Few corporate leaders have had as big an impact on their companies as Paul Girolami. During his 13-year tenure as CEO and then chairman of Glaxo Holdings PLC, he transformed the British drugmaker into a world pharmaceutical giant second only to Merck & Co. And he did it in true bootstrap fashion. Fiercely opposed to acquisitions, which he felt would distract Glaxo from its research focus, Girolami, an Italian-born immigrant, spent lavishly on developing blockbuster drugs. Glaxo's most successful: Zantac, an ulcer-fighting medication that remains the world's top-selling medicine.

But now, as the 68-year-old Girolami prepares for retirement in November, Glaxo is entering a period of profound uncertainty. Sales of its aging powerhouse drug are likely to weaken in the next few years. And there are no megahits in Glaxo's pipeline to immediately take Zantac's place. Worse, industry insiders believe Girolami's go-it-alone strategy has left the company at a competitive disadvantage. That's especially true in the all-important U.S. market, which accounts for more than 40% of Glaxo's sales and where behemoths such as Merck & Co. and SmithKline Beecham PLC have scrambled to acquire smaller competitors and drug distributors. "The foundations of our business are changing," Girolami acknowledges.

MAJOR SHIFT. Things will change at Glaxo, too, under Girolami's successor, CEO Richard B. Sykes. Glaxo's new top man is exploring possible acquisitions and joint ventures to offset slowing sales in coming years (chart). True, many of the more obvious targets, such as Medco, have already been snapped up. That's why many in the drug industry, as well as Wall Street, believe Sykes will have to set his sights even higher to have a sufficient competitive impact. Among the rumored possibilities: a deal with Eli Lilly or Warner-Lambert Co.. Glaxo needs "a strategic alliance or a combination," says a former senior executive at a rival company. "I don't think they're going to have a choice." Says Sykes, a plain-spoken Yorkshireman: "We haven't ruled anything out."

Sykes's ascendancy clearly signals a major shift in strategy at Glaxo. For Glaxo to contemplate a merger would have been unthinkable during the height of Girolami's reign. An accountant by training, Girolami always argued that new products alone were the key to growth. And he quickly dispatched anyone who doubted that wisdom. Ernest Mario, Sykes's predecessor as CEO, resigned in March, 1993, after pressing for the acquisition of Warner-Lambert to gain entry into the lucrative over-the-counter drug market. "There was not blood on the carpet," says Richard E. Southwood, an Oxford University zoology professor and Glaxo board member. "There was a difference of opinion about what direction the company should follow."

In recent months, as mergers multiplied in the industry, insiders say that the board realized it was time for a change at the top. The company's revenue and profits are expected to slow in coming years as sales of the 13-year-old Zantac start to ebb. The drug is already under attack by cheaper generics and a new generation of antiulcer drugs, such as Astra's Prilosec.

Zantac is likely to face even stiffer challenges from a raft of new competitors now that SmithKline Beecham's patent for Tagamet, an ulcer drug similar to Zantac, expired in May. And Glaxo's own patents on Zantac begin expiring in 1996. Salomon Brothers Inc.'s Peter A. Laing predicts Zantac's sales could be nearly halved by 1997, to $2.2 billion.

All that translates into a severe bottom-line headache for Glaxo. Last year, Zantac's sales accounted for 43% of Glaxo's 1994 revenues and perhaps more than 60% of its profits. Given time and more intensive marketing, some of Glaxo's drugs could eventually emerge as blockbusters. But Laing figures the drugmaker's traditionally strong earnings growth could start slipping in a couple of years. In the fiscal year ended in June, pretax profits rose 10%, to $2.9 billion as sales climbed 15%, to $8.8 billion. But by fiscal 1996, pretax profits could decline by 7% from this year's expected results, to just under $3 billion, estimates Laing, as revenues drop 2%, to $9.2 billion.

That scenario has already made investors jittery. Glaxo's stock has fallen by a third, to just 9, from its all-time high of over 14 in 1992. Last year, institutional investors began pressuring the board for change at the top, say insiders. On June 15, Girolami announced his departure--more than a year ahead of schedule. "Everybody agreed with me it was the right time to go," says Girolami. "As someone said to me, `Even your shadow is too strong."'

Unlike his predecessor, Sykes grew up on the research side of Glaxo's business. He first joined the company as a microbiologist in 1972 and later spent seven years at the Squibb Institute for Medical Research. Returning to Glaxo in 1986, he swiftly rose through the ranks, eventually supervising research and development efforts. Sykes, now 52, is credited with managing Glaxo's huge R&D buildup. The company's research budget went from $176 million in 1986 to $1.3 billion last year.

Still, there are some similarities between the two. Like his boss, Sykes believes Glaxo's huge research machine is critical to the company's future. A striking symbol of this commitment can be found in Glaxo's sprawling new 73-acre research campus at Stevenage, north of London. Costing more than $1 billion, the nearly completed project will bring more than 1,000 British researchers under the same roof for the first time. Sykes is expected to increase Glaxo's R&D spending by 6% this year, to $1.4 billion, second only to Merck in the drug industry.

PRICING PROBLEMS. Generous budgets alone don't guarantee top-selling drugs, however. Imitrex, Glaxo's promising antimigraine drug, has run into price resistance. European governments are up in arms at what they consider the drug's unreasonable cost, $30 a dose. A complaint by the Danish government has triggered an investigation into Glaxo's pricing by the European Commission. Meanwhile, France's powerful drug agency has refused to give Imitrex final marketing approval until Glaxo lowers the price.

Without a Zantac replacement, Glaxo could have a hard time sustaining its costly sales force and huge research outlays. Sykes expects that R&D spending will start to drop off at many drug companies in the next few years, because the drug market is so fragmented that it's difficult to generate huge growth in sales volume. But he insists Glaxo will remain a research-intensive company.

It's largely because of his inability to find homegrown solutions to Glaxo's problems that Sykes is looking for outside help. On the R&D front, he recently forged alliances with 10 small research boutiques. Two promising products in Glaxo's pipeline--Lamivudine for hepatitis B and 3TC for HIV--come from BioChem Pharma Inc., a small research company in Laval, Quebec. Analysts estimate both drugs could generate combined revenues of $78 million for Glaxo by 1997. And sales could rise dramatically by the end of the decade.

Sykes is also seeking out partners to help Glaxo's marketing efforts. Just months after Sykes became CEO last year, Glaxo entered into a partnership with Warner-Lambert to market over-the-counter versions of its medicines. That way, Glaxo hopes to extend the life expectancy of some of its major drugs. In Britain, Warner is marketing Glaxo's allergy drug to fight rhinitis, Beconase. Glaxo, meanwhile, has applied for regulatory approval to sell a less-potent version of Zantac over-the-counter in Britain. It plans to seek similar permission in the U.S. in October.

Still, the best cure for Glaxo's future worries may lie in a full-fledged acquisition or joint venture with another drug giant. Glaxo is sitting on a cash pile of $3.5 billion and analysts reckon it could easily finance a deal worth five times that amount. Sykes acknowledges that Glaxo's financial strength "gives us a strong position in a marketplace which is relatively unstable." But he cautions against assuming that he will chase after the first available drug distributor. Instead, a future alliance with another drugmaker is possible, says Sykes.

DIRECT SALES. Indeed, the CEO suggests that a drug distributor may not turn out to be the ideal merger candidate as the health-care system evolves toward "disease management." Under such a system, Sykes says, consortia of drugmakers, insurers, and managed-health-care providers would cooperate to deliver service and offer better value--eliminating the need for distributors.

If that happens, Sykes argues that Glaxo would be better off negotiating deals directly with health-maintenance organizations--and even with big corporations that could pressure insurers to buy certain drugs. Thanks to a special sales force established in 1986 to market directly to HMOs, Glaxo has a significant share of the managed-care market. The company recently set up a sales group to call directly on big corporations. "We're not trying to sell yet," says Robert A. Ingram, CEO of Glaxo Inc., the U.S. unit. "We're trying to build relationships."

So for now, Sykes says he sees little need to rush into a deal. True, the linking of competing drugmakers with distributors may restrict market access, but Sykes says he has found "no doors closed to us yet." Moreover, he contends that innovative medicines will always be sought after by distributors--even if they are owned by rivals. Through the years, Glaxo has adequately demonstrated its scientific strengths. Now it's up to Sykes to prove that Glaxo's management has some deal-making prowess as well.

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