GlaxoSmithKline merger hits second delay

US regulators express unexpected concern about drug giant's domination of smoking cessation market

The deal to create the world's most powerful drugs group through the merger of Glaxo Wellcome and SmithKline Beecham was delayed for a second time yesterday, amid unexpected concerns surrounding the companies' dominance in anti-smoking drugs. The companies reckoned they had settled the issue with the US Federal Trade Commission long ago. So why is the US regulator taking so long to approve the deal?

The deal to create the world's most powerful drugs group through the merger of Glaxo Wellcome and SmithKline Beecham was delayed for a second time yesterday, amid unexpected concerns surrounding the companies' dominance in anti-smoking drugs. The companies reckoned they had settled the issue with the US Federal Trade Commission long ago. So why is the US regulator taking so long to approve the deal?

GlaxoSmithKline, as the combined group will be known, will command the largest single share of the world drugs market. The two companies envisaged no major regulatory hurdles to the tie-up when they announced its creation in January but bringing together Britain's largest drugs firms was always likely to involve a complicated process of regulatory submissions.

Yesterday, both groups put a freeze on appointments linked to the merger's completion, the date for which has been set for the end of this year. It had previously already been put back from 21 August to 25 September. "Perhaps we were a little optimistic in the completion dates that we have given before," said a spokesman for SB.

Winning approval from the Federal Trade Commission (FTC) remains the key obstacle to the deal. European regulators approved the merger in May, and both sets of shareholders gave the go-ahead in July. Just 12 days ago, FTC approval seemed to be within easy reach, after SB agreed the divestiture of treatments for genital herpes and cold sores, and Kytril, a chemotherapy drug, to satisfy regulatory concerns.

But the FTC is having second thoughts about other issues and it is not hard to see why. The presidential elections have put the spotlight on healthcare spending and a spate of mega mergers in the US over the last year have doubtless made the FTC wary of granting approval, lest GlaxoSmithKline later commands monopolies in high profile markets such as the stop smoking sector.

The FTC approached the companies earlier this month seeking information about Glaxo's Zyban, the world's only prescribed anti-smoking treatment, and SB's Nicorette and Nicoderm, a range of nicotine patches and gum that has 80 per cent of the over the counter smoking-cessation market.

Glaxo said it was also taking longer to settle some minor issues that have long lingered in the background.

"We were very surprised that the FTC came back to us," said a spokesman for SB yesterday. "The FTC looked at the anti-smoking franchise initially and thought it was okay. We believe that with a fair wind behind us, this deal will happen by the year-end."

A spokesman for Glaxo said: "We don't believe the merger creates competitive issues in the anti-smoking area."

Zyban represents just 1 per cent of Glaxo sales, while Nicorette and Nicoderm are just 2.7 per cent of SB's. The groups argue that the drugs occupy entirely different markets, since Zyban is a prescription-only treatment. "There's no question of divesting either drug at the moment," they said. The problem is that the active compound in Zyban is also available as Wellbutrin, an antidepressant, which unlike Zyban qualifies for reimbursement. HSBC, the investment bank, estimates that 35 per cent of Wellbutrin sales are actually prescribed for smoking cessation. "The Zyban situation is potentially much more complicated," said HSBC'S Martin Wales.

Zyban was launched in the UK to a fanfare of publicity in June and has had a chequered history. Disappointing US sales early last year forced Sir Richard Sykes, Glaxo's executive chairman, to drop the company's commitment to double-digit sales growth in 1999. Rather than offset falling sales of Zantac, its anti-ulcerant that had lost patent protection, Zyban sales themselves declined. Glaxo was forced to recruit an extra 1,000 marketing staff.

Zyban is a tablet that works by modifying two neurotransmitters in the brain implicated in craving and withdrawal symptoms. In the first half of 2000, global Zyban sales were up 12 per cent to £44m, while Nicorette and Nicoderm notched £178m. With smoking cessation a relatively small franchise for GlaxoSmithKline, City reaction to yesterday's fresh delay was subdued. Shares in Glaxo fell 10p to 1,910p, while those in SB closed down 9.5p at 863.5p.

"If they have to sell Zyban, so be it," said James Culverwell of Merrill Lynch. "A little delay in a company that'll be around for 100 years doesn't matter."

Still, with the deal in the offing since the aborted merger announced in 1998, pressure is mounting on Jean-Pierre Garnier, SB's chief executive, who is to head the group. The point of the deal, he has said, is the urgent task of exploiting the "brief window of opportunity" opened by the mapping of the human genome. Nine months on, the companies have yet to fully assemble the research and development hothouse they dreamt of. Moreover, the projected £70m of cost savings arising from the deal this year will be shunted into 2001.

The feeling in some quarters in the City is that the companies have been arrogant in their approach to the FTC. "They told the FTC how they saw potential competition issues being dealt with. But the FTC doesn't like to be told what to do," said one analyst, who declined to be named.

Most analysts expect the companies to announce FTC approval this year, with the deal being rubber stamped in the UK High Court about 10 days later. That will create a company with 7.3 per cent of the world's pharmaceutical market, ahead of the 6.3 per cent held by the recently merged Pfizer Warner-Lambert, a deal that many say triggered Glaxo and SB's merger. Geographically, GlaxoSmithKline will have 8.9 per cent of the US market and 7.5 per cent of the European and Asian markets. It will command leading positions in anti-infective drugs, like Relenza, for flu, and Ziagen, for HIV, as well respiratory drugs, like Ventolin for asthma and Beconase for rhinitis.

And, ironically, it will be run from the very market giving it most grief, the US.