SmithKline in radical shake-up
Wednesday 10 February 1999
The company announced the disposal of two underperforming US businesses for over $2bn and the closure or sale of several of its manufacturing plants. The sweeping restructuring will see the departure of around 15,000 of SB's 58,000 employees over the next four years. The measures will land SB with an exceptional charge of over pounds 1bn but the company said they would help to reduce costs and boost profits in the long term.
SB used the announcement to rush out its 1998 results. The figures, released a week earlier than expected, showed a 10 per cent rise in underlying profits to pounds 1.77bn on sales up 7 per cent to pounds 8.3bn.
The chief executive, Jan Leschly, denied suggestions that the shake-up could rekindle a pounds 120bn mega-merger with SB's UK arch-rival Glaxo Wellcome. Talks between the two companies foundered last year after a clash of personalities between Mr Leschly and the Glaxo chairman Sir Richard Sykes. "This has nothing to do with the previous discussions we had on a merger. We think we'll be an independent company now, a stronger company," Mr Leschly said.
He said SB's leaner structure would help to boost earnings by around 13 per cent this year and to produce "mid to high teens growth in 2000 and 2001". Mr Leschly said the restructuring would free up resources for new pharmaceutical products such as the forthcoming blockbuster Avandia, a diabetes drug with expected sales of over $1bn.
Money will also be invested in SB's consumer products, which include Ribena, Lucozade and Aquafresh. SB shares finished 33p higher at 831.5p as dealers welcomed the plans and refused to believe Mr Leschly's denial of merger talks.
SB declined to specify which of its manufacturing plants would close but a spokesman said that there would be few redundancies among UK-based staff. SB employs around 4,000 people at factories at Irvine in Scotland and Crawley and Worthing, both in Sussex. The scale-down in manufacturing and a renegotiation of deals with suppliers will lead to cost savings of pounds 200m a year from 2002. Before then, SB will take a pounds 750m restructuring charge, with pounds 90m already included in this year's accounts.
In a marked shift from the expansionist strategy of the past few years, SB also announced the disposal of two US businesses employing 15,000 people. Clinical Laboratories, a US-based clinical trials unit, was sold to rival Quest Diagnostics for $1bn in cash - well below the $2.3bn paid by SB to acquire the business - and a 29.5 per cent stake in the enlarged group.
DPS, an agency which manages health benefits for 23 million Americans, went to US rival Express Scripts for $700m in cash and a $300m tax benefit. SB said it took a pounds 629m provision for the loss on the DPS operations.The proceeds will go to cutting SB's debt, with gearing set to fall to around 15 per cent from 52 per cent in 1998.
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