Drug Firm Glaxo Bids $14.2 Billion for Rival : Health care: Acquiring Wellcome would create a pharmaceutical giant challenging Merck as the biggest in the world.

By DAVID R. OLMOS

Jan. 24, 1995 12 AM PT

TIMES STAFF WRITER

Bidding to create the world’s largest drug company, Britain’s Glaxo on Monday offered $14.2 billion to buy rival Wellcome in a deal that underscores the sweeping transformation taking place in health care.

The proposed merger--which would be the largest ever in the pharmaceutical industry and the second-largest in corporate history--is likely to heighten debate about the impact of drug industry merger mania on the development and cost of new medications.

The global pharmaceutical industry, buffeted by the cost-cutting emphasis in health care, is undergoing the kind of revolutionary change that challenged the likes of IBM and General Motors in past years. Drug makers have responded with a flurry of corporate mergers that industry watchers expect will reduce the number of major drug companies by half in the next decade.

“We want to lead in this process, not be carried along by it,” Glaxo Chief Executive Sir Richard Sykes told a news conference in London.

But some academics and consumer advocates say the merger wave could lead to less competition, higher drug prices and reduced drug development.

The merger would combine London-based Glaxo, maker of the popular ulcer drug Zantac, with London-based Wellcome, best known as the maker of AZT, a leading AIDS treatment, and Zovirax, a successful treatment for genital herpes. Besides Zantac, Glaxo’s other main products are treatments for respiratory ailments and infections, including Ventolin, an asthma inhaler.

The merged companies would have combined pharmaceutical sales of about $12 billion, possibly surpassing New Jersey-based Merck & Co. in worldwide drug sales. The deal, among the largest corporate mergers and acquisitions ever, would rank behind only the $24.9-billion takeover in 1989 of RJR Nabisco by Kohlberg, Kravis, Roberts & Co. It would surpass the $13.9-billion melding of Time Inc. and Warner Communications Inc. in 1990.

Analysts said they expect Wellcome to accept Glaxo’s cash and stock offer, which represents a premium of 49% over Friday’s closing price of Wellcome shares. Trustees of Wellcome’s biggest shareholder, the Wellcome Trust, with a 39.5% stake, have agreed to the offer, Glaxo officials said.

Glaxo stock fell $1.375 a share Monday to finish at $19.125, while Wellcome surged $4.375 a share to $15.125. Both trade on the New York Stock Exchange.

Analysts said Glaxo’s offer was probably generous enough to discourage any companies from making rival bids.

Analysts said the deal will probably receive regulatory approval because there is little overlap among the companies’ drugs and it would not give the companies a dominant worldwide market share.

Although drug making is an expensive process, analysts often liken it to a “cottage industry,” a fragmented business in which no drug maker holds more than 5% of the market. Glaxo said its purchase of Wellcome would give it 5.3% of the worldwide drug business.

Also, the deal would broaden both firms’ relatively narrow product lines. Glaxo officials said the deal would yield significant cost savings by eliminating duplication in the companies’ management, research and manufacturing operations.

Peter Laing, a Salomon Bros. analyst in London, estimated that Glaxo would eliminate 6,000 to 12,000 jobs from the firms’ combined worldwide work force of about 60,000. A sizable chunk of those cuts could come at Research Triangle Park near Raleigh, N.C., where both firms have their U.S. headquarters and where Wellcome has a manufacturing plant.

The deal would also help both companies weather the future loss of patent protections on key products. Zantac accounts for about 40% of Glaxo’s $8.5 billion in annual revenue, but sales are expected to plummet when the ulcer drug loses its U.S. patent protection in 1997, opening the way to competition from lower-cost generics.

Wellcome depends on Zovirax for about half its $3.5 billion in annual sales, but the herpes treatment will also lose its patent protection in 1997.

“Each company faces heightened competition and the prospect of flat to declining profits over the next few years,” said Steven Gerber, an analyst with Oppenheimer & Co.

By attempting to swallow up a rival drug maker, Glaxo officials have opted--either by choice or necessity--for a different strategy than other drug makers. Competitors such as Merck, SmithKline and Eli Lilly have sought to gain more influence over market share by paying handsomely to acquire companies that manage prescription drug-benefit programs for employers or health maintenance organizations.

“This is a battle of strategies, and Glaxo is betting on one and the others are betting on another,” said Hemant Shah, an independent analyst. “In my opinion, this one (Glaxo’s) is wrong.”

With managed-care companies expanding rapidly in the United States and interest growing in Europe, Shah believes Merck and the others were wise to “vertically integrate” by forging closer ties with drug-benefit managers.

Glaxo, however, may have been left without any good alternatives after mulling the possibility of acquiring a drug-benefit company. Last year, it was widely reported that Glaxo was talking with McKesson’s PCS Health Systems unit before Eli Lilly bought the drug-benefit manager.

A Glaxo-Wellcome marriage wouldn’t end the merger wave. Most analysts expect the current 25 big drug companies to dwindle to between five and 12.

But while mergers may help drug makers compete by boosting their market share, the deals “may not be competitive in the sense of helping consumers gain access to more or better drugs at reasonable prices,” said Stephen Schondelmeyer, economist at the University of Minnesota’s College of Pharmacy.

Schondelmeyer says he is concerned about the growing possibility that two or three giant drug makers will be the only suppliers of certain medications. That would harm competition and give the drug makers more market power to set prices to their liking, he said.

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The Companies at a Glance

In a bid to become the world’s largest drug maker, Glaxo has offered to buy rival Wellcome for $14.2 billion in cash and stock. A brief look at the two British corporations:

Glaxo

* Headquarters: London

* Chief executive: Sir Richard Sykes

* Employees: 45,000

* Major products: Zantac, the world’s biggest-selling prescription medicine. Also drugs for ulcers, respiratory afflictions and migraines.

* 1994 revenue: $8.4 billion

* 1994 profit: $1.9 billion

* Monday stock price: $19.125, down $1.375 on the NYSE

Notes: Fiscal year ends June 30; stock is traded on the NYSE as ADRs.

Wellcome

* Headquarters: London

* Chief executive: John W. Robb