SmithKline, Glaxo Merger Falls Apart

Drug maker SmithKline Beecham called off merger talks with Glaxo Wellcome, citing “insurmountable differences” in putting together what would have been the biggest corporate unification in history.

SmithKline officials said the negotiations began falling apart Friday after Glaxo sought to change terms of a tentative deal announced Jan. 30. Glaxo spokesman Rick Sluder confirmed that the talks had ended but would not comment on the cause of the breakdown.

SmithKline said Glaxo’s position created “insurmountable differences” that left the two British drug makers “unable to agree on the terms of a possible merger.”

Discussions since Friday, SmithKline said in a statement, “revealed a number of differences between the companies, including differences in the approach to the possible merger, management philosophy and corporate culture.”

“Most importantly, Glaxo’s recent conduct of these discussions has inevitably strained relations between the two companies,” it said.

Hemant K. Shah, an independent drug industry analyst in Warren, N.J., said the breakdown in talks was “really related more to management roles than anything else.”

SmithKline said its board unanimously decided against recommending the merger to shareholders.

On Jan. 30, SmithKline had announced it was calling off talks with American Home Products Corp. in favor of a potential deal with Glaxo, sending the stocks of both British pharmaceutical companies surging.

SmithKline said it was “aware of the significance” of calling off the merger in light of its recently buoyed stock price.

Since the announcement of the merger talks, SmithKline’s U.S.-listed American depository receipts had risen as high as $68.68, compared with $63.13 before the talks became public. The shares closed at $66 Monday, down 25 cents, before news of the impasse broke. Glaxo’s ADRs had risen from $53.81 on Jan. 30 to $62.44 Monday, down 31 cents. Both trade on the New York Stock Exchange.

SmithKline had a market value of about $70 billion and Glaxo Wellcome about $96 billion when the talks were announced.

If Glaxo had bought SmithKline, the deal would have eclipsed the most expensive merger announced to date, the planned buyout of MCI Communications Corp. by WorldCom Inc. for stock valued at about $37 billion.

Sluder, the Glaxo spokesman, said, “We’re not actively looking for another merger partner.”

Many analysts had considered the merger a fait accompli because all major issues appeared resolved. The original plan decided senior management positions, gave Glaxo a majority 59.5% share and left the merged company in Britain.

But on Friday, Glaxo negotiators said they were no longer willing to go ahead on those terms, SmithKline officials said.

The end of the Glaxo discussions leaves SmithKline free to resume talks with American Home, but analysts said Glaxo offered a better match because the companies’ corporate cultures were more similar.

“The Glaxo-SmithKline merger seemed to be a little more reasonable just given the geographies,” said Len Yaffe of NationsBank Montgomery Securities.

American Home spokesman Lowell Weiner declined to comment on a possible rekindling of talks with SmithKline. However, the Madison, N.J.-based drug maker has been trying to find a merger partner for about six months and cannot become “a top-tier drug company”--such as Whitehouse Station, N.J.-based Merck & Co. or New York-based Pfizer Inc.--without partnering, according to Shah.

Analysts grew worried over American Home’s future in August, when the company withdrew two diet drugs, Pondimin and Redux. The company faced lawsuits accusing it of failing to warn users of potential heart-valve damage.

But industry sources say the company’s liability is probably limited to $2 billion or $3 billion, less than half of earlier estimates. American Home also faces lawsuits from 50,000 women who claim they weren’t warned adequately about the side effects of Norplant, its surgically implanted contraceptive.

Drug makers view merging as a way to boost their research and development budgets. The cost of developing a single drug has bolted from $54 million in 1976--or an inflation-adjusted $125 million--to a range of $400 million to $600 million today, according to Pharmaceutical Research & Manufacturers of America, an industry trade group.

Drug makers in the United States and Europe will spend an estimated $20.6 billion on research this year, or about 20% of sales.

Costs are rising because genetic engineering, stricter Food and Drug Administration requirements and inflation have combined to make searching for drugs more expensive, said Jeff Trewhitt, a spokesman for the trade group.

A combined Glaxo and SmithKline would have sunk $3 billion into research and development. That equals the combined R&D; budgets of Merck and Pfizer.