This Growth Pill Will Cost Glaxo Plenty

It was quite an about-face. In the late 1980s, Glaxo Inc. approached the Wellcome Trust, then an obscure medical research charity, about buying the Trust's biggest holding, a major stake in drugmaker Wellcome PLC. It was turned down cold. On Jan. 22, Glaxo got a far warmer reception. At a late-night Sunday meeting, the Trust quietly signed off on an offer valuing the company at a dizzying $14 billion.

Nothing better reflects the turmoil reshaping the global drug industry. For years, both Glaxo and Wellcome have determinedly pursued independent paths. Quiet Wellcome, protected by a friendly trust holding a 39.5% interest, lavished attention and spending on its researchers. Glaxo made it big by aggressively outmarketing rivals with products such as the anti-ulcer treatment Zantac. And under longtime Chairman Sir Paul Girolami, who recently retired, Glaxo eschewed acquisitions. Now, under new CEO Sir Richard B. Sykes, Glaxo is on the prowl.

Wellcome's management may resist Sykes's takeover bid. Chief Executive John Robb, who was informed of the bid hours after the Trust inked the deal, said publicly as recently as Jan. 12 that he wanted the drugmaker to remain independent. Wellcome's board is advising stockholders to take no action, and it has held a flurry of meetings, including with the Trust.

R&D PUNCH. Yet with just $3.2 billion in revenues, Wellcome lacks the research and distribution heft needed to compete in key markets--much like Marion Merrell Dow, Warner-Lambert, and Britain's Zeneca Holdings, which also may soon be acquired. So after a decision on Jan. 12 by the U.S. Food & Drug Administration not to recommend over-the-counter marketing approval for Wellcome's top drug, Zovirax, the company looks particularly vulnerable now.

Glaxo wants heft, too. Although it's the second-largest drug company in the world, after Merck & Co., it is looking to broaden its product portfolio to gain more clout with health-maintenance organizations and other big buyers. With Wellcome, it would acquire Zovirax, a herpes treatment that produces $1.2 billion in annual revenue, the AIDS treatment AZT, as well as added research punch in antiviral drugs, migraine therapies, and other areas. Together, the two companies would have more than $12 billion in sales.

The bid represents the culmination of 12 months of strategic soul-searching by Sykes. A former research scientist for Glaxo and Bristol-Myers Squibb, Sykes has aggressively pursued ventures with biotechnology companies and marketing partners to broaden Glaxo's reach.

But he also wants to squeeze costs. Glaxo and Wellcome are both headquartered in London and have sprawling research facilities in southeast England and in North Carolina. Analysts estimate that consolidating such operations could save upwards of $800 million. Last year, Glaxo's pretax profits were $2.9 billion, up 10%. Likewise, Sykes figures that by spreading the high costs of discovering and developing drugs over a wider sales base, the company will compete more effectively against such rivals as Merck and Roche Holdings Ltd.

SIMPLE MATH. Cost-cutting alone, though, does not a perfect marriage make. Some analysts believe it will be difficult to merge the market-oriented Glaxo with research-driven Wellcome. And they say the deal fails to address the looming expiration of key patents at both companies. Patents on Zantac, which accounts for 43% of Glaxo's sales, begin expiring in 1996. The U.S. patents on Zovirax, which produces 37% of Wellcome's sales, will expire in 1997. "I'm not sure [a merger] solves Glaxo's biggest problem, which is product maturity," says Ronald M. Nordmann, a portfolio manager at Deerfield Management Co.

Sykes counters that the deal's logic is a matter of simple mathematics: By combining the two companies' sales, the deal reduces their dependence on any one product. "It isn't compounding the problem," he says. "It's making it more manageable."

Wellcome won't buy that logic easily. CEO Robb declined to comment, but his options seem limited. Glaxo's offering price will be hard to beat. Arvind H. Desai, an analyst at Mehta & Isaly in New York, notes that Glaxo has offered to pay about five times Wellcome's estimated 1994 sales--twice the multiple that American Home Products Corp. paid for American Cyanamid Co. and Roche paid for Syntex Corp. last year. Says Sykes: "It's a price that should send a clear signal" to other potential bidders for Wellcome. It's a clear signal, too, of continuing upheaval in the drug industry.

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