Select Committee on Science and Technology Minutes of Evidence

Memorandum submitted by SmithKline Beecham plc

CONSOLIDATION IN THE PHARMACEUTICAL INDUSTRY

1. INTRODUCTION

  SmithKline Beecham (SB) is a healthcare products and services company focused on pharmaceuticals. SB discovers, develops, manufactures and markets human pharmaceuticals and vaccines, over-the-counter (OTC) medicines and health related consumer products. It also provides healthcare services including clinical laboratory testing, disease management, and pharmaceutical benefit management. Perhaps more than any other healthcare company, SB is at the leading edge of the rapidly evolving technologies which are transforming healthcare.

  SB is a British company which makes a substantial contribution to the UK economy. We employ about 8,500 people in the UK from a total of 55,000 worldwide. Our exports from the UK in 1997 amounted to almost £1.2 billion. We have recently invested £250 million in our R&D facilities at Harlow, and have a long track record of support for the UK biotechnology sector.

  SB's success is built upon research to discover, develop, manufacture and market new medicines. 1997 spend on R&D was £841 million worldwide, of which about £293 million was spent in the UK. The company's total expenditure on R&D has grown from £390 million at the time of the merger of SmithKline and French and Beecham. Although 35 per cent of our total R&D spend is invested in the UK, our UK sales are only5 per cent of global sales.

2. SB'S SUPPORT FOR THE UK SCIENCE BASE

  SB is one of the most active supporters of the UK academic science base. Our support encompasses 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. In these collaborations, we are providing an intellectual as well as a financial contribution.

  SB is also active in providing sustained training at the undergraduate (approximately 120 sandwich studentships) and postgraduate (approximately 150 CASE PhD studentships) levels. For discovery-associated research activities, consultancies and non-clinical development, our annual spend on the academic science base in the UK is about £7 million. Much of our UK academic research spend is at the individual project grant level, but we have a major collaborative agreement with Cambridge University.

  We also make major investment in external clinical development activities and this can include a significant proportion of novel research effort. For example, through the Foresight Programme, SB has come together with the British Heart Foundation, the Wolfson Foundation and Addenbrooke's NHS trust in a £16 million consortium to create the Cambridge Cerebrovascular Centre.

3. INDUSTRY CONSOLIDATION

  There are strong pressures towards consolidation in the pharmaceutical industry. Competitive R&D in pharmaceuticals and healthcare, for the discovery, development and delivery of new and better medicines, now demands unprecedented scale, constant adoption of new skills and stringent focus on productivity. Future success will be predicated on the ability to utilise leading-edge science and technology to understand disease mechanisms and to accelerate the delivery of better medicines to patients across the world.

  Leading edge research is becoming increasingly expensive—the cost of R&D for a major new chemical entity has risen tenfold in the past 20 years and is estimated now to exceed £300 million. At the same time, purchasers everywhere are seeking to contain the cost of healthcare. It is this background—the twin pressures of maintaining critical mass in R&D in a cost-constrained environment—that has encouraged consolidation in the pharmaceutical industry.

4. RATIONALE FOR THE MERGER

  It was announced on 30 January that Glaxo Wellcome and SmithKline Beecham were in detailed discussions with a view to merging the two companies. The proposed merger would have created the world's leading pharmaceutical group, based in the UK, with the largest research and development organisation in the global healthcare industry.

  For SB, the merger would have represented one response to the environmental challenges confronting the pharmaceutical industry. SB is at the leading edge of the rapidly evolving technologies which are transforming healthcare. As a result, we are generating unprecedented opportunities for the creation of innovative drugs, vaccines and diagnostics, as well as generating powerful new approaches to the identification of disease risk and prevention. A key driver of the merger for SB was therefore to create an R&D organisation to expand and accelerate the delivery of new healthcare products to diagnose, prevent, treat or cure disease.

  By combining the respective strengths of their existing R&D organisations, the merger of SB and GW would have retained a powerful base for UK science by creating a powerful scientific skills and technology platform from which to discover and develop new medicines. Both SB and GW currently devote significant resource to improving the development processes of new medicines with the aim of reducing costs and timescales.

  The merger would have created an opportunity to pool development resources and to draw on the "best practice" in the two companies.

5. EMPLOYMENT IMPLICATIONS

  The merger would have represented the latest example of the consolidation that has been taking place in the pharmaceutical industry over the last 10 years. During that time, industry employment levels in the UK have been stable—almost 76,000 people were directly employed in 1990, compared to an estimated 75,000 in 1996. It is inevitable that mergers produce ambiguity and concern for employees until the new organisational structure and individual roles are defined. However, the rationale for the merger was to sustain investment and leadership in R&D, to create an R&D powerhouse, not cut costs.

  The Committee may wish to note that the merger of SmithKline and French and Beecham in 1989 did not lead to losses in UK R&D jobs. Pre-merger, SK&F and Beecham separately employed 2,037 permanent staff in R&D, together with 35 temporary staff—a total of 2,072 in the UK. In R&D, SB currently employs 2,025 permanent, together with 201 temporary staff and 1,123 consultants and temporary staff from agencies—a total of 3,349 in the UK.

6. SB'S FUTURE

  On 23 February the merger discussions were terminated. In the event of mergers in sectors such as pharmaceuticals, it is important that cultures and structures are aligned if the full potential of the intellectual assets are to be realised. It became clear during discussions with GW that the required alignment would be impossible to secure.

  SB and GW had agreed the fundamental principles underlying the proposed merger before any anouncement was made. These principles were documented and agreed by SB's Board. We understand from Sir Richard Sykes, as Executive Chairman of GW, that they were also approved by the Board of GW.

  The principles were that this was to be an equal merger of two strong British companies, retaining the best people and sharing the best practices of each. After three weeks of intensive further discussion on more detail, GW walked away from those principles, saying they were unable to proceed on that basis.

  The potential value of the merger was dependant upon these principles. SB made intensive efforts to return to the agreement in order to deliver the potential shareholder value anticipated. Our non-executive directors met privately to consider all options. Our non-executive Chairman initiated contact with GW's Deputy Chairman. However, GW were not willing to proceed on the agreed basis.

  SB's Board decided unanimously that there was no purpose in continuing further discussions since GW had walked away from the agreement. We perceived the way GW wanted to proceed as a takeover. We are not another Wellcome, and we had to act in the best interest of shareholders and employees.

  The merger offered a clear opportunity, and represented one tactical means of taking forward SB's strategic vision. However, as an independent entity, the company retains a strong commercial position with excellent growth prospects from an impressive R&D portfolio.

  We have indicated above the enormous number of leads being generated by our leadership in new technologies. Competitive success in the pharmaceutical industry will be influenced increasingly by competency in the planning and conduct of R&D. This demands:

—  requisite scale and critical mass in R&D

—  research leadership in core technologies

—  an extensive, global alliance network to ensure proactive capture of an array of new technologies

—  superior management of technical complexity both internally and across alliance networks

—  positioning the use of pharmaceutical products within a broader framework of integrated healthcare in concert with new molecular diagnostics and the increasingly sophisticated assessment of variations in patient responses to therapy (pharmacogenomics) and differing individual patterns of susceptibility to disease (information-based targeted care)

—  attraction and retention of worldclass talent in science, computing and medicine.

  SB is confident of its strength in each of these prerequisites. We have an impressive record in adopting state-of-the-art R&D methods and in re-engineering key R&D processes to enhance productivity. We have proven experience in successful development and registration of new products—indeed, we have recently announced that we have 60 clinical development programmes currently underway.

  Our launch of new technology-driven initiatives in diagnostics and information-based healthcare makes us a highly attractive partner for collaborations, spanning the full spectrum from advanced research in academia and new entrepreneurial companies to more traditional in-licensing strategies. And the expertise of the company in the emerging areas of molecular medicine and healthcare services also make it an attractive partner for commercialisation of products and services beyond pharmaceuticals such as molecular diagnostics and new services in pharmacogenomics and patient risk profiling.

  We also believe SB is well-placed to attract and retain the best candidates in science and medicine. The dramatic pace and scope of today's technological advances means that ever fewer researchers enjoy comprehensive access to the state-of-the-art equipment, faciltities and world-class colleagues needed for leadership in R&D. The intellectual, technical and organisational resources available to R&D personnel within SB rank among the best in the industry. This will be a significant motivational factor in enabling the company to retain, and to attract, personnel with world-class credentials, both as employees and as collaborators.

7. CONCLUSION

  Further consolidation in the global pharmaceutical industry is highly likely. Some rationalisation and restructuring of operations will be inevitable in the merging of global R&D organisations. However, since R&D will continue to be the basis for future growth, successful mergers are likely to be those which seek to build more effective R&D operations, rather than simply aiming to reduce costs. In this regard, the UK is well-placed for future investment as a result of its long tradition of scientific and technological excellence and its outstanding track record in drug discovery and development.

  However, it cannot be taken for granted that the UK will remain as attractive a location for pharmaceutical R&D. The serious shortage of funding for scientific facilities in our universities over many years, together with weakness in science teaching at every level of our education system, are now causing major problems for pharmaceutical companies seeking to recruit R&D staff in the UK. The problems have been highlighted in the Dearing Report and by the recent Report from the Science and Technology Select Committee which recommended, inter alia, that "...a real and urgent need for the Government to provide additional resources to resolve the immediate crisis in research infrastrucutre in the UK's universities . . . be treated with the utmost priority in the Comprehensive Spending Review.

  Unless the growing flaws in the UK science base are urgently and effectively addressed, there is a danger that the UK's long-standing strength in pharmaceutical R&D could be eroded. This would make UK R&D facilities more vulnerable to future consolidation in the global pharmaceutical industry. SB's commitment to the UK science base is well-established. We will work with Government, the scientific community and other interested parties to ensure that the rich tradition of UK science and technology continues into the next Millennium.

17 April 1998

---

---

Prepared 16 June 1998