Examination of witnesses (Questions 20 - 39)
WEDNESDAY 1 APRIL 1998
SIR
RICHARD
SYKES
and DR
JAMES
NEIDEL
20. So might that lead to perhaps a different type of bid
in future?
(Sir Richard Sykes) It could, but you have to recognise
that, today, if you take Glaxo Wellcome, it is capitalised on
the market at £60 billion; if somebody wanted to buy Glaxo
Wellcome today they would probably have to pay £70 billion
to £80 billion. If they paid £80 billion, £75 billion
of that is intellectual capital; the tangible asset value of Glaxo
Wellcome today is less than £5 billion. So all that money
has to be dealt with somehow, and that means you have got to have
very significant cost-cutting to deal with that tremendous sum
of money that is being paid to acquire that organisation. It is
almost impossible.
Dr Turner
21. I take it then that the fact that there was a hostile
element in the Glaxo Wellcome merger accounts for the fact that,
rather than getting overall synergy and growth in research and
development, as you were looking for with the merger with SmithKline
Beecham, the history of the Glaxo Wellcome merger was that, in
fact, both companies, when they were separate, had growth and
expenditure on R&D of between 13 and 25 per cent per year
prior to the merger, and then negative growth for two years after
the merger? So did that represent paying the cost of the merger;
and does this have an implication for what would happen to research
and development in any future merger or takeover, or some sort
of hybrid animal, whatever we get?
(Dr Niedel) Let me just describe what happened. In
1994, if you combined the spend of Glaxo alone and Wellcome alone,
on R&D, it was just a little under £1.2 billion, and,
you are right, that over these ensuing three or four years we
have held that fairly constant; as a percentage of revenue, we
have also kept it constant. So both companies spent roughly 15
per cent of revenue on R&D, and this year, 1998, our spend
is about, in fact it is, exactly, 15 per cent of revenue. And
so what you are seeing is that both companies would have faced
a revenue problem, Zovirax disappearing from Wellcome, Zantac
disappearing from Glaxo. And so, simply because we are a business,
we have to live within our means, if we had been two separate
companies, both separate companies, I think, would have also flattened
out their R&D spend, it would have been prudent business fiscal
practice. We combined the two companies, we have been able to
go through that in a very smooth way, and the outcome, I should
say, is that, if you look at the productivity, which is really
what is important, the productivity of R&D in the combined
company is now three-fold greater than in the two companies separate.
So the synergies, the complementarity, that we captured by bringing
those two companies together, has led to a three-fold increase
in productivity, in terms of approvals, submissions, new molecules
being discovered and taken into development for disease, and we
have the data to support that. So that was what we were looking
for, that increased performance, it does not necessarily require
an increased spend, but what we were looking for was increased
performance; we have got a three-fold increased performance out
of the combined R&D organisation.
22. And was that apparent increased performance, as measured,
definitely not a function of work that had been started years
before coming through at the end of the lead time?
(Dr Niedel) Of course, it is a combination of all
those things. When I talk about submissions and approvals, much
of that work would have begun six or eight years ahead of time.
But what we have done is we have tracked molecules coming out
of research and going into development, and that is very much
a short-term measure, those are programmes, in fact, the programmes
that started since the merger are now bearing fruit, and last
year we brought 18 new molecules into development, and the vast
majority of those were programmes that had begun since the beginning
of 1995. In 1994, the year before the merger, the two companies
had brought six molecules into development. So just on that one
measure there is exactly a three-fold increase in the output of
the research phase, and the output of development is keeping pace
with that.
23. And this increased productivity has been increased with
a smaller spend on R&D?
(Dr Niedel) No, it is a constant spend, at about £1.2
billion; this year, our spend is just a little over £1.2
billion.
Chairman: A constant spend, a higher output?
Dr Jones
24. An increase in real terms; real terms?
(Dr Niedel) Yes, in real terms, because of inflation;
it has been constant in absolute terms.
Chairman
25. A constant spend but a higher output and increased productivity?
(Dr Niedel) A constant spend, a three-fold increased
output, greater productivity.
Dr Williams
26. I would like to ask Sir Richard: you have portrayed the
breakdown in the merger talks during those 23 days as being sort
of rival philosophies, as it were, or management styles or management
structures, that when it came to analysing in detail somehow these
two very large giants could not be merged. But the portrayal that
I read at the time, in the financial press, the heavy newspapers,
was very different; it was not a case that these large giants
could not fit together, it was just that these five people, or
two people, perhaps, at the top of the two structures, had these
different visions and just could not sort out their differences.
Did you find that the merger talks was an intensely personal affair,
as well as being about these multi-billion companies?
(Sir Richard Sykes) No. In fact, I believe that everyone
involved in this process negotiated in good faith through the
entire three-week period. The negotiations that I was involved
with personally, and I am sure it is true of others, were always
very good negotiations, always conducted extremely professionally,
relations were always extremely good, and there were not, in my
opinion, any personality clashes involved here. And these decisions
were being made not by two people, in fact, I do not think two
people ever got together at any time in this process, it was always
groups of people, and, of course, at the end of the day, the decisions
are made by Boards, not by individuals.
27. Was part of the difference the difference between the
company that was London-based, or British-based, whereas in SmithKline
Beecham's case the leading people there wanted to be United States-based?
(Sir Richard Sykes) There is a difference in culture
in those two organisations and there is a difference in management
style, and, as I say, those are very significant issues, at the
end of the day; somehow they have to come together. I do not think
we went into this saying we have to end up as a Glaxo Wellcome,
I do not think SmithKline went in saying, "We have to go
and we have to be a SmithKline", we have to be something
in-between, and it is getting that agreement and getting that
unity that is so important, if you are going to succeed in a combined
organisation.
28. I have to say, at a personal level, I do not know whether
I speak for the Committee here, but I feel some sense of disappointment
that this—what would have been a British-based, the world's
largest, or whatever—company did not come about. I can see
that Glaxo is still a very large organisation and with a very
big business, but in terms of SmithKline Beecham where does this
leave them, in that having been courted twice, as it were, into
near mergers, does it not leave them very vulnerable to another
possible takeover bid?
(Sir Richard Sykes) I think you have to address that
question to Mr Leschly. But, as I said at the outset, remember,
these organisations have to be driven today; if we want to be
successful in ten, 15 years' time we have to be spending significant
amounts on research and development today, simply because the
Human Genome Project, the whole drive of genomics, pharmacogenomics,
genetics and pharmacogenetics, are going to drive medicine in
a very different way than we have ever seen medicine in the past.
If we invest today, we will be there in ten years' time, and we
will be very, very competitive in that environment. And so it
is a question of how quickly to get there, how much power one
can put behind that, simply because there is so much information
available today, the technology is there to achieve the ends.
And, therefore, our strategy is clear; this was obviously a tactic
to reach our strategic goal much quicker than we could do alone,
we can still reach it, we can still do it, and I am sure that
is still true for SmithKline.
29. Can I just ask, finally, is it possible for merger talks
to re-open, or are there Stock Exchange rules that prevent that,
over a certain period?
(Sir Richard Sykes) No. There are no Stock Exchange
rules that would prevent merger talks re-opening, and they certainly
could re-open. There are certainly a lot of rules regarding what
can be said by companies when they enter into a merger discussion,
and that is why, of course, not a lot was said during this time
period, because there are very strict rules, from the Stock Exchange,
about what can and cannot be said by companies who are actually
in merger discussions. But that could re-open. Again, there are
no inhibitions on that process starting again.
Mr Beard
30. Sir Richard, you mentioned earlier how important good
morale and security are to harmonious working, to get the best
out of a research and development organisation, and yet the process
of merger is a very destabilising period, where people are not
too sure whether they are going to inherit the same job; or whether
someone is going to come in from the other company and they will
be made redundant; or whether certain teams are going to be kept
on, or whatever. How did you overcome that, in the Wellcome/Glaxo
merger?
(Sir Richard Sykes) Through communication. I think
the critical issue here is to communicate, communicate and communicate,
to make sure that people understand what is the vision, where
are you trying to go, what are you trying to achieve, and how
are you going to do it. So we quickly put together a group of
people that were a mixture of Glaxo people and Wellcome people
to form an Integration Committee, and that Integration Committee
then quickly set about pulling all the research, all the development,
all the manufacturing, all the operating companies together, and,
in fact, those two companies were given regulatory approval in
March of 1995, and, I can tell you, by the end of 1995, with a
few exceptions in manufacturing, because it takes a lot longer
to do that, most of the functions within the two organisations
were acting as one and they were actually working together. So
it is very important to make quick decisions, communicate them,
and make sure that everybody understands what the process is,
and that way it goes very smoothly, and I think that was true
in R&D as well.
31. How long did it take for the R&D to settle down,
because there must be a period of turmoil when it is not settled
at all and, in fact, the exercise is somewhat counterproductive?
(Dr Niedel) Yes; and I think, when Sir Richard spoke
about risk/benefit, obviously the risk is what we are describing
right now, is how badly do you destabilise the organisation. Just
to give you some measures, we began integrating with Wellcome
in the middle of March, I think it was 16 March, and by 30 or
31 July, all of the research people in the company knew what their
job would be, who their boss would be, where they were located
and what project they would work on; so very quickly we tried
to give stability by making sure that the people who were staying
knew exactly what they were doing. At the same time, there were
some people who left, and it is documented in the paper we submitted;
those people were treated fairly, they got what we think were
quite reasonable and generous redundancy terms, and I think how
you treat the people who leave also influences morale. By the
end of the year, R&D had a meeting of the senior management,
it was clear that we had coalesced again and were feeling quite
positive. And we track a number of measures, and one of the measures,
for instance, is turnover, how many people are leaving the company.
Before the merger, in 1994, in fact, in the early nineties, that
number was generally just a little above 5 per cent; in 1997,
it was 3.9. We track things like absenteeism, illness, we have
a company that deals with employees' stress, called EAP, so we
track our employees—it is all anonymous but at least we
get the numbers, and so we track that. By those measures, the
morale, the enthusiasm for the organisation today is as strong
or stronger than it was in 1994, and that is reflected in the
productivity, you do not get a three-fold increase in productivity
if the employees in an intellectually-driven activity are not
pleased with their work surroundings.
32. In that case, you, Glaxo, were in charge of the organisation;
in this prospective case you would not have been, you would have
been much more a partnership. Would not that have brought in added
difficulties?
(Sir Richard Sykes) Yes, of course, it is much more
difficult when you have got two sides that have an equal say in
how the process is brought together, and, of course, mergers are
always more difficult, it is recognised that they are going to
be more difficult than takeovers. But, of course, in a takeover,
when you buy something, you want to make sure you are getting
value for money, you do not want to destroy it. So, in the case
with Wellcome, we said to everyone, both in the Glaxo organisation
and in the Wellcome organisation, everybody has to be matched
so we can say we want the best of both organisations, and that
is what you would have to do in a merger as well.
Chairman
33. Thank you, Sir Richard. We are going to go back to Dr
Turner, but, just before we do, we have listened very carefully
to all the comment you have made about the breakdown of your talks,
but could I just draw your attention to a press release issued
by SmithKline Beecham after the breakdown of talks on 23 February,
in which they said, amongst other things: "Glaxo Wellcome
indicated that it was not prepared to proceed on the agreed basis
... despite considerable effort on the part of SmithKline Beecham
... Glaxo Wellcome has been unwilling to proceed on the agreed
basis." Now, you are free to comment, or not comment, just
as you wish, but that is a press release that the other company
did issue. Would you care to comment, Sir Richard?
(Sir Richard Sykes) I would just say to you again
that as we went through these negotiations we went through them
always in good faith, and, of course, negotiations are negotiations,
you might start at a position here, you might finish at a position
here, but nowhere through that process was anything agreed until
it goes to a Board at the end of the day. And all I would say
is that at the end of that time SmithKline were the ones that
broke off negotiations, not Glaxo Wellcome.
Dr Gibson
34. Is it true that your shareholders are in revolt?
(Sir Richard Sykes) You had better ask the shareholders
that; not to my knowledge.
Dr Turner
35. The failure of this merger proposal has obviously led
to speculation about further moves likely to happen within the
pharmaceutical sector, and, clearly, one must ask whether the
same factors are still at work in the industry. Do you think that
the British pharmaceutical sector is still sufficiently fragmented
to give a need for further mergers, and, if any further mergers
should happen in this sector, do you think this would be good,
or bad, for the UK?
(Sir Richard Sykes) Consolidation will take place
in the world pharmaceutical industry, that just does not apply
to the UK, and it will take place mainly because of the two pressures
that I mentioned earlier, science and technology, on the one hand,
economics, on the other. So throughout the world the cost of health
care is rising, and, of course, Governments who pay for health
care, people who pay for health care, want to contain the cost
of health care. Pharmaceuticals, obviously, are becoming more
and more valuable in the way they contribute to health care, and
therefore they come under pressure of pricing, and that happens
in every country in the world. So, as the pressures come down
on this industry, and, of course, the pressures in science and
technology are the fact that that is positive, because tremendous
scientific advancements are being made, and in the technological
area, there is going to be pressure to bring more and more of
these companies together, because all these events are scalable.
If we today go out and build clinical genetic databases, so that
we not only know the phenotype of the patient but also the genotype,
it probably costs something like £200 million just to get
one clinical genetic database; that database can be used by one
company or ten companies. So all these very, very expensive activities
are scalable, and that is going to actually drive consolidation,
simply because this is a very highly fragmented industry. We have
today something like 4.9 per cent market share; now, will that
be good for the UK, it should be good for the UK, because the
UK has a very strong pharmaceutical industry, it has a strong
pharmaceutical industry because it has a very strong science base,
it has a very strong clinical base. And, of course, provided we
keep putting money into that system, providing that the education
system remains strong, providing that the research base remains
strong in this country, then why would not people invest here,
because, at the end of the day, this business is all about science
and technology?
36. Can I follow that with a sort of very direct question?
Are you looking for an alternative partner to SmithKline Beecham?
(Sir Richard Sykes) We have a clear strategy as to
where we want to go; if we see that there are tactical ways of
getting there quicker then, obviously, we are going to look at
them, and I think that is our responsibility. We are committed
to Britain, we are committed to the British science base, and
if we can put more money into research and development to make
this company more competitive in the future then we certainly
will.
Mr Beard
37. Sir Richard, between the two companies that were involved
in this you had some 20 per cent of all UK civil research and
development in your hands, £2 billion compared with Government
research funds of £1.3 billion, and so whatever you do is
going to have very major implications for the United Kingdom's
biotechnology, bioscience and pharmaceuticals industry; and yet
the public at large are faced with an off/on, that we have been
talking about, and the reasons for the off/on, to be frank, are
somewhat abstract, in the way you have represented them. How would
you reassure the public that this major national asset is safe
in your hands, at this rate?
(Sir Richard Sykes) I think you perhaps have to look
at, you have to look back and you have to look at how the company
has developed in a global sense; it is today the biggest company
in the UK, in terms of value; you have to look at our strategy
for the future and then shareholders have to make that decision.
If I appear to be evasive, I am trying to explain that you cannot
just put two companies the size and complexity of Glaxo Wellcome
and SmithKline Beecham, 100,000 people, together and just expect
it to happen, it cannot happen, it has to go forward in a very,
very clear way. We are dealing with a lot of sensitive flowers.
In the UK, we employ 5,000 people in research and development,
80 per cent of them have a bachelor's degree, a PhD, or an MD.
You cannot just mess people around like that, they have to have
a clear vision of where you are going, and they have got to have
leadership, and it is very critical that that happens, otherwise
the whole thing might be a disaster.
Dr Gibson
38. Do you think mergers are a substitute for capital investment,
and the reduced competition? Do you think that is the philosophy
behind merging? what is the philosophy behind merging? I know
you have the vision, and so on, but in capitalist terms what is
the message in mergers? Capital investment goes down?
(Sir Richard Sykes) The message in mergers is that
if you do a non-premium merger no money changes hands, and, therefore,
in this case, it would have been the 60/40 merger, 60 per cent
of the company would belong to Glaxo Wellcome shareholders, 40
per cent would belong to SmithKline Beecham shareholders, and
that is how you put the two companies together, that is the agreement
of the split, but no money changes hands. In a takeover, there
you are talking about a very different situation, but you would
end up, of course, with the same company, at the end of the day.
Chairman: Sir Richard, I am sorry to interrupt you but, as
you can see, we have a division. I am obliged by the Standing
Orders to suspend this Committee for the time being. We are enjoying
this session very much and finding it very useful; whether you
are or not is another question. But I would be very grateful if
you would just bear with us while we suspend for ten minutes and
then come back after the division. I declare the Committee suspended
until 17.40. Order.
The Committee suspended from 17.30 to 17.39 for a division
in the House.
Chairman: Order. We are resuming a minute earlier than I
said, but I think everybody is back so we will resume, and may
I again thank you, Sir Richard, and Dr Niedel, for your patience
in the interruption, which was beyond our control. Mr Beard.
Mr Beard
39. This question involves the presumption that a merger
on the greater scale brings greater benefits, and I can see that
entirely on the financial side and on the amalgamation of sales
forces and others where there are probably duplicate efforts.
I find it more difficult to see exactly where you were brought
to a stop on research and development, because, for instance,
if you have two organisations with work going on in the same therapeutic
area, it may well be that it would be very unlikely they are taking
the same approach, and by keeping the two going you double the
chance of getting somewhere in this area. So what are the criteria
for getting the best out of this sort of merger of research and
development, because one can see many ways where you could end
up with two and two making one and a half?
(Dr Niedel) Although the question was brief, the answer
could be very long and complex, because you are talking about
the fundamental problem of leading a complex organisation like
R&D. First of all, if this merger had gone forward, I think
your premise is correct, if there were two groups and they had
equally good ideas but they were different for cardiovascular
or cancer, both of those groups would have kept going. The advantage
would have been that both groups now would have had the latest
technology available, so that the people in SmithKline Beecham
could have had access to combinatorial chemistry, the people in
Glaxo Wellcome could have had access to some of the SmithKline
genomics. And so what you would have done is taken the scientists
with very good ideas, working on good programmes, and given them
better tools with which to tackle those problems; so that is the
idea of economy of scale, of scale, basically. All of those tools
are very expensive, and, as Sir Richard said, the key is they
are scalable, which is an important concept, and it is different
from the laboratory in the past. If you thought about a scientific
laboratory as recently as ten years ago, you would have one leader,
two lead scientists, a few technicians, a spectrophotometer, a
centrifuge, etc., and so every small cluster of scientists required
this cluster of equipment, and so if you were twice as big you
needed twice as many of these pieces of equipment. That is not
true today, the technologies that we are investing in, you would
make one big investment and that can take care of the needs of
ten scientists or 10,000 scientists just as easily; once you invest
in combinatorial chemistry you can distribute that technology
across all of the sites. But the company that we purchased, Affymax,
their technology could supply the entire pharmaceutical industry,
so you can see that it scales very easily; and that is true for
everything, that is true for all of the information systems, it
is true for the genetic clinical networks that you would set up.
And so I think what you would do is take very fine scientists,
working on good programmes, and give them absolutely first-class
tools and then let them get on and do it, just as they would have
gone on and done it ten years ago, but you give them really fine
tools today.
(Sir Richard Sykes) I think, another point which is
very important is, it is not just a case of throwing money at
something like this either, we would have increased our budget
from £1.2 billion to £2 billion, but, more importantly,
we would have had the skills to take that money and utilise it
effectively. So skills are just as important today as money, and
skills are more and more difficult to come by; as we are driven
by science, the science is actually outpacing the skills that
are coming out of our academic environment, and, therefore, they
are always trying to catch up. But we are always trying to find
those people, and, of course, as big organisations in this country,
we are always vying for those highly skilled people that we need
to run our businesses. So that is also important. There would
have been tremendous synergy there, bringing those skills together.
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