By Randall Osborne

Glaxo Wellcome plc and SmithKline Beecham plc continued Monday what the companies called "detailed discussions" of their prospective merger, which would create the world's largest pharmaceutical group and could throw into uncertainty their respective biotechnology collaborations, as well as thousands of jobs.

"It was a surprise to us," an employee of SmithKline told BioWorld Today. "But you get the gut feeling that it's more serious than the American Home Products [AHP] deal."

Last month, SmithKline confirmed it had been talking with AHP, of Madison, N.J., about a possible merger. That deal fell through, and talks with Glaxo were confirmed late Friday. The Glaxo merger is valued at $65 billion to $70 billion.

In a memo to SmithKline employees, CEO Jan Leschly called the merger "a compelling opportunity" and predicted "much speculation" about the proposal. The SmithKline staffer told BioWorld Today that not much more is being disclosed to the rank and file.

"We know about as much as has been released publicly," the employee said.

Morale at SmithKline has not suffered, at least not yet, the insider said. "The staff seems reasonably sanguine about it, as far as I can see."

Glaxo sells Zantac, an anti-ulcer drug, and AIDS drugs Retrovir (AZT) and Epivir (3TC), among other products. SmithKline's products include the antidepressant Paxil, the cold medicine Contac and the antacid Tums. Together, the two London-based companies would have worldwide sales of more than $25 billion, surging ahead of competitors Merck & Co., of Whitehouse Station, N.J., and Novartis AG, of Basel, Switzerland.

But the merger is not about existing product lines, said Alex Zisson, a biotech and pharmaceutical analyst at Hambrecht & Quist Inc., of San Francisco.

"Strategically, this is a research and development deal," Zisson said. "The goal is to completely dominate, especially in genomics. It's the first [proposal] we've seen in a while where both companies are playing out of strength."

Zisson predicted the merger will be completed shortly, now that ownership and management have been agreed upon.

"Those are usually the two biggest sticking points, as apparently they were with the SmithKline-AHP deal," Zisson said.

SmithKline, Glaxo Have Many Biotech Partners

If the merger goes ahead, Glaxo shareholders would hold 59.5 percent of the company and SmithKline would hold 40.5 percent. The board of directors of the new entity would be drawn from both groups. Richard Sykes, CEO of Glaxo, would serve as chairman of the merged company. Leschly would become the new firm's CEO.

SmithKline has chalked up biotech deals potentially worth substantially more than $600 million. The company's big step into genomics came in 1993, when SmithKline signed a $125 million pact with Human Genome Sciences Inc. (HGS), of Rockville, Md. That alliance has been supplemented by other deals focused on functional genomics, gene sequencing and gene discovery. The fate of the collaborations, Zisson said, is "a big question. It's a red flag for investors."

Glaxo is collaborating with, among others, Incyte Pharmaceuticals Inc., of Palo Alto, Calif., in a deal providing Glaxo with access to Incyte's LifeSeq database of human gene sequences; with the former Sequana Therapeutics Inc., of La Jolla, Calif. (since merged with Arris Pharmaceuticals Corp., of San Francisco) to evaluate gene function using the nematode worm; with Vertex Pharmaceuticals Inc., of Cambridge, Mass., to develop HIV protease inhibitors; and with BioChem Pharma, of Laval, Quebec, for AIDS and hepatitis B drugs.

In 1995, Glaxo bought Affymax NV, of Amsterdam, the Netherlands. Affymax, a combinatorial chemistry company, launched the genomics company Affymetrix Inc., of Santa Clara, Calif., in 1993, in which Glaxo has a share.

SmithKline To Benefit From Research Funding

By teaming with Glaxo, SmithKline will beef up its research and development budget and speed products toward the marketplace, Zisson said, adding that SmithKline, having identified many genetic targets, has "more information than it can handle."

William Haseltine, chairman and CEO of HGS, acknowledged that with the abundance of validated targets, "there are more opportunities to develop than [companies] can afford."

However, he said, available technologies can handle the job.

"The solution is to increase the concentration of resources early in research and development," Haseltine said. "We have opened the door, but it costs a lot of money to walk through." Glaxo and SmithKline together, he noted, would have a research and development budget estimated at $3 billion.

David Crossen, an analyst with Montgomery Securities, of San Francisco, said SmithKline's pact with HGS has "given them a huge amount of stuff, and [Glaxo has] Affymax, which has given them a huge amount of information. More and more drug companies are telling their people, 'Go out and do screening,'" Crossen said.

Peter Ginsberg, an analyst with Piper Jaffray Inc., of Minneapolis, agreed that research and development is driving the SmithKline-Glaxo deal, but "product companies will generate the sales and earnings in the near term, and that's what is going to generate investor interest."

Ginsberg said SmithKline is "realizing what a lot of middle-tier to lower-tier drug companies are realizing: You need a broad line of products in a broad line of therapeutic areas to be successful."

News of the SmithKline-Glaxo proposal is effecting other stocks, as investors anticipate similar deals, Ginsberg said.

"Amgen is up four [points] today," he said. "A lot of that is people thinking Amgen [of Thousand Oaks, Calif.] is a take-out candidate." The company's shares (NASDAQ:AMGN) closed at $54, up $4.

Glaxo employs 58,000 people worldwide. SmithKline employs 53,000 worldwide. Union leaders were quick to warn that half of the companies' 20,000 jobs in the U.K. could be cut as a result of the merger. Roger Lyons, general secretary of the Manufacturing, Science and Finance Union in London, asked the U.K. government to block the merger, and the European Commission vowed to look into the deal.

Zisson said a similar union skirmish occurred when Glaxo plc and Wellcome plc, both of London, proposed their merger in 1995, but the deal went through. "Governments can only do so much to hobble an industry," Zisson said.

Zisson noted that Leschly has long beaten the genomics drum, and is not stopping, although the rewards of genomics research may not be fast.

"It takes years before you know if executives have made the right decisions," Zisson said. "You have to look ahead."

Glaxo's stock (NYSE:GLX) closed Monday at $62.75, up $8.937. SmithKline's shares (NYSE:SBH) ended the day at $67.50, up $4.37. *

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