Select Committee on Science and Technology Third Report

Memorandum submitted by Manufacturing Science Finance

1. MSF AND SCIENCE

  Manufacturing Science Finance (MSF) is a multi-industry union spanning the public and private sectors with over 400,000 members. The union brings together scientific workers in universities and professional scientists and engineers in Industry. We also have scientific membership in the National Health Service, Research Councils and Independent Research and Technology Organisations. With an estimated 100,000 members engaged in science, R&D and transferring innovation to marketable goods and services, MSF is the largest union in the private sector for scientific workers and is organised in many of the key areas of the next generation of scientific and technological advance.

2. MSF AND THE PHARMACEUTICAL SECTOR

  MSF is the largest staff and scientific union in the pharmaceutical sector with 10,000 members in total. We are established in most of the long established pharmaceutical companies located in the UK. MSF represents clerical and administration, scientific and technical, and some craft grades.

  In the Glaxo Wellcome and SmithKline Beecham (SB) we represent 5,000 members. MSF has had a long and constructive relationship with Glaxo Wellcome which pre-dated the merger that formed the company.

  In SB, MSF had very successfully represented the interests of our members employed in the Management and Scientific Common Interest Group nationally and the SB Pharmaceuticals and Animal Health Technician Group since 1975. Unfortunately, in 1990, shortly after SmithKline and Beecham merged, the Company gave notice that it was withdrawing recognition from MSF. At the time of derecognition MSF had around 600 members in the technical and managerial areas. MSF retained some consultation rights for the site at Irvine.

  Recently, MSF has successfully re-established a dialogue with SB and have worked together on the European Directive on the Patenting of Biotechnology Inventions. In addition, MSF was in talks at the time of the latest merger announcement with SB over forging a constructive working relationship to represent employees who had been transferred from West Middlesex NHS Trust and are now working in the Company's clinical laboratory in West London.

3. TERMS OF THE INQUIRY AND SUMMARY

  MSF would like to thank the Committee for the opportunity to submit evidence to your Inquiry. We believe that you have focused on a key issue relating to this merger. The reporting of this merger has focused on the creation of the world's largest pharmaceutical company and the fees that may accrue to the bankers and lawyers. The UK Pharmaceutical Industry is widely viewed as a manufacturing success story. This is based on the industry's reputation as a high-tech, high-investment, high-wage, skills intensive, value added industry.

  The UK has a number of truly global competitors: Glaxo Wellcome, SmithKline Beecham (Anglo-American) and Zeneca. These companies occupy three of the top 10 positions in the DTI Scoreboard of investment in R&D. The sector is responsible for output worth £12 billion and has a positive trade balance of £2.1 billion.

  At a time when overall employment in the manufacturing sector declined from seven million to just over four million, employment in the pharmaceutical sector expanded by 5,000 and presently stands at 75,000 people.

  We believe that innovation is the cornerstone of this record of success. These are two great British companies and we are concerned that if this merger was to take place and the financial engineers, rather than the engineers of a UK manufacturing success story, take control of the new company, this could have a detrimental effect on the UK's science base.

  We are not against the link up between the two companies, rather we are unconvinced about the business rationale behind the merger and have sought urgent meetings with the Chief Executives of both companies in order that we can obtain a better idea of their corporate strategy so that we can effectively explain this position to the employees which MSF represents in both companies. This is not a question of a trade union defending restrictive practices and opposing change.

4. BACKGROUND TO THE MERGER PROPOSAL

  The Pharmaceutical Industry is highly fragmented and a process of consolidation took place during the 1990s. Merger and acquisition activity has taken place worth $37.9 billion in 1994 and $34.7 billion in 1995.

  In the early 1990s, Glaxo was hugely successful, generating the best cash returns in the Industry. Glaxo responded to this position by distributing value added as dividends which was well above the average for the sector. Glaxo and other pharmaceutical companies have found it increasingly difficult to maintain such levels of dividends payments as patents expired and investment in R&D bought declining returns particularly through a failure to develop new "blockbuster" drugs.

  As a result companies like Glaxo and SB have become victims of their own success and are impelled to try and find through acquisition and merger increases in earnings which once came from organic growth. From this perspective, it becomes easier to understand the business motives behind the proposed merger.

5. CONCERNS

  We do, of course, take great pride from the possible creation of a UK owned global champion. But at the same time there are issues of great public concern. Primarily, we have concerns in five areas:

What will be the effect on scientific employment of this merger?

  Forecasts of job losses caused by this merger vary. They range up to 20 per cent of UK employment or between 4,000-5,000 jobs. The two companies claim that no plans have yet been made and add that any forecasts are being alarmist. But in the words of a statement from Glaxo Wellcome to employees: "It is unavoidable that when two companies of the size of ours get together there would be opportunities for improved efficiency and inevitably some job losses".

  The balance of any job cuts, whether this would fall on administration, manufacturing or R&D, or on employees of Glaxo or SB is also open to speculation. Although it is estimated that the bulk of £1bn savings are likely to be found in manufacturing which accounts for 50 per cent of Glaxo's head count and 36 per cent at SB.

  From our own sources and business reports we have identified the following R&D facilities in the two companies:

GLAXO WELLCOME AND SMITHKLINE BEECHAM COMBINED R&D FACILITIES

Glaxo	Constituency
Beckenham	Beckenham
Dartford	Dartford
Greenford	Ealing North
Stevenage	Stevenage
Ware	Hertford and Stortford
SB
Harlow	Harlow
Weybridge	Runnymede and Weybridge

  We are not in the business of spreading undue alarm and therefore will not speculate on R&D sites that we fear may close. In addition, the Glaxo site at Stevenage and the SB site at Harlow have both been subject to major new investment programmes and are "state of the art" R&D facilities. It would be an act of industrial vandalism if any merged company closed either of these facilities.

  However, the nature and balance of work being conducted between thee facilities may alter to the detriment of one or the other with a consequential effect on status and employment. Examining the merger which created Glaxo Wellcome we can witness that although Beckenham remains as a R&D facility, it is a much smaller operation and lacks the prestige of Stevenage in the new operation. We estimate that over one thousand jobs were lost from the Beckenham site. Although some of these jobs were relocated, the overall effect was to reduce the total level of scientific staff employment when compared to the figure at the time of the merger.

  Also, one reason for the merger is to generate internal savings. Where functions could be usefully combined we are sure that any newly merged company will seek to make that gain. This merger will result in "paste and cut" with the various sites. This may affect existing R&D facilities.

  Because these companies are major employers of science graduates we would be concerned at any further reduction in employment opportunities. Science is already viewed by many young people as an insecure career with relatively poor levels of remuneration when compared with other professional occupations. Employment on R&D performed within UK Businesses has already declined from 176,000 to 139,000 or by 21 per cent over the period 1989-1996. [Source: First Release—Business Enterprise Research and Development 1996: ONS (97) 325—14 November 1997].

2. What effect will this have on the UK's science base?

  Glaxo and SB between them spend almost £2 billion on R&D. To put this in perspective this is over 20 per cent of private sector expenditure on R&D; two-thirds of total UK investment in pharmaceutical R&D; twice the total level of investment on R&D in the engineering sector; over 50 per cent above the level of science expenditure in Research Councils and by the Office of Science and Technology. Even a small reduction in expenditure will have a ripple effect throughout the whole science base.

  An examination of R&D productivity in the two companies produced by Dresdner Kleinwort Benson highlights a relatively poor record of innovation and concludes that the cash brought in from new drugs would not cover the amount invested to produce them. In fact, the size of the new company will mean that it will need to have a remarkable record of innovatory success to meet promised earnings growth from Glaxo's Sir Richard Sykes.

  It is unlikely that the new company will move quickly to reduce overall expenditure on R&D. The Companies claim that the reason for the merger is to create a "truly world-leading organisation with the largest R&D capacity and expenditure is the driving force for the merger discussions". The truth of this commitment will be seen by investment decisions in future years and whether the rate of growth in R&D expenditure matches the trend of expenditure if the two companies were to remain independent.

  Once again we wish to highlight the effect of the merger which formed Glaxo Wellcome on R&D expenditure.

Year	Glaxo	Wellcome	Combined £ million	per cent change
1991	399,000	221,200	620,200
1992	475,000	229,700	704,700	+13.6
1993	595,000	254,000	849,600	+20.6
1994	739,000	325,500	1,064,000	+25.2
1995	858,000	346,300	1,204,300	+13.2
1996			1,200,000	—0.4
1997			1,161,000	—3.0

Source: DTI R&D Scoreboard. Combined expenditure reported from 1996.

  Here we can see that the Company can honestly state that it has maintained levels of expenditure on R&D. However, the growth in expenditure on R&D in the years prior to merger was between 13 and 25 per cent. In effect, Glaxo has subsumed the Wellcome R&D budget to provide costs savings in the first two years after merger.

3. Why are the Companies refusing to consult with representative trade unions?

  The Chief Executives of both Companies are presently declining to meet MSF claiming that the regulatory constraints prevent them from making any further comment at this time. The precise nature of these constraints have never been properly outlined and European law gives recognised Unions rights to consultation.

  MSF has challenged Glaxo to explain what "regulatory constraints" exist to prevent a premilinary exchange at this time. This general issue had previously been raised with Mr Alistair Defriez, Director General of the Panel on Takeovers and Mergers who gave a written assurance that there is nothing in the voluntary code which prohibits prior consultation with trade unions about mergers.

  Recent communications from both Companies to Members of the UK and European Parliament indicate that this consultation will take place at business level. This will preclude consultations with Unions at a national level and prevent employees from adopting an overall response to the merger, creating the risk of setting site against site and employee against employee. This uncertainty will have a detrimental effect on scientific effort in the Companies concerned.

4. Are the companies responding in the right manner to global pressures?

  The companies are claiming that they have to merge to remain globally competitive. But some analysts have questioned whether size is key to success in R&D. Both Glaxo and SB became global players in their own right through organic growth rather than merger or through acquisitions. All the available business evidence points to the fact that acquisitions or mergers have a negative impact on the performance of the companies involved.

  For example, one study presented to the Royal Economic Society concluded that the net, long-run effect of takeover bids was to reduce the return on capital of the companies making the bids [Source: The Impact of Acquisition on Company Performance: Andrew Dickerson, Heather Gibson and Euclid Tsakalotos—University of Kent, Department of Economics]. Therefore, the effect of the merger will be to reduce the ability of the new company to generate capital to reinvest in R&D.

  In short, will competition in a bigger company be more effective in R&D than competition between companies? The merger reduces competition and therefore also reduces pressure to invest sufficiently in R&D. Mergers are often a substitute for capital investment.

  Besides, the process of innovation is slightly more complex than cost push. Although, having greater levels of investment is more likely to create positive results, sustaining an environment for research and maintaining a secure, highly-motivated and skilled scientific workforce could be seen to be equally important.

5. What will be the effect of this merger on other UK based companies in the pharmaceutical industry?

  This merger will act as spur to further competitive mergers and acquisitions in the sector possibly leading to further rationalisation in R&D expenditure and shedding of scientific. One of the UK's few manufacturing successes faces a period of upheaval and uncertainty. This is unlikely to help the research effort in this sector.

FURTHER EVIDENCE

  MSF would welcome the opportunity to give oral evidence to the Committee in order to outline our concerns in greater detail.

20 February 1998

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Prepared 16 June 1998