Glaxo, SmithKline Reportedly to Merge

Pharmaceutical powerhouses Glaxo Wellcome and SmithKline Beecham agreed to merge and create the world’s largest drug company in an all-stock transaction worth about $81.6 billion, people familiar with the situation said Sunday.

The merger, expected to be announced today, would give Glaxo shareholders about 59% of the combined company, the people said. Glaxo SmithKline, the company’s new name, would have a market value of about $186 billion, based on last week’s closing share prices. Officials at both companies declined to comment. But sources said the boards of both companies met Sunday in London to approve the merger plan.

The proposed Glaxo-SmithKline linkup comes at a time of mounting pressure on global drug firms to join forces as the search for new medicines becomes ever more complex. Pharmacia & Upjohn Inc. and Monsanto Co. recently announced merger plans, while Pfizer Inc. and American Home Products Corp. are battling for Warner-Lambert Co. to gain control of Lipitor, Warner-Lambert’s top-selling cholesterol treatment, and other drugs.

Glaxo SmithKline would leapfrog those deals, creating the world’s biggest drug maker, with a market share of about 7.5%, ahead of a combined Pfizer-Warner-Lambert market share of 6%, according to analysts at Commerzbank.

Glaxo--the leader in AIDS, asthma and migraine treatments--and SmithKline--whose strengths include diabetes drug Avandia, antidepressant Paxil, and consumer products such as Tums antacids and Aquafresh toothpaste--are combining as mergers and acquisitions sweep the $300-billion-a-year worldwide pharmaceutical industry. Merger talks collapsed two years ago amid disagreements about who would run the combined company.

Now, SmithKline Chief Executive Jan Leschly is retiring in April and Glaxo Chairman Richard Sykes plans to cede management responsibility, so the old disagreements are disappearing, analysts said.

“Leschly and Sykes had to step aside and look to the greater good,” said Martin Evans, head of research at Sutherlands Ltd. in London. “These companies are more important than the men.”

The companies expect to cut costs by about $1.3 billion in coming years, sources said. It would probably lead to thousands of job cuts, though the final number hasn’t been determined. But sources said 5,000 to 10,000 jobs out of a combined global work force of 105,000 could be lost.

Analysts expected the new company, which would have combined sales of more than $26 billion a year and a research budget of $3.3 billion, to take a charge of about $2.4 billion over the next three years.

British newspapers said Sunday that the group would have its headquarters in Britain but be run from SmithKline’s U.S. headquarters in Philadelphia.

The pharmaceutical industry is being reshaped by a spate of multibillion-dollar mergers. The world’s top two drug makers, Aventis and AstraZeneca, were created by mergers last year.

Glaxo SmithKline would have annual drug sales of about $18 billion, as calculated using 1998 figures. It would easily leapfrog current industry leader Aventis, with $10.8 billion in pro forma 1998 sales, and be larger than a combination of Pfizer and Warner-Lambert or a Warner-American Home union.

In a brief statement Friday, the two British companies said they were in talks “which may or may not lead to a merger of equals.”

Shares in both companies rose strongly Friday as investors relished the prospects of a deal that would strip out costs and boost the combined group’s research and sales clout in a consolidating industry. In New York Stock Exchange trading, Glaxo’s American depositary receipts jumped $2 to close at $60, while SmithKline ADRs gained $3.31 to close at $70.

Analysts said Sykes’ decision to step into a nonexecutive chairman’s role and Leschly’s announcement that he would resign at SmithKline’s annual shareholders meeting in April were an essential compromise to making the merger happen.

“Leschly and Sykes are two dominating personalities with long industry track records,” said Robin Gilbert, an analyst with WestLB Panmure. “With Leschly to be gone soon, Sykes will now form the world’s biggest drug company, then graciously step aside.”

J.P. Garnier, SmithKline’s chief executive-designate, would be chief executive of Glaxo SmithKline.

Discussions this time have been on the basis of Glaxo offering 0.45 to 0.48 share for each SmithKline share, to be met by the issue of approximately 2.6 billion new shares.

That would give roughly a 60-40 ratio in favor of Glaxo, although SmithKline’s share could edge up to 41% or 42% to reflect its superior growth prospects, thanks to diabetes drug Avandia.

The planned merger still must be approved by the Federal Trade Commission and the European Union.

Such an ownership ratio is reasonable because it’s roughly equivalent to the two companies’ market values and in line with the agreement discussed two years ago, said Paul Diggle, an analyst at SG Securities.

However, Diggle said, SmithKline’s growth prospects have improved in recent years with the introduction of Avandia, while growth in new Glaxo drugs--such as Relenza for influenza and Zeffix for hepatitis--hasn’t met forecasts.

Glaxo is being advised by Goldman, Sachs & Co. and SmithKline is being advised by Morgan Stanley, Dean Witter & Co.