City: Glaxo gamble

GLAXO, Britain's largest company in terms of stock market value, has a balance sheet that must be the envy of corporate Britain - stuffed full of cash. So where do the rumours come from that it is planning a pounds 3.5bn rights issue?

If they are true - recently they became specific enough for old City hands to know the idea must at least have been explored - then the only possible explanation is that Glaxo wants the money for an acquisition. It certainly doesn't need it for more research and development. Glaxo is already spending as much as it sensibly can on R&D - and still generating cash on top.

For Glaxo, a substantial acquisition would represent a dramatic shift in strategic direction, a complete U-turn in policy. Under Sir Paul Girolami, Glaxo's Italian-born chairman, the company has prided itself on achieving explosive growth entirely through organic means; there have been no acquisitions and no calls on shareholders. Almost alone in British industry, Glaxo's world-beating success was generated under its own steam.

Sir Paul has always vowed that he intends to keep it that way. His vision is that the company will remain an internally driven machine creating its own culture and business opportunities. Billions are beingpoured into research and development of new medicines that might one day replace Zantac, the company's blockbuster anti-ulcer drug.

It is a big gamble that has met with limited success. Even the new migraine treatment, Imigran - hailed by some analysts as likely to be at least as successful as Zantac - has not so far lived up to its early promise. And, in any case, the world is becoming a less friendly place for the big pharmaceutical companies. Lengthy patents - Zantac's included - are being challenged. Governments and medical insurers are no longer prepared to pay over the odds, even for pioneering treatments. With their fat-cat profits and bumper executive salaries, pharmaceutical companies are beginning to develope a poor public image.

That does not mean Sir Paul has got it wrong. His has been one of the most remarkable business achievements of the post-war period and it is far too early to judge his attempts to position Glaxo for the 21st century. But it may be that throwing money at R&D in the exclusive pursuit of blockbuster prescription drugs is no longer the whole solution. In particular, Glaxo needs to begin hedging its bets by developing in the non-prescription over-the-counter market. Zantac will soon be heading in that direction, anyway. Returns in the OTC market are not as spectacular, but still good enough to make most businessmen green with envy.

To some extent, Glaxo already recognises its deficiency. Last week it made a big noise about the appointment of Arthur Pappas from its Singapore operation to head the group's emerging OTC business. But as Sir Paul and his chief executive, Ernest Mario, are only too well aware, much more needs to be done. Above all, they lack sufficient OTC product to make the business wholly viable.

I have no idea whether the rumours about an agreed merger with Warner-Lambert of the US are true. One of my spies tells me that it's not Warner-Lambert but Upjohn Glaxo is talking to.

Either way, it would be the deal of the year, if not the decade, if it happened. Warner-Lambert would cost about pounds 7bn. With its strong OTC business, it would fit Glaxo like a glove. The problem is that anything other than an agreed deal would be out of the question, and that might prove hard to engineer. Furthermore, a pounds 3.5bn rights issue to help pay for it, even for a company of Glaxo's stature, would be a tall order.

With Sir Paul now 67 and preparing to hand over the reins to Mr Mario, Glaxo has nevertheless reached something of a crossroads in its corporate development. Fundamental change is afoot and the next few years are going to be fascinating to watch.