House of Commons - Science and Technology

Select Committee on Science and Technology Third Report

GLAXO WELLCOME AND SMITHKLINE BEECHAM: THE MERGER PROPOSALS

1. On 30 January 1998 Glaxo Wellcome plc and SmithKline Beecham plc announced that they had entered talks with a view to merging and that SmithKline Beecham had terminated its merger talks with American Home Products (AHP). City reaction to the proposal was enthusiastic; share prices in both companies shot up. The deal would have created the world's largest pharmaceutical company and, in terms of market capitalisation, the third largest company overall. On 23 February 1998, after twenty three days of talks and before we had examined the participants, SmithKline Beecham announced that the negotiations had been terminated amid suggestions that Glaxo Wellcome had failed to abide by earlier agreements and rumours of insolvable differences between the two boards.

2. Our interest in the merger resulted from its potential impact on the UK's science base. Both Glaxo Wellcome and SmithKline Beecham are giants in terms of their research and development (R&D) expenditure: in 1997 they ranked first and second, respectively, in the Department of Trade and Industry's R&D Scoreboard and between them accounted for more than a fifth of all private sector expenditure on R&D in the UK.[1] Although both companies have over 90% of their sales overseas, much of their R&D is conducted in the UK.[2] In 1997 SmithKline Beecham spent some £293 million, or 35%, of their total R&D budget here:[3] in Glaxo Wellcome almost 50%, or some £500 million, of global R&D spend was domestic.[4] Both employ significant numbers of scientists, clinicians and technicians in the UK (over 4,600 are employed by Glaxo Wellcome and just over 3,300 by SmithKline Beecham[5]) and both fund much external R&D activity. Glaxo Wellcome told us that it currently spends "over £16 million per year on our support for basic research in academia, most of which is in the UK ... we provide for the training of 260 PhD students in 56 UK universities ... over the last 10 years we have endowed 11 Professorships in British universities at an average cost of £1 million. In addition we spend some £33 million a year with UK universities and hospitals in the conduct of clinical research and therapeutic trials".[6] Similarly, SmithKline Beecham told us of "a range of collaborations, including individual studentships, consultancy agreements, research grants, the Shared Equipment Initiative and leading participation in multilateral LINK schemes and Foresight Challenge Awards" where they provide both a financial and an intellectual contribution to the UK science base. They also provide for the training of about 270 students (both under- and post-graduates) and spend about £7 million per annum on research in UK universities.[7] The sheer size and breadth of the two companies' R&D operations leads inevitably to the conclusion that, if the merger had resulted in even a small change in expenditure, there would have been a ripple effect throughout the entire UK science base.

3. Both Glaxo Wellcome and SmithKline Beecham pointed out that each was a strong company in its own right and therefore that merger was not essential to either but that they were drawn to consider the option because of the significant improvements in R&D productivity and efficiency that might result.[8] Sir Richard Sykes, Chief Executive of Glaxo Wellcome, told us that he entered the talks with the vision of "creating a pharmaceutical company that would be second to none in the world, that would have the resources and the skills to put into all the modern science and technology that we have access to today, to produce medicines of value in the future which we could bring to people throughout the world".[9] Similarly, SmithKline Beecham told us that by bringing together "two very strong companies, both acknowledged as research leaders in their own right ... there really would be very tangible advantages" and that the specific rationale was to generate a much stronger research and development engine.[10] Both were equally adamant that the merger was designed not to enable the companies to reduce their combined R&D budgets but, by combining the budgets and redeploying them, to make the new company's R&D operations more efficient and competitive than either existing company's.[11] It had been agreed that any savings made in R&D as a result of eradicating duplication would have been put back into R&D operations. Both companies told us of the complementarity between their research operations that would have meant that each could have learnt from the other, benefited from each other's previous investments, and used their combined expertise to develop new products.

4. Although both companies gave us their interpretation of why the talks failed, the precise reasons remain unclear. Admittedly, bringing together two enormous organisations with distinct organisational structures and many disparate parts would have been an extremely complex process. Unlike Glaxo's acquisition of Wellcome plc in 1995, which was in effect a hostile takeover, this was to have been a merger of equals with the new company forging its own identity rather than adopting the image of one or other of the participants.[12] A combined market capitalisation of around £100 billion meant that the stakes were certainly high and, with much of that value held as intellectual capital, the assets fragile. Sir Richard spoke of different approaches, different cultures and different styles of management that could not be reconciled.[13] Mr Leschly, Chief Executive of SmithKline, told us that Glaxo Wellcome had changed their minds on points which had already been agreed which resulted in a loss of trust on the part of SmithKline Beecham's board.[14] The net result is that both companies have decided that the risks of merger outweigh the potential benefits.[15]

5. Had the merger gone ahead on the agreed terms, where reduced administrative overheads would have enabled more resources to be devoted to scientific research and the overall R&D budget maintained, both companies believe that there could have been a beneficial effect for the whole of the UK science base.[16] The creation of a R&D powerhouse, able to compete across the world, and conducting the bulk of its research in the UK would have reflected well on the UK science base and given important signals about the quality of its output. We share a sense of disappointment that an opportunity to create a national champion with R&D at its heart has been lost.

6. However, as both Sir Richard and Mr Leschly told us it is better that both companies remain separate than that the merger proceed without producing the desired returns.[17] Had the merger been unsuccessful, the UK could have lost two strong R&D companies without any tangible benefit and the contributions which each currently make to the wider science base would have been jeopardised.

7. We had some concerns that the failure of the merger talks would have a negative impact on the ability of two companies to work together on collaborative projects. However, Mr Leschly assured us that there was no reason why the two companies should not continue to have a good relationship and we are glad to hear that, post-merger, a new collaborative research project is under consideration.[18]

8. Both companies were confident that, despite the failure of the merger talks, they would maintain and enhance their respective positions in the global pharmaceutical industry and would remain active supporters of the UK science base. This can only be to its benefit.

Conclusion

9. The benefits of merging the R&D activities were emphasised by the Chief Executives of both companies. But twenty three days after the start of discussions those advantages were set aside—we were told because the management styles and philosophies of the two companies were so different as to be irreconcilable. However, the two companies had known one another well for many years. The Chief Executives were on such good personal terms that Sir Richard could ring Mr Leschly in the middle of SmithKline Beecham's negotiations with another company—AHP—and, as a result of that telephone call, those negotiations were dropped and new negotiations between SmithKline Beecham and Glaxo Wellcome were urgently embarked upon. If the two companies were so trusting of one another at that point what incompatibility could have been revealed in the subsequent twenty three days that was not apparent at the beginning? That was not made clear.

10. There appear to be two alternative conclusions to be drawn from the evidence before us. Either

(a) there had not been adequate initial assessment of the potential advantages or feasibility of the merger; or

(b) the substantial advantages to be derived from merging the two R&D programmes were as great as stated but were abandoned because of the incompatibility of the management of the two companies.

11. Either way the judgement of the senior executives must be called into question. They readily embarked on an adventure with major national assets and then equally readily abandoned the enterprise less than a month later without a clear cause consistent with the claimed advantages. It must be a cause for public concern as well as concern to shareholders that neither of the Chief Executives nor the boards of the two companies have been held publicly accountable for this course of events, nor have adequate explanations been forthcoming despite our inquiry.

1 SET Statistics 1997, Office of Science and Technology, Table 4.12. Back

2 pp. 3 and 14. Back

3 p. 14. Back

4 Q. 46. Back

5 pp. 1 and 5. Back

6 p. 2. Back

7 p. 14. Back

8 QQ. 2, 3 and 58. Back

9 Q. 13. Back

10 QQ. 54. See also QQ. 55-58. Back

11 eg. QQ. 15 and 60. Back