Listening To Prozac And Zestril, And...

When it comes to dealmaking, Glaxo Holdings PLC clearly has the interest--and the money. It's Glaxo's timing that may be a little off. CEO Richard B. Sykes confirms that Glaxo held talks with McKesson Corp.'s PCS Health Systems and Diversified Pharmaceutical Services earlier this year--only to have both drug benefits managers snapped up by competitors. SmithKline Beecham snared DPS for $2.3 billion, while Eli Lilly & Co. got PCS for $4 billion.

Now, after the global drug industry has struck some $36 billion worth of deals in the past year, Glaxo is still without a partner. But that could change before the end of the year, say analysts, consultants, and industry executives, who are keenly awaiting a big deal by Glaxo. Even Glaxo insiders acknowledge that the company is scouting out prospects. "So many kites have been flown," says one.

"UNBELIEVABLE." For now, a deal with Lilly seems the odds-on favorite. It's widely rumored throughout the industry that executives at Glaxo and Lilly are already talking about a friendly alliance, though neither will comment. In many ways a Glaxo-Lilly link makes sense. For starters, such a deal would protect Glaxo's access to the U.S. market if the PCS deal goes through later this year. Lilly has suggested it might want a partner to help pay for PCS. Moreover, Glaxo would give Lilly an expanded menu of products to feed PCS.

A merger with Lilly would also help Glaxo fill out its product line. The big prize: Prozac, Lilly's blockbuster antidepressant. It would be "an unbelievable deal," says a consultant whose firm works closely with Glaxo. "It would also scare the hell out of everyone else."

There are plenty of hurdles, though. Since a takeover requires approval from 80% of Lilly's shareholders, it might be tough to pull off--especially with 20% of the stock controlled by the Lilly family and employees. But the biggest dealbreaker might be the price tag: $24 billion, estimates Carl Seiden, an analyst at Sanford C. Bernstein & Co. Still, analysts say that doesn't preclude a stock swap or a joint venture.

Warner-Lambert Co. is also frequently mentioned as a possible partner. But most analysts and drug executives doubt Glaxo wants a company best known for its over-the-counter business. Instead, they suggest that Glaxo might acquire the company's prescription-drug unit. Warner has seven new drugs in late-stage testing, including Omnicef, an anti-infection drug. Such an acquisition would also be cheaper than a megadeal with Lilly, possibly costing as little as $6 billion.

There are all sorts of dark-horse candidates rumored to be on Glaxo's list as well. Among the favorites: Britain's Zeneca Holdings PLC, which was spun off from Imperial Chemical Industries PLC last year. Sales of its antihypertensive Zestril and cancer anaesthetic Diprivan both grew more than 40% last year, to a combined $967 million. Glaxo might also prefer a research-intensive company that's badly in need of some marketing clout. One possibility: Wellcome PLC, which dominates the antiviral drug market. Even after months of frenzied industry dealmaking, analysts agree there are plenty of potential partners. It's just up to Glaxo to settle on the timing.


Analysts speculate that Glaxo is studying mergers or joint ventures with the following companies:


An alliance with this giant drugmaker would improve Glaxo's U.S. distribution and give it access to the antidepressant Prozac.


Company could sell its prescription drug unit to Glaxo. Such a deal would allow Warner to concentrate on the over-the-counter market.


Company would broaden product portfolio with fast-growing drugs such as the intravenous anesthetic Diprivan.


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