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SMITHKLINE BEECHAM PUTS Rx MARKETING IN HANDS OF SK&F's CHAPPELL, R&D GOES TO BEECHAM's MANSFORD; COMARKETING "LOCK-UP" PLAN IS BEGINNING "IMMEDIATELY"

Executive Summary

The division of pharmaceutical management responsibilities for the combined Beecham and SmithKline businesses reflects the basic logic of the merger: SK&F marketing is marrying Beecham's R&D pipeline. John Chappell, currently president of SK&F, will be in charge of pharmaceutical marketing; Keith Mansford, Beecham Pharmaceuticals research chairman, will head the combined research effort. Each will carry a chairman's title. Chappell will be chairman pharmaceuticals; Mansford will be chairman R&D. Mansford will report to Chappell. If the financial markets allow it to be consummated, the merger will create the second largest ethical drug business in the world behind Merck, as well as the second largest OTC drug business behind the combination of American Home Products and Robins. Based on 1987 worldwide ethical drug sales, the combined businesses, to be called SmithKline Beecham, had sales of $ 3.38 bil., second only to Merck's $ 3.55 bil. Ciba-Geigy with $ 2.68 bil. would have been third, while Glaxo, with $ 2.43 bil., and Hoechst-Roussel, with $ 2.4 bil., would have been fourth and fifth in the revised rankings... In 1987, SmithKline and Beecham's combined U.S. prescription drug sales of $ 1.27 bil. would have been second only to Merck. SmithKline Beecham pro forma sales in 1988 were $ 6.7 bil. The newly merged company will generate approximately 51% of sales from prescription drugs, 20% from consumer brands, 12% from OTC drugs, 10% from clinical labs, and 7% from animal health care based on 1988 sales. Beecham's interest in attracting a marketing partner for prescription drugs in the U.S. has been strongly and openly stated since the company brought in two top American officers. Beecham's first key hiring move in the Americanization of the company's senior management was the hiring of Chairman Robert Bauman in September 1986. That was followed by the recruitment of Sterling's President James Andress as chairman of pharmaceuticals after the Kodak purchase of Sterling. At a meeting with U.S. analysts at the end of last year, Andress made the point about Beecham's full pipeline and need for a marketing outlet so strongly that he quipped that he did not want to come across as a rug trader. At that point, Beecham said it would have to look for out-licensing candidates for several of its research projects (such as CNS candidates) because it did not have enough marketing clout -- especially in the U.S. ("The Pink Sheet" Dec. 5, p. 5). Bauman will be the chief executive officer for the newly merged companies, and is likely to emerge as the most important corporate officer at SmithKline Beecham. SmithKline Chairman Henry Wendt will assume the chairman's title. Andress will head the non-Rx parts of the businesses, as Chairman of health care products and services. That position will put him in charge of half of the company's revenues and the OTC business, which is a familiar area to him from his Sterling experience The SmithKline/Beecham engagement announcement was accompanied by an exchange of products that went into effect immediately. In addition to marketing advantages for both companies, the co marketing agreement is clearly designed to cement the relationship and act as a de facto lock-up provision, making an outside move against either of the new partners more difficult. The comarketing agreement will cover Tagamet, the rheumatoid arthritis treatment Ridaura, and the once-a-day cephalosporin Monocid from SmithKline, and Beecham's antibiotic/clavulanic acid combination, Augmentin and the NDA-pending NSAID Relifex. The agreement also covers OTC cimetidine, once approved. At an April 12 press conference in Philadelphia, Wendt said the detailing would begin "immediately for some drugs. We have to start training our respective sales forces within the next couple of weeks, [but] I don't see that actually working in the field until the first of June." Once finalized, the merger will create a combined sales force of 1,900 ethical drug sales reps in the U.S. and 6,000 worldwide. Both SmithKline and Beecham are emphasizing the marketing advantages of the comarketing deal and downplaying the arrangement's value as a deterrent to unfriendly break-up offers from outside suitors. Asked by analysts at an April 12 meeting in New York whether the merger agreement included a lock-up provision, SmithKline Beckman Exec VP Kenneth Kermes said, "No, just the comarketing agreement." Kermes qualified that statement, adding the comarketing arrangement "was designed to facilitate getting with the transaction quickly. It has not been designed to stop anybody or encourage anyone to change whatever decision he might be making as he looks at the merger." Kermes is to get the top corporate development position in the merged companies. The top finance officer will come from Beecham, Hugh Collum. Beecham's Andress also denied that the comarketing deal was an attempt at a lock-up arrangement. The deal, Andress told the analysts, "is not on the commercial scale that the financial community thinks of lock-ups. The intent truly was to let us get started concentrating our detail forces in anticipation of this deal which is going to take some time to consummate." Kermes said that the comarketing agreements "take effect as of today and they go forward whether the merger agreement is consummated or not." SmithKline described the arrangement as "standard industry level comarketing agreements with a condition to the comarketer that meets the ordinary definition in similar arrangements." The agreement, which runs five years to 1994, provides the unaffected party, if the merger is ambushed by an another offer, "with the ability to remove his products from the copromotion deal," Andress noted. Whether the comarketing deal carries the weight of a lock-up agreement or not, once firmly in effect, it clearly makes an outside takeover a messier proposition. The comingling of the Beecham and SmithKline sales groups, once in place, may be hard to undo. Andress observed that the comarketing arrangement should force any latent suitors to show their hands. Baxter successfully stepped into a merger plan and beat a similar co-venture agreement between Hospital Corporation of America and American Hospital Supply Corporation in 1986. While the practical period for a third party bidder to emerge is fairly restricted, the merger is vulnerable until consummated. The anticipated consummation date is some time toward the end of this summer. On the day of the merger announcement, SmithKline stock dropped two points to 62-3/4, indicating the disappointment on Wall Street with the lack of immediate cash from the deal. The stock rebounded slightly to close on Friday, April 14 at 63-1/8. At least one shareholder suit has already been filed against SmithKline management. The suit, filed April 13, charged SmithKline management with entering a deal that "does not reflect the maximum value of SmithKline." The suit also asserted that the comarketing arrangement with Beecham has "the affect of deterring any other bidder." The Street sharks had been counting on a merger price in the $ 70-$ 75 per share price. Those expectations are hard to counter with a long-term, paper merger plan; but SmithKline is spinning off Beckman and, more importantly, Allergan to add the potential for big returns to the deal. At the April 12 press conference, Wendt emphasized the growing importance of global marketing in the pharmaceutical industry and highlighted the geographical fit of the two companies. Wendt described the merger as creating "the first true transnational health care company." That boast appears most directly aimed at Glaxo, a common nemesis of Beecham and SmithKline. As chairman of the new firm, Wendt will have responsibility for public/industry affairs, investor relations, corporate identity and long range strategic planning. For Wendt, the move means giving up the chief exec title and it is being described by some outside observers as a kick upstairs. In many respects, however, Wendt has been the driving force behind the deal. He has maintained a visible presence with the financial community during a tough period for SmithKline and repeated a refrain of "unlocking the value" in SmithKline to prepare the way for the merger/spinoff formula. He simultaneously has overseen a tough pre-merger trimming (including major facilities and top SmithKline execs) and unwinding of competing arrangements (such as the KabiKinase deal). Many of the moves taken by Wendt in recent months were probably particularly difficult because they entailed unwinding strategic plans begun earlier in his tenure and closely associated with his stewardship of the company. With hindsight, the Beecham merger to build a worldwide Rx/OTC drug presence and assure a deep pipeline is probably the move that SmithKline should have tried in 1981 when it spent $ 1 bil. to try to diversify on the periphery of the health care business. Wendt was charged with making that purchase work; it took place before he acceded to the top spot. On the Beecham side, the merger would culminate a series of major changes undertaken since the arrival of Bauman, primarily in the departure from the cosmetics business. It also completes the effort to turn Beecham's attention west from U.K. Among the top business segment management already designated for the new company, Beecham Products Chairman European and International John Hunter will head SmithKline Beecham's OTC drug and consumer products business, reporting to Andress. Also reporting to Andress will be SmithKline Beckman Animal Products President Norman Blanchard, as head of the animal health care division, and SmithKline Bioscience Labs President Harry Groome, who will head the clinical labs business. In addition to Mansford, also reporting to Chappell will be Fred Kyle, SK&F Labs exec VP-operations. Kyle will head SmithKline Beecham's pharmaceutical business in the U.S. and Canada, and Martyn Greenacre, SK&F area VP-continental Europe, who will be in charge of SmithKline Beecham's business in Europe outside the U.K. Yet to be announced are the heads of the merged company's pharmaceutical operations in Japan, the U.K. and the rest of the world. The merger will create a company that spent over $ 500 mil. pro forma on R&D in the prescription drug area in 1988. SmithKline's recently promoted head of R&D George Poste will get "a very important position" in the merged companies, Wendt said. Poste has recently developed a wide reputation as an effective spokesman for SmithKline and for the biotechnology efforts of the established drug companies. Reflecting excitement over an enhanced marketing capability, Beecham execs stressed the marketing synergies provided by the merger in comments to reporters and analysts. "A hell of a lot of these synergies have to do with the application of these detail forces on a bigger scale to these products. And I'll tell you, most of those are the application of SmithKline's detail force, which is 50% bigger than ours, to our antibiotic products with the GPs and hospitals," Beecham's Andress said. "We will match our clinicals on those antibiotics head-to-head with anybody, but we won't match our detail force. Man-to-man their worth their weight in gold, but we just need a hell of a lot more of them. And that's how this whole copromotion deal started." Beecham's pipeline appears to fill some of the holes in SmithKline's future -- particularly in the central nervous system and cardiovascular fields. SmithKline had been trying to catch up in both fields through licensing and start-up financing; but, with Beecham, the merged company has immediate access to active research compounds in each area. Beecham has three promising compounds nearing regulatory submission in the CNS area, including the 5HT uptake inhibitor Aropax (paroxetine), granisetron, a 5HT-3 antagonist, and denbufylline, a xanthine derivative. Andress told the analysts that Beecham plans to begin regulatory submissions for paroxetine as an antidepressant in 1989. The Beecham drug is in the same class as Lilly's successful Prozac (fluoxetine). Regulatory submissions for granisetron I.V., for the prevention of nausea associated with chemotherapy, will begin during the fourth quarter of 1989, Andress noted. The drug is also in Phase II study for the treatment of migraine, in a race against Glaxo's sumatriptan ("The Pink Sheet" March 6, T&G-2). In Phase III study, but further away from a regulatory submission is denbufylline, which is under study for the treatment of senile dementia. Regulatory submissions are expected by early 1993, Andress said; however, he acknowledged the difficulty the drug might have in the regulatory climate for neuropharmacological drugs in the U.S. Beecham cardiovascular compounds include the closely-watched anti-thrombolytic Eminase (APSAC), which could be approved in 1989 in the U.S., a potassium channel activator, cromakalim, in Phase III for asthma and hypertension, and a calcium channel blocker diproteverine, also in Phase III. SmithKline Beecham will have four NDAs pending in the U.S., including Eminase and Relifex (nabumetone) from Beecham and SmithKline's Engerix B recombinant hepatitis B vaccine and congestive heart failure treatment, Carlopam (fenoldopam). Beecham's Eminase, however, is already the subject of a copromotion agreement with Upjohn. Asked at the analyst meeting whether the Beecham had received any indications that the marketing rights might be regained from Upjohn, Andress replied: "we have some definite indications that [Upjohn is] not interested" in returning the marketing rights. "We want them to stay," Andress noted, "and . . . it is our intention that that agreement remains in place just as we hope that the DuPont agreement [for copromoting Tagamet] remains in place." In the OTC area, an obvious attraction for Beecham is OTC cimetidine. The OTC version of Tagamet would fit well with Beecham's Tums franchise in the upset stomach market. However, OTC cimetidine is also the subject of a comarketing agreement with Bristol-Myers. In 1987, SmithKline traded rights to OTC cimetidine to Bristol in return for the hoped-for "Son of Tagamet" -- an H[2] antagonist in development. SmithKline continues to try to retrieve the exclusive rights to OTC cimetidine. B-M may now be in a good position to demand a larger quid pro quo for giving up its rights. The SmithKline Beecham OTC line-up will include Contac and Ecotrin from SmithKline and Tums, N'ICE, Sucrets, Sominex, Geritol, Vivarin, and Oxy from Beecham. The combined OTC businesses generated sales of $ 930 mil. in 1988 -- $ 220 mil. from SmithKline and the remaining $ 710 mil.-plus from Beecham. The Beecham OTC operations in the U.S. have recently been consolidated under the direction of former Norcliff-Thayer President Charles Pergola ("The Pink Sheet" Feb. 20, T&G-10). For a number of years, SmithKline management has viewed the consumer business as a dilemma: too small to be a real force in the OTC business but too important as an outlet for OTC cimetidine to give up. Beecham adds the size and stature in OTCs to make the combined operation a full-fledged partner of the Rx business. An obvious plus for the merger are consolidation possibilities. For example, it is speculated that SmithKline may fold its antibiotic manufacturing into Beecham's. At the press conference in Philadelphia, Wendt said that the employee cuts announced last year would be completed regardless of the merger. "But, I see no further change in the employment in Philadelphia, and, if anything, an increase," he added. SmithKline Beecham will be headquartered in London with a jet set management schedule. Corporate management, Wendt said, "including myself, Bob Bauman, Ken Kermes, and others will have offices in both places." He noted that the worldwide prescription pharmaceutical, animal health and clinical lab operations will be centered in Philadelphia. The board will alternate meetings in London and Philadelphia. The board will include nine directors from each of the merging companies. Details of the proposed 50/50 merger will outlined in documents to be filed with the Securities & Exchange Commission in May. At that time, registration statements will be filed covering the divestiture of Allergan and the remaining 84% of Beckman Instruments still owned by the parent company. SmithKline Beckman shareholders wil receive a special $ 5.50 a share cash dividend, along with .18 share of Beckman and .5 shares of Allergan. Under the terms of the merger SmithKline Beckman and Beecham Group will become subsidiaries of SmithKline Beecham. SmithKline shareholders will exchange each of their shares for an American Depository Share consisting of five B ordinary shares together with preferred stock in a U.S. subsidiary of SmithKline Beecham. Shareholders of Beecham will receive .8784 of an ordinary share in SmithKline Beecham for each share. The merger advisors for the deal are Kleinwort Benson Ltd. and Wasserstein, Perella & Co. for Beecham and J.P. Morgan and Goldman Sachs for SmithKline. The most recent round of talks leading up to the merger began in mid-summer 1988. The presence of the specialists was disclosed two weeks ago as the merger appeared imminent. Wendt said that a SmithKline shareholders meeting to vote on the merger would likely take place by the end of July or in early August.
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