Long-term goals could help Leschly

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The Independent Online
EVERY NOW and again the stock market gets it into its head that the Glaxo Wellcome merger with SmithKline Beecham is on again. Whether this is just wishful thinking on the market's part, or the story is mischievously being put around by Glaxo, is anyone's guess, but the fact of the matter is that you would be more likely to encounter a snow fall in Hades than see friendly merger talks resumed between these two companies.

SmithKline executives feel so bruised by their encounter with Sir Richard Sykes, who they think double crossed them, that they could barely stand to be in the same room as him any longer, let alone engage in a friendly chat. So if Sir Richard is still intent on doing the deal, he'll have to launch a hostile bid and that's going to require a very hefty premium. Since it appears he's not prepared to do that, the merger strategy is presumably as dead as a dodo.

That underlying reality hasn't stopped the market dreaming. Why doesn't Jan Leschly, chief executive of SmithKline, and the rest of his management team resign, leaving the way clear for Sir Richard to move in and realise the short term cost saving and long term R & D benefits of combining the two, it is often asked? The simple answer is that this would amount to a hostile takeover. For SmithKline to agree such a clearout would therefore require a premium. And so the argument goes round and round.

As it happens SmithKline probably doesn't need a merger as much as Glaxo does, though that doesn't seem to be the perception among investors. SmithKline has as promising a drugs pipeline as Glaxo (some would say more so) but it doesn't have the same patent expiry problem with existing products. So in theory its growth potential is much higher.

Even so, the markets don't quite buy the story. When Mr Leschly said at a results presentation a couple of months ago that growth this year would be restricted to single digits, his shares took a battering, even though this slower growth is being caused by heavy development expenditures. It seemed the final straw after the failed merger talks and American investors in particular swopped out of SmithKline into life science stocks with better short term prospects with a vengeance.

In operational and sales terms, SmithKline may be more of a US company than a British one, but its shares have become more and more heavily owned in Britain - around 70 per cent after the latest American sell off. So even though it wasn't SmithKline's fault that the merger talks failed, the episode has nonetheless quite significantly undermined the company's investment following.

Don't be surprised, then, to see Mr Leschly attempt to confound the sceptics by taking a leaf out of BP's book. The market responded very favourably to the long term targets and goals set first by David Simon and then his successor at BP, John Browne - who incidentally sits on the SmithKline board as a non executive. These five year goals also have the effect of galvanising management into achieving them.

Long term targeting of this sort is a good deal more difficult in a major drugs company, where future profits are highly dependent on product approvals, and could in certain circumstances prove quite dangerous. But provided SmithKline confines itself to what it believes to be realistically achievable, the approach couldn't be anything but positive. Just recently, SmithKline shares have been returned to the buy lists of a number of brokers. They may have got their timing spot on.

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