SmithKline to Lay Off 1,600 but Southland Plants Spared
In a bid to halt declining profits, pharmaceutical giant SmithKline Beckman Corp. announced sweeping layoffs and plant closings Tuesday but spared its profitable divisions in Southern California.
The company said it will lay off 1,600 employees, eliminate half of its manufacturing capacity and take a one-time writeoff of up to $400 million and sell at least 17% of its Beckman Instruments, its Fullerton-based subsidiary.
Underscoring its problems, the company said that because of declining pharmaceutical sales in the United States, it expects net earnings for 1988 to fall to as low as $458 million, down 19.6% from $570 million in 1987.
None of the layoffs will affect the 5,500 workers at the company’s three Southern California operations, SmithKline officials said.
The rescue plan was greeted with disappointment by industry analysts, many of whom had expected a more dramatic gesture, possibly including the outright sale of some of SmithKline’s assets.
The plan will affect Philadelphia-based SmithKline’s pharmaceutical enterprises but will spare the jobs of employees at SmithKline Bio-Science, which has a clinical laboratory in Van Nuys with 1,000 workers; Allergan, an eye care products maker with 2,200 employees in Irvine, and Beckman Instruments, a scientific and medical instruments company with 2,300 workers in Fullerton and Brea.
The plan for Beckman Instruments calls for SmithKline to sell 17% of newly issued Beckman common shares to the public.
In an interview Tuesday, SmithKline Chairman Henry Wendt said he decided to create an independent market for Beckman Instruments stock to give that company more visibility and to give SmithKline shareholders more investment choices.
He said the company initially will sell 17%, but could put more shares on the market in later offerings. Wendt said he may take similar steps with Allergan and SmithKline Bio-Science Laboratories, which is headquartered in Pennsylvania.
Rumors had been rampant on Wall Street for the past week that some company--possibly a Japanese firm looking for a worldwide sales arm--would buy Beckman Instruments, the medical diagnostic and analytical instrument manufacturing firm that SmithKline spent $1 billion to acquire in 1982.
But Wendt denied in an interview Tuesday that he has any intention of selling Beckman Instruments, Allergan or SmithKline Bio-Science Laboratories. “They are not for sale,” he said.
In response to the announcement, the price of SmithKline’s stock, which had risen during the past week as investors speculated about the company’s decision, dropped $2.12 a share Tuesday to close on the New York Stock Exchange at $46 a share.
‘Survival Strategy’
Industry experts said the moves announced Tuesday do not solve SmithKline’s basic problem: Its two star drugs, Dyazide, used to treat congestive heart failure and hypertension, and Tagamet, an ulcer drug, have begun to lose their luster because of competition from newer drugs and the company as yet has not introduced other products potentially as lucrative.
“It’s not enough,” Robert Uhl, a pharmaceutical analyst with Salomon Bros. in New York, said of the plan. “I thought they would make a bold enough restructuring move, such as selling a division or laying off more people.”
Several analysts said they expect SmithKline’s current strategy to increase profits by 10% in 1989 and perhaps by the same amount in 1990. After that, they predicted, the company again will run out of steam. “Basically it is a survival strategy to buy time until maybe something in the R and D pipeline will arrive,” Uhl said.
The belt-tightening strategy also did not satisfy Standard & Poor Corp., which Tuesday downgraded its rating on $600 million of SmithKline’s senior debt. The rating company said the downgrading “reflects heightened concern over the firm’s unproductive drug research program, which now faces a major reorganization.”
Wendt said the layoff of 1,600 of SmithKline’s 42,000 workers involve mostly cuts in corporate and other administrative staffs and the closing of under-utilized manufacturing facilities, including a 40-year-old plant in Philadelphia and some as yet undesignated plants overseas.
The costs associated with these measures will oblige the company to take a one-time writedown of $375 million to $400 million in the third quarter of 1988.
He stressed that even if SmithKline had a new drug to take to market immediately, “we would still be taking these steps we announced today.”
None of the layoffs, Wendt said, will involve the company’s sales force or hamper the company’s research and development enterprises. He said development of new drugs will receive increased focus through a reorganization of SmithKline’s pharmaceutical business. In that effort, he said, John F. Chappell, president of Smith Kline & French Laboratories-International, has been named to the new position of president of Smith Kline & French Laboratories.
Wendt said SmithKline Beckman has some promising drugs in development, including a new product for treating congestive heart failure and hypertension that it hopes to begin marketing in two to three years.
