SmithKline May Merge With Glaxo Wellcome

World’s largest pharmaceutical company would result from the proposed merger

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CEO SUMMARY: Both companies confirm that merger talks are under way. The merger is another example of consolidation within the healthcare industry, and is expected to trigger mergers between other drug companies. Fate of SmithKline’s clinical laboratory division in the merger with Glaxo Wellcome is unclear.

NEWS OF A POSSIBLE MERGER between SmithKline Beecham PLC (SB) and Glaxo Wellcome PLC electrified Wall Street and financial markets world-wide.

Not only would the merger of SmithKline and Glaxo Wellcome create the largest drug company in the world, but it would be the biggest corporate combination in history.

Both companies confirmed that merger talks were under way. The name of the new firm would be Glaxo SmithKline PLC. As proposed, Glaxo shareholders would hold 59.5% and SmithKline shareholders would hold 40.5% of the issued ordinary share cap- ital of the combined group. Sales at SmithKline are $13.2 billion. At Glaxo Wellcome, sales are $13.6 billion.

The proposed merger of SmithKline and Glaxo results from market forces which encourage consolidation. Analysts predict that a wave of drug company mergers and consolidations will occur in response to the creation of Glaxo SmithKline PLC. These consolidation forces are the same ones transforming healthcare and clinical laboratories.

Merger talks between Glaxo and SmithKline came about because SmithKline earlier acknowledged that it was exploring merger options with American Home Products, another drug giant. Glaxo immediately approached SmithKline and American Home dropped out of the discussions.

“We are in the middle of a revolution where biology meets chips.”
Jan Leschly
CEO, SmithKline Beecham PLC

The SB-Glaxo merger could significantly change the clinical laboratory industry. SmithKline Beecham Clinical Laboratories (SBCL) would become a relatively small business unit within the new corporation.

Reimbursement declines, increased government regulation and falling test utilization plague SBCL and its laboratory competitors. Because the clinical laboratory industry is recognized as having poor potential for sustained growth in revenue and operating profits, SBCL would not be peceived as a major profit center within Glaxo SmithKline.

That is particularly true given the corporate priority on researching and developing new drugs. SBCL’s laboratory activities might be considered a distraction of corporate management and resources.

Evidence indicates that management discussions about the role of the laboratory division within the post-merger company took place. While talks with American Home Products were under way, news services reported from London that SmithKline was considering divesting both its pharmacy benefits division and SBCL.

Impact On Lab Industry

The clinical laboratory industry would see an impact from the merger of Glaxo and SmithKline. Should the merger occur, and should SBCL be spun-off, then the competitive marketplace for laboratory services would undergo fundamental changes.

For that reason, perceptive laboratory executives should watch this story as it unfolds. Of the three national laboratories, SBCL seems to have best weathered the financial storms. But any major restructuring to its corporate parent will directly bring about changes to the laboratory division.

Such changes will not be visible in the day-to-day operations at SBCL. As a billion-dollar operation, SBCL has the resources to sustain existing services. Instead, such changes will involve fundamental strategic decisions about what kind of business SBCL wants to become.

Those strategic decisions would affect marketing and sales activities within the laboratory company. It will also influence pricing decisions for laboratory testing. Because of SBCL’s size and clout, any new directions would affect the competitive market- place for laboratory services.

Radical Technology Drives SB Merger

Two technological developments push SmithKline Beecham PLC to consider merging with a competitor. Both technologies will similarly transform clinical laboratories.

First is the introduction of techniques to rapidly locate and identify genes. Genes and the proteins they produce are used by drug companies to decipher a disease’s biochemical pathway, thus identifying “drug targets,” sites where a pharmaceutical could have therapeutic value. These same genes and proteins will also create diagnostic opportunities.

Second, new robot chemistry is transforming the way chemicals are produced and tested. Automated instruments, combined with silicon chips, can now make thousands of new chemicals per day. Previously, chemists could only make such compounds one at a time. Technology used in these auto- mated chemistry systems is working its way into diagnostic testing instruments for clinical laboratory use.

Richard Sykes, CEO of Glaxo Wellcome, noted the profound change this technology is bringing to the pharmaceutical industry. To “reskill” the company away from trial-and-error screening of chemicals for medicinal activity, he said “the future is in molecular genetics, cell biology and the modern sciences.”

CEOs at both Glaxo and SmithKline decided that consolidation would give both companies the best chance of surviving this technological revolution. It is estimated that up to $3 billion of administrative, marketing and manufacturing costs can be eliminated through consolidation. This money will be applied to further research and development, improving the competitive position of the merged company.

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