Glaxo pipped at post by Lilly's dollars 4bn bid for PCS: Failure to acquire McKesson casts shadow over US healthcare market strategy and sends shares lower

GLAXO has been outmanoeuvred by Eli Lilly, the drug company whose products include Prozac, the anti-depressant, in the race to buy PCS Health Systems, one of the largest pharmaceuticals benefit managers in the US.

McKesson Corporation, based in San Francisco, yesterday said it was selling the company to Eli Lilly for dollars 4bn ( pounds 2.67bn), a price Glaxo seemed unwilling to match.

Glaxo and the American Johnson & Johnson had been widely tipped as front-runners to acquire PCS. Its disposal to Eli Lilly removes the last significant US pharmaceuticals manager from the market place.

Glaxo shares fell in London by 8p to 563p, reflecting concern among dealers that the UK company had missed out.

Its failure to strike a deal over PCS was perceived as having cast a shadow over Glaxo's strategy in the US healthcare market where it makes 40 per cent of its sales.

'This has to be seen as a disappointment for Glaxo. There aren't a lot of other PBMs around,' said Peter Laing of Salomon Brothers.

Glaxo began discussions with McKesson over its PCS subsidiary earlier this year. Options had varied from a full takeover of PCS by Glaxo to a significant equity stake in the company together with other drug manufacturers.

By midday yesterday McKesson shares had soared dollars 24.25 to dollars 97.50. Analysts attributed some of the buying to speculators' hopes that Glaxo or some other company might still weigh in with a rival bid to Eli Lilly's dollars 76-a-share, all- cash tender offer. A Glaxo counterbid is, however, unlikely.

The deal is the latest example of the restructuring of the US healthcare industry, as a combination of market forces and the spectre of President Clinton's healthcare legislation force healthcare players to rethink their strategies. Companies such as PCS manage the prescription drug needs of health- plan sponsors, which can lower their drug purchase costs and administrative overheads by using a powerful middleman company such as PCS.

The drug companies have been buying up these middlemen, giving them more control over distribution and pricing.

The two biggest rivals to PCS in the pharmacy benefit management sector were both recently sold. Last year Merck purchased Medco Containment for dollars 6.6bn, and in May of this year SmithKline Beecham bought Diversified Pharmaceutical Services.

Glaxo declined yesterday to comment on the sale but said it continued to review its operation in the US.

'We've said that we have been talking to various people and that we are aware of the changes in the US marketplace and that still remains the position,' a spokesman said.

Some analysts welcomed Glaxo's decision not to draw on its pounds 2bn cash pile to pay too high a price to McKesson for PCS.

They noted that shares in SmithKline Beecham came under pressure in the wake of the company's recent move to follow Merck by paying dollars 2.3bn for Diversified Pharmaceutical Services.

'On balance, we've always believed that Glaxo would embark on a series of strategic deals in much the same way as Pfizer has done,' said Nigel Barnes of Hoare Govett.

In May, Pfizer established a dollars 100m joint venture with Value Health, a US health data manager, to develop healthcare delivery systems and improve the use made of some Pfizer products.

In addition to receiving dollars 76 in cash for each of their shares, McKesson stockholders will be left with one new share in the new, restructured McKesson, containing the company's non-prescription drug operations.

Eli Lilly shares were marked down dollars 7.25 to dollars 50.125, as investors realised the deal would dilute earnings and add a heavy debt burden to the balance sheet.

Moody's and Standard & Poor's reacted to the news by putting Eli Lilly's unsecured debt under review for a possible downgrade.

(Photograph omitted)