75bn SB merger threatens to endanger drugs competition

What is Jan Leschly on? One answer has to be 8m a year, as SmithKline Beecham’s chief executive. But I was rather wondering whether he was on some kind of recreational pharmaceuticals – whether he had dipped into the stock-cupboard, as it were – that had delivered a turbo-charged drive, ambition and boundless energy. For he doesn’t seem to be as other mortals.

For a start, the man’s a former international tennis pro, who made the Wimbledon quarter-finals. Having turned his hand to business, he now stands to be the most powerful man in the global pharmaceuticals industry, as SB plans a 75bn merger with its US drugs oppo, American Home Products (AHP). This is the biggest corporate deal ever. We might conclude that Leschly is a competitive man.

The question really has to be: how much is this a deal that is led by the man and how much is it about a man who is led by the deal? The Leschly ego is a well-known phenomenon. He is said to have very badly wanted to be an industrialist who is up there with Microsoft’s Bill Gates, Intel’s Andy Grove or General Electric’s Jack Welch. Well, soon he will be – the biggest cock crowing from the top of the pharmaceuticals heap.

It should serve to satisfy the hunger for power that dogged him at American drugs concern Squibb, which he left after becoming a victim of a night of the long knives when it merged with Bristol-Myers. He spent a year after that reading philosophy and theology. One is tempted to presume that it taught him that there is no more to life than being rich and powerful.

But this deal must be driven by more than one man’s desire to be the biggest, mustn’t it? Nearly two years ago, I wrote here that one of the delightfully quixotic aspects of the global pharmaceuticals industry was that it was bucking the popular trend of the time for demerger. Hanson, British Gas and Thorn EMI were all at it and it had become something of a shibboleth that conglomeration was a thing of the past. Delightfully, drugs companies started to conglomerate like crazy.

AHP itself got in some practice in this respect by acquiring Cyanamid in 1994 for 6.3bn and, in l996, Upjohn of the US got together with Sweden’s Pharmacia in an 8.8bn deal. There was also Glaxo’s 9.1bn takeover of Wellcome. And then the sky went dark, as an Independence Day sized deal eclipsed everything else in the shape of Sandoz and Ciba-Geigy, creating Novartis in a 32.8bn merger.

Economies of scale are invariably the driver of these deals and we can expect to see some considerable fall-out from the SB/AHP entity (more of which in a moment). But there are other imperatives in the pharmaceuticals sector. There is the constant concern over patents and their expiry dates – in SB’s case, the worry was that ulcer treatment Tagamet was unduly relied upon to deliver earnings. Then there are the onerous research and development budgets – huge lead-times and vast investment – that is alleviated by corporate critical mass.

On combined sales of 16.7bn and earnings of 2.2bn, the new company will have an R&D spend of some 1.7bn if it just stands still. That is awesome muscle in this industry and something to keep executives at Merck, Glaxo Wellcome and Novartis awake at night, unless they have a handy line in executive sedatives.

As to those economies of scale, expect SB/AHP to be an American company, whatever the talk of globalisation. Both companies have their US headquarters in Philadelphia and Leschly is said to be based there now. That means the writing is on the wall for SB’s West London HQ, where some 1,800 of the company’s total 8,500 UK staff are based.

Furthermore, it is already emerging that there could be a rationalisation attached to the deal, worth in the order of 7bn, which in the scale of a deal of this size is peanuts. But it could mean the sale of SB Healthcare Services, the US clinics and pharmacy management business and the gutting of many AHP operations in the States.

In short, Britain loses a major company and there will be wholesale closures on both sides of the Atlantic. The returns on this strategy will be an international pharmaceuticals megalith with the marketing muscle to put the wind up any competition and a stable of world-class brands, from Lucozade and Ribena to Panadol and Advil.

The trouble with this sort of deal is that globalisation can take no account of national regulatory regimes, which it sweeps aside in the tide of conglomeration. These deals are just too big for any local regulatory or anti-trust body to contain. And there seems to be no natural ceiling on their value. If a 75bn deal can be struck, then why not a 150bn merger of SB/AHP with Merck? We really could be facing a time, not too distant in the new millennium, when our drugs are made by a single international conglomerate. I don’t think that’s a happy vision.

And finally, consolidation means rationalisation. A great British enterprise is drawing to a close with this deal. If it really is driven by the ego of one man, then that is a very sad state of affairs indeed.

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