small groups doggedly pursued and
championed ideas few others believed in, Dr. Vagelos says. Genomics and
automated chemistry, he says, "are just tools."
Until recently, Glaxo research officials expressed caution about the new
methods. At an analysts' meeting last year, a company executive noted "a
lot of hype around genomics" and said the technology didn't give a
competitive advantage to companies. Nevertheless, the company recently
formed an institute to do gene research.
For Glaxo, a bigger research budget may mean more resources for the
development side of R&D. Officials said at the analysts' meeting that
Glaxo was investigating 300 molecular targets and had 120 development
programs under way.
Speeding It Along
Drug development is where Sir Richard made his mark when he headed
Glaxo's research. He was particularly adept at picking promising
compounds and accelerating their progress, says Ernest Mario, former
Glaxo chief executive and now head of Alza Corp., a drug company in
Palo Alto, Calif. Imitrex, Glaxo's well-regarded migraine treatment, "was
wallowing around" Glaxo laboratories for 20 years, Dr. Mario says,
before Sir Richard spotted it and championed its development.
Sir Richard also brought Zofran, Glaxo's breakthrough antinausea drug,
from discovery to pharmacy shelves in just six years, Dr. Mario says,
instead of the more typical eight to 12 years. He did it by having his
research team work on several phases of research at once instead of the
one-at-a-time sequence. Such an approach carries risks because it
requires a hefty investment earlier than is customary, so more money is
wasted if the compound eventually fails in human trials.
Mr. Leschly and Sir Richard would complement each other in a combined
SmithKline-Glaxo company, says Dr. Mario, who worked with them
when all three were at the former Squibb Co. earlier in their careers. Mr.
Leschly's strengths are in the commercial and marketing side, Sir Richard's
in research.
Mr. Leschly and Sir Richard have also just gone through one of the most
traumatic experiences a pharmaceutical executive can face: expiration of
patents on drugs that represented a huge portion of their companies'
revenues. Expirations of two ulcer drugs, SmithKline's Tagamet and
Glaxo's Zantac, plus Glaxo's antiviral medication Zovirax threatened the
companies' financial health and independence. Both companies got through
it, Glaxo cushioning the impact by making a major acquisition: Wellcome
PLC.
The prospective merger partners have many new products in the pipeline.
Some of Glaxo's late-stage projects include medications for AIDS,
infections and influenza; SmithKline is testing drugs or vaccines for
Alzheimer's, diabetes and Lyme disease.
Both companies say they learned a great deal from the harsh
patent-expiration experience. For instance, the Tagamet crisis helped push
SmithKline to embrace gene science as a way to boost research
productivity and make sure it wouldn't be so dependent on one drug again.
The company also is trying to cut drug-development time to 2,000 days by
the year 2000, from 4,000 to 5,000 days.
But SmithKline insiders say Mr. Leschly is frustrated by the gargantuan
effort of switching to gene-based research, and, faced with a likely period
without new drugs from that technology, he has been open to a merger
that would help provide profits until the new research pays off.
A merger would also, of course, bring chances to cut administrative,
marketing and manufacturing costs. Analysts estimate that a merged Glaxo
and SmithKline could save $2 billion to $3 billion this way. Hemant K.
Shah, an analyst in Warren, N.J., predicts layoffs and job reductions of
10,000 or even 20,000.
Glaxo and SmithKline, which are both based in London, haven't endorsed
such estimates. But the two companies apparently saw benefits in a
combination well before last week's whirlwind negotiations. They held
casual merger discussions last year, industry executives say. After
SmithKline disclosed its talks with American Home Products, Glaxo
moved with lightening speed.
It made an overture just a few days later, and by last Monday, the two
chief executives were meeting at a Glaxo apartment in New York City.
Talks then continued at the offices of Lazard Freres & Co., Glaxo's
investment advisers. SmithKline is being advised by Morgan Stanley, Dean
Witter, Discover & Co.
The five-day negotiations last week resolved the major sticking points of
management and economics. The companies say they have agreed that Sir
Richard will have responsibility for long-range planning and Mr. Leschly
will manage day-to-day operations.
The merger's price tag is actually less than the current market capitalization
of SmithKline, the smaller company, because the ratio by which the stocks
will be swapped was set based on share prices before the recent run-up in
drug stocks, say industry executives tracking the talks. The proposed deal
is being structured so that neither company receives a takeover premium,
these people say.
As for regulators, such a huge deal would of course draw the attention of
European Union antitrust authorities. But EU antitrust chief Karel Van
Miert has said that he would welcome more consolidation in Europe's
fragmented pharmaceuticals industry. Analysts don't expect the European
Commission to try to stop a Glaxo-SmithKline deal.
The U.S. Federal Trade Commission would no doubt take a look, since
the two British companies market many products in the U.S. In the
Sandoz/Ciba-Geigy merger last year that formed Switzerland's Novartis,
the FTC demanded divestiture and licensing of certain gene-therapy
technologies and patents. Even though the gene therapies weren't close to
market, the FTC acted to protect innovation in the fledging technology.
--Ron Winslow, Steven Lipin and Stephen D. Moore contributed to
this article |
