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Glaxo, Smithkline in merger talks - Views on News from Equitymaster
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  • Jan 15, 2000

    Glaxo, Smithkline in merger talks

    Glaxo Wellcome Plc and Smithkline Beecham Plc have confirmed they are in a merger talks that would lead to the creation of the world’s biggest pharmaceutical company (market cap: $180.7 billion or £ 110 billion).

    The merger, if it were to come through, would however be in place only after a year since the European Commission can be expected to probe thoroughly into the anti-competition aspect. The merged company would have a global market share of 7.5% and R & D expenditure of $ 4 billion annually.

    The fundamental driver for the merger internationally is obviously the fact that Smithkline has an impressive product pipeline (which includes pathbreaking work in genetics) which Glaxo (with turnover of £ 8 billion) can fund. Glaxo on the other hand has not had a blockbuster drug since Zantac (Zinetac in India) as well as Zovirax and Epivir (which the company got post takeover of Burroughs Wellcome Plc.)

    The development costs for creating a new blockbuster drug have been the most significant drivers for the spate of mergers sweeping the pharmaceutical industry. And the smaller companies, which have good product pipelines have become candidates for takeover. This is what has prompted Pfizer to make a hostile bid for Warner Lambert. (The latter has been talking to American Home Products before the former made a hostile bid)

    As far the Indian operations are concerned the merged company with a market share of 7% will be way ahead of competitors Cipla and Ranbaxy. The merged company will have brands such as Iodex, Augmentin (an amoxycillin–clavulanic acid combination), Engerix (Hepetitis B vaccine), Zevit and Livogen (vitamins and minerals), Betnovate and Neosporin (dermatological), Cetzine (anti–allergics), Zovirax and Epivir (Anti–virals).

    There would be doubts regarding what happens to the 100% subsidiary of Smithkline Beecham viz Smithkline Asia which markets Crocin and Tums. While Glaxo has been shareholder friendly, Smithkline made provisions for royalty payment to the parent, set up a 100% subsidiary and planned to introduce quite a few new products such as Avandia (its anti–diabetes blockbluster) as well its anti–meningitis drug through the 100% subsidiary. This infact has led to a diametric difference in the valuations of the two companies.

    Another interesting sidelight is the fact that Glaxo worldwide sold its food business (which includes Farex) to Heinz while Smithkline has an extremely successful product in Horlicks. In fact, India is the only other place where Horlicks is manufactured apart from the UK.

    The legal merger can however be expected to take longer in India (at least two years) while the management and the marketing consolidation can be done sooner. This is because of three reasons. First, the fact that India features much lower in the scheme of importance in the global order.

    Second is the shareholding pattern of the two companies and the parent’s holding in each subsidiary. While Smithkline UK has a 40% holding in its two subsidiaries viz. Smithkline Consumer and Smithkline Pharma apart from the 100% subsidiary, Glaxo has a 51% stake in its Indian subsidiary.

    Third, is the likely pressure from the unions as has happened in the case of Glaxo–Burroughs Wellcome merger where the salaries and the perks were higher in Burroughs and the workers are resenting a uniform salary structure.



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