Outlook: A bold step at the pharmaceutical crossroads

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The Independent Online
The strategy discussion and decision-making that led up to yesterday's blockbuster £8.9bn bid by Glaxo for Wellcome came too late for Sir Paul Girolami, the uncontested genius behind Glaxo's success, to participate in. Sir Richard Sykes, his successor and the man whose show this is, insists that Sir Paul undoubtedly would have gone along with it and he may be right. None the less, it would have stuck in the gullet. Sir Paul's great achievement and boast was that he transformed Glaxo from the small, unfocused "quoted university" it was in the 1970s into Britain's largest company in terms of stock market worth entirely by means of organic growth. The only comparable cases in recent British corporate history are all in the field of retailing - Marks and Spencer, Sainsbury's and Tesco. The last of Sir Paul's foot soldiers to suggest anything as vulgar as an acquisition, Ernest Mario, was quickly dispatched back to hisUS homeland, a £3m cheque in his pocket.

That proposal - a merger with Warner Lambert - was different in nature and concept from what is now proposed. In fairness to Sir Paul, it would almost certainly have been a mistake. However, in a fast-changing world Sir Paul's alternative strategy - steady as she goes in the hope that the boffins in research would discover another Zantac - looked like a formula for stagnation.

It is a favourite joke of Sir Richard Sykes, his feet now firmly under the table, to talk about the "good old days of the pharmaceuticals industry - as in about 18 months ago". The pace of change has taken even the most perceptive of observers by surprise. To say a revolution is taking place is no exaggeration. Ever since the war, prescription drugs have been a largely protected industry. Governments and healthcare organisations have been happy to pick up the tab, shielding the customer from the high costs of these products.

No longer. The effect is to create a far more competitive environment, putting margins and R&D budgets under severe pressure. A supplier-driven industry is in the process of becoming like most others - purchaser-driven. Other pharmaceutical companies have responded by buying into the distribution chain. Glaxo, too, flirted with the same strategy but found it could not justify the cost. Consolidation in a notoriously fragmented industry - Glaxo, one of the three biggest, has only 3.9 per cent of the world market - none the less looked inevitable. To stay in the game, Sir Richard took the view he would need quickly to add sales to give the necessary economies of scale. Doing so organically in the time available plainly wasn't an option.

Wellcome is one of the very few international companies of the size and availability to do the trick. Nobody was pretending yesterday that this is a merger that is going to be without pain. Thousands of jobs in marketing and research will go. Glaxo wouldargue that the competitive pressures are such that ultimately they would go anyway, with or without a merger. Sir Richard's calculation is that the short sharp shock is better than death by a thousand knives. Certainly he believed there was little pointin going through the etiquette of polite negotiation customary for such a royal marriage. He knows what needs to be done, or says he does. Wooing is for sissies.

This is a deal which at a stroke demolishes Glaxo's cash mountain and a great deal more besides, creating Britain's largest company, an investment monster head and shoulders above the rest. Some shareholders might justifiably ask whether the more boring but far less risky strategy of handing the money back to shareholders, slowly running down the company, many of whose drugs are maturing, might be wiser. Sir Paul believed there was something to be said for such a course. The new man would regard it as acop-out.

Whatever the wisdom of this bid, the price looks hard to top at 23 times historic earnings and a 49 per cent premium to the price on Friday. This explains Glaxo's confidence in making its offer final. It is a fair bet that if it had been less obviously generous, a rejection would already have winged its way from the Wellcome board. As it is, the silence after the board meeting suggests dissent is rife. It would be as well to be careful between now and Thursday night, because the Wellcome Trust has untilthen to change its mind about its acceptance of the offer, which is not yet irrevocable. But given the premium, Wellcome will be hard put to find a white knight. And without a counterbid at a higher price it will certainly be hard to change the trust's mind.

Glaxo's gamble is bigger than Sir Richard admits. Despite the soaring cost of research and the need to copy Merck and patrol as wide a field as possible for new products, there is always room in pharmaceuticals for a smaller company to rise to prominenceon a brilliant development. These are big numbers, big stakes. Is this too ambitious, hubris on a grand scale? It is always possible but the greater likelihood is that this is the correct way forward in an industry that stands at the crossroads of change.

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