Burying The Hatchet Buys A Lot Of Drug Research

Glaxo SmithKline may prompt other megamergers

It's a deal that had been brewing for two years--and which many industry insiders had expected for months. Now the world's largest drug company merger--the $174 billion combination of Britain's Glaxo Wellcome and SmithKline Beecham is all but a done deal.

Despite all the anticipation, it's still shaking the global drug industry. First, there's the sheer size: The combined company will have $25 billion in total revenue, making it the biggest drug company in the world. Together, Glaxo SmithKline will have 107,000 employees around the world and an unrivaled research and development budget of $4 billion. That, says Jean-Pierre Garnier, the SmithKline Chief Operating Officer who will be chief executive of the combined company, will keep it at the cutting edge of new drug discovery, particularly biotech products. "Dollar for dollar we have the opportunity to discover more drugs than any of our competitors," says Garnier. And Glaxo SmithKline will employ the biggest pharmaceutical sales and marketing team in the world--40,000 strong--to sell them. Finally, it will have the financial resources to pursue more deals. Glaxo chief Sir Richard Sykes hinted that the new company is already looking for targets.

True, the industry has been consolidating for years. But now, no deal is impossible--and the pressure is building on loners such as Merck to get in the deal game. Even as Glaxo and SmithKline announced their deal, the takeover of Warner-Lambert Co. took a new twist. Days after Warner-Lambert agreed to negotiate with hostile bidder Pfizer Inc., news came of a possible deal with Procter & Gamble Co. A source close to Warner confirms it is talking about a three-way matchup with American Home Products Corp. and P&G. Others say Bristol- Myers Squibb Co. and Eli Lilly & Co. make a good team. And don't forget DuPont and Johnson & Johnson, which may also be snooping around.

Who will be left standing when the deals are done? Glaxo SmithKline would create a British giant; the two Swiss biggies, Novartis and Roche Holding Ltd., are likely partners. As the deals reach jumbo proportions, Hemant Shah, an independent drug-industry analyst, foresees perhaps four U.S. drug companies surviving along with a German entity.

And Merck & Co.? The former No. 1 will see its U.S. patents expire on several big products in the next few years, including the patent on the moneyspinner hypertension drug, Vasotec, which has $2.3 billion in annual sales. Though Merck CEO Raymond V. Gilmartin has maintained Merck doesn't need anyone, industry insiders say the Glaxo SmithKline combo changes that. "This does force Merck to rethink their position," says Stephen S. Tang, national director of consulting firm A.T. Kearney Inc.'s health-care industry practice.

10,000 TARGETS. The rush to consolidate--and amass huge research and financial resources--is tied to the great strides scientists have made in unraveling the human genome. These genetic discoveries have yielded more than 10,000 viable biological targets around which to develop new medicines. But it will take billions to turn them into drugs. Says Lehman Brothers analyst Stewart Adkins: "There is a land grab taking place in genomics."

The biotech opportunity is what convinced Sykes and his onetime rival, SmithKline Beecham chief Jan Leschly, to forget the enmity left over from their failed merger try in 1998. Tadataka Yamada, newly appointed chairman for research and development at Glaxo SmithKline, figures the new company can readily foot the bill for the expensive clinical trials needed to exploit the countless opportunities emerging from gene sequencing. "Both companies are also leaders in bioinformatics," which uses advanced computer programs to find similarities among gene sequences, Yamada notes.

That tech edge is vital in speeding up the arrival of the genome-based drugs the company so badly wants. Now the two sides have to prove they can make this megamerger work.