Britain’s SmithKline, Glaxo Plan to Combine

Giant drug makers Glaxo Wellcome and SmithKline Beecham unveiled a stunning merger proposal late Friday that would create the world’s largest pharmaceutical company and would likely be the biggest corporate marriage in history.

A deal between the two British companies would send repercussions through the worldwide health-care market, from major hospital chains to consumers’ corner drugstores.

Such familiar remedies as SmithKline’s Tums antacid tablets and Glaxo’s Zantac ulcer medicine would now be produced under one roof, and the new entity would have annual sales exceeding $25 billion.

The companies’ announcement further shocked the drug industry because SmithKline had disclosed only last week that it was discussing a merger with American Home Products Corp., a major U.S.-based drug producer.

SmithKline said Friday, without elaborating, that it had scrapped those negotiations. But that merger already faced challenges, in good part because American Home potentially faces huge legal liabilities involving its Norplant contraceptive product and two diet drugs that have been linked to health risks.

Lowell Weiner, a spokesman for Madison, N.J.-based American Home, confirmed the talks were terminated but would not comment further.

SmithKline spokesman Jeremy Heymsfeld said the companies weren’t yet disclosing what the merger terms might be, except to say that Glaxo’s current stockholders would own a combined 59.5% of the new company and SmithKline’s holders, 40.5%.

Glaxo and SmithKline are currently valued in the U.S. stock market at $96 billion and $70 billion, respectively, so a deal between the two concerns--even if Glaxo buys SmithKline--would probably surpass the biggest merger to date: WorldCom Inc.’s proposed $37-billion acquisition of MCI Communications Corp.

Glaxo spokeswoman Nancy Pekarek said it was most likely that a final merger announcement would not come for weeks, and she declined to discuss the talks further.

The drug industry’s merger frenzy reflects the companies’ renewed rush to slash overhead expenses and otherwise become more efficient in order to grapple with the industry’s continuing squeeze on costs.

The same trends had prompted a rash of mergers in 1994 and 1995, and Glaxo and SmithKline are themselves the product of earlier combinations. The merger mania subsided in 1996 and 1997 as the industry enjoyed a period of strong sales.

But if SmithKline and Glaxo do merge, it could set off another wave of mega-deals among drug producers, especially among mid-size players such as Schering-Plough Corp. and Warner-Lambert Co., who might feel a new sense of urgency to move quickly to stay within the industry’s top ranks, analysts said.

And the pharmaceutical business is still considered quite fractured--with about 20 major players--relative to many other industries where mergers already have narrowed the field to just a handful of primary companies.

Drug manufacturers are under growing pressure to keep a lid on prices from managed-care insurers--which themselves are merging aggressively to lower expenses--and government agencies that buy huge numbers of drugs.

SmithKline’s other drugs include the Nicorette and Nicoderm smoking-cessation products and the antidepressant Paxil. It also produces Aquafresh toothpaste and Geritol vitamins. Glaxo’s lineup also includes AZT, which is used in treating AIDS.

At the same time, the drug producers are wrestling with rising costs for the research and development needed to bring new drugs to the market.

Indeed, Glaxo and SmithKline said “a major and significant benefit” of their deal would be to form “the largest research-and-development organization in the global health-care industry.” Together, they could probably spend more than $3 billion a year on new-product development.

“These are two huge companies with relatively little product overlap,” said Hemant Shah, an independent drug-industry analyst in Warren, N.J. “That means they can eliminate 20% to 25% of their operating expenses, which is a huge savings that can be plowed back into research.”

But it’s also quite possible that the merger, and the companies’ effort to slash costs, could mean massive layoffs. Glaxo’s U.S. operations are based in Research Triangle Park, N.C., and SmithKline’s are based in Philadelphia.

Together the companies employ more than 105,000 people worldwide. Glaxo and SmithKline had sales of roughly $13 billion and $12 billion last year, respectively,

Glaxo’s American depositary receipts (which represent the British company’s U.S. shares) slipped 19 cents, to close at $53.81 apiece on Friday, and SmithKline’s ADRs fell 75 cents, to close at $63.13, in New York Stock Exchange composite trading.

American Home’s stock fell 56 cents a share to close at $95.44 on the Big Board.