THE SMITHKLINE BEECHAM DEAL : New Drug Firm Would Be World’s 2nd Largest
Two weeks after revealing that they were in negotiations, SmithKline Beckman Corp. and Beecham Group PLC announced Wednesday that they have agreed to merge, creating the world’s second-largest pharmaceutical company.
The new British-based company, to be called SmithKline Beecham, would have worldwide sales of $6.7 billion in prescription and over-the-counter drugs and health-care products. Only Merck & Co. of Rahway, N.J., is larger.
As part of the merger, Philadelphia-based SmithKline would spin off two profitable Orange County subsidiaries, Beckman Instruments in Fullerton and Allergan Inc. in Irvine.
The parent company said Beckman, a maker of medical and diagnostic equipment, and Allergan, a maker of eye and skin care products, would not fit into the merged company’s focus on pharmaceutical products. The new firm would keep its SmithKline Bio-Science Laboratories subsidiary, which operates a chain of clinical labs, including a large facility in Van Nuys.
The SmithKline-Beecham combination would operate more effectively in “an increasingly competitive and truly worldwide marketplace” for their products, the chairmen of the two companies said in prepared remarks.
The merger would open the U.S. and Japanese markets, two of SmithKline’s strengths, for Beecham. It also would give Beecham access to SmithKline’s worldwide marketing expertise and create a 6,000-member sales force, with nearly a third of that in the United States.
SmithKline would benefit from the Beecham presence in Europe, which is rapidly evolving into one market as the 12 Common Market nations prepare to remove economic restrictions in 1992. SmithKline, suffering from the faltering sales of its primary product, the anti-ulcer drug Tagamet, also would gain from several of Beecham’s promising new prescription drugs, including Eminase, a drug to quickly dissolve blood clots in arteries.
SmithKline is the world’s fifth-largest pharmaceutical company, while Beecham is the 19th largest.
With products such as Tums, Sucrets and N’Ice, Beecham has a strong market in over-the-counter drugs, and the merged company would rank No. 2 in such sales. The combination also would create the world’s fourth-largest firm in animal health products.
The proposed deal, which must be approved by regulators in both countries and by shareholders of both firms, would be close to a merger of equals.
Under the terms of the definitive agreement, current shareholders in SmithKline would receive half of the stock in the new company, and shareholders in London-based Beecham would get the other half.
In addition, holders of SmithKline’s 133 million shares also would receive a one-time cash dividend of $5.50 a share.
SmithKline’s chairman and chief executive, Henry Wendt, would become chairman of the new firm, and Beecham’s executive chairman, Robert Bauman, would become chief executive. An equal number of directors would be appointed by each company to a new 18-member board, and board meetings would alternate between London and Philadelphia, the companies said.
Heading the pharmaceutical operations, which would represent about 51% of the new firm’s revenues, would be John Chappell, currently president of Smith Kline & French Laboratories. James Andress, a Beecham executive, would head the new firm’s health products and services operations.
But the company would be created under British law and based in London, and its shares sold on the London Stock Exchange. American depository shares, representing ownership in the new firm, would be traded on the New York Stock Exchange.
Diffuse Market
“It’s clear that the power axis has shifted,” said David H. MacCallum, an industry analyst at the investment firm Hambrecht & Quist in San Francisco.
“This is perhaps a merger of equal equity interests in terms of share holdings, but the power structure has moved from Philadelphia to London,” he said.
Analysts have mixed views about how well off the combined company would be as it competes in a diffuse market in which no firm has more than a 10% share of the market.
The deal is a “good one” for both companies because they have strengths in different areas, said Kent Blair, an industry analyst with Donaldson, Lufkin & Jenrette Securities in New York. But MacCallum said the bigger size won’t necessarily mean better results.
News of the definitive agreement made SmithKline Beckman’s stock the volume leader on the New York Stock Exchange as nearly 4.7 million shares traded hands on Wednesday, closing at $62.75 a share, down $2 a share.
The merger, MacCallum said, “doesn’t really fix the basic problem in both companies.” That problem, more evident at SmithKline, he said, is that “the research pipeline is simply not producing a sufficient flow of product to replace some of the products that are getting tired.”
Sales of Tagamet, which was developed in the mid-1970s, have slumped as competitors developed anti-ulcer drugs in the early 1980s. The company’s profits fell 60% to $229.2 million last year from $570.1 million in 1987.
“The bet in SmithKline is that the payoff in research is just around the corner, but that corner keeps getting farther away,” MacCallum said. He also said he wasn’t impressed by the prescription drugs that Beecham is developing.
Blair agreed that there was “some truth to the belief that there is little in the pipeline,” but he said the combined research and development operations should help the new firm come up with more products.
Beecham spokeswoman Joanne Lawrence pointed out that the combined firm would spend $500 million a year on research and development. She said that Beecham has several drugs ready to be marketed now and in the next few years and that SmithKline is working on drugs that should be available later in the 1990s.
Since last fall, SmithKline has been under pressure to improve its financial results. In November, it spun off 16% of Beckman Instruments by selling stock to the public as part of an effort to shore up the corporation’s declining profit and shaky reputation on Wall Street.
In early January, SmithKline’s president, George W. Ebright, surprised Wall Street by resigning. Two other top SmithKline executives resigned late last year. And the company’s stock price fell well below analysts’ estimates of its breakup value, touching off rumors that another drug company might mount a hostile takeover bid.
Value in Allergan
At the time, Beecham was rumored to be interested in SmithKline and, it was revealed later, executives of both firms had discussed a possible merger. SmithKline confirmed earlier this month that it was negotiating a possible merger with Beecham.
MacCallum believes that the real value in the proposed merger is the spinoff of the two Orange County firms, especially Allergan, “which is a jewel of a company.”
BEECHAM GROUP PLC AT A GLANCE
Main businesses: pharmaceuticals, over-the-counter drugs, consumer products.
Employees: 30,000.
Stockholders: 101,000.
Headquarters: Brentford, Middlesex, U.K.
ADR Price (American Depositary Receipt) at Wednesday’s close: $21.
ADR Price at Tuesday’s close: $20.375
Income Statement
Amounts in millions of dollars except per-share figures. All numbers are converted based on rate of $1.6925 to the pound.
Year ended March 31 1989 1988 Revenue $4,245 $4,197 Net income 829.3 709.3 Per share 0.67 0.56
Source: Associated Press
