Glaxo and SmithKline Beecham face drugs sell-off to seal pounds 100bn mega-merger

Glaxo Wellcome and SmithKline Beecham are expected to sell some of their best-selling drugs in order to avoid a full-scale regulatory inquiry into their proposed pounds 100bn mega-merger. Meanwhile unions are asking the Government to block the deal, which they fear could lead to the loss of 10,000 jobs in the UK. Nigel Cope, City Correspondent, reports.

Disposals are likely in two areas of therapeutic drugs where Glaxo and SmithKline dominate their markets. In anti-viral drugs, used to treat infections such as Herpes, Glaxo markets the highly successful Zovirax and Valtrex while SmithKline has Famvir.

In drugs used to combat nausea caused from chemotherapy, Glaxo and SmithKline dominate the market with Zofran and Kytril respectively. The two companies expect they will have to make disposals in these areas in order to satisfy the competition authorities that consumer choice would be protected and that a position of market dominance would not be used to raise prices.

There is a parallel with the Glaxo takeover of Wellcome in 1995, when both companies had migraine treatments in late stages of development. Glaxo sold its drug to Zeneca.

The deal will be scrutinised by the Federal Trade Commission in the US and the European Commission in the European Union. However, it is possible that the UK competition authorities could seek to gain a role in the inquiry process.

Though a merged Glaxo-Wellcome and SmithKline Beecham would be a UK company with its base in London, unions have reacted angrily to the prospect of widescale redundancies here. They fear up to 10,000 job cuts as part of a pounds 1bn cost-cutting programme and say it will reduce the country's pool of skilled scientists, hit competition and reduce consumer choice. Roger Lyons, the general secretary of the MSF, the manufacturing, science and finance union, said: "Our concern is that the only advantage of the deal is in cutting costs by shedding jobs." The union is calling for urgent meetings with Margaret Beckett, President of the Board of Trade, as well as MEPs and both companies.

The biggest threat to jobs is at the two groups' head offices and sales and marketing centres. Glaxo's head office is in Greenford while SmithKline employs almost 2,000 people in head office and sales functions at several offices in Brentford.

It is not clear whether the group's main research and development centres could be threatened. Glaxo opened a pounds 700m facility in Stevenage in 1995. SmithKline spent pounds 250m on a new site in Harlow, Essex, which opened last April.

Neither company would comment on possible research closures though SmithKline said: "The driving force behind this merger is that it would build a R&D function that would be second to none."

The combined research spending of the merged group would be pounds 2bn. SmithKline claims this would be double the spending of any other drugs company. Analysts estimate that the UK job loss figure could be closer to 2,000, mostly from head office and sales functions.

They were responding to the surprise announcement late on Friday that the two companies were in detailed discussions which could lead to a full scale merger. The deal would be the largest merger in corporate history and create the third-largest company in the world after General Electric of the US and Royal Dutch-Shell, the Anglo-Dutch Group. It will also be the world's largest pharmaceuticals company, leapfrogging Merck of the US.

The proposals also mean that SmithKline has dropped its plans to merger with American Home Products in a pounds 77bn deal that was only announced last week.

The terms of the deal have already been decided even though the two groups first made contact only eight days ago. Glaxo shareholders will hold 59.5 per cent of the group with SmithKline investors holding the remaining 40.5 per cent. Sir Richard Sykes, Glaxo's chairman, will be executive chairman of the combined group. Jan Leschly, chief executive of SmithKline, will be chief executive.

The merger will provide a fees bonanza for the investment banks. Lazards, which is advising Glaxo, and Morgan Stanley, which is representing SmithKline, could net fees of pounds 100m, according to some estimates.

Analysts say the merger is likely to prompt another wave off consolidation in the pharmaceuticals industry. Drug company shares are expected to soar today as traders try to spot the next bid or merger target.

Zeneca yesterday dismissed suggestions that it would be forced to seek alliances in order to combat the Glaxo-SmithKline behemoth. "The company has been very successful in developing a drug portfolio in the past few years and there is no reason why that should not continue," a spokesman said.

Zeneca has concentrated on two areas, cardio-vascular drugs and cancer treatments.

Hoechst, the German drugs group said the Glaxo merger would intensify international competition. "If the industry concentration process continues, then all industry participants will have to re-think their positioning," it said.