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MARKET COMMENT
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This morning Glaxo Wellcome (LSE: GLXO) and SmithKline Beecham (LSE: SB.) announced that the US Federal Trade Commission had cleared their proposed merger without insisting on any further product sales. SmithKline will have to divest itself of its Kytril, Famvir and Vectavir/Denavir products. It is proposing to sell these drugs to Roche and Novartis for approximately £2b. Kytril and Famvir accounted for £187m in sales in the first six months of 2000, representing about 2.5% of the combined group's sales. The FTC will continue to investigate the group's smoking cessation products such as Nicorette. The merger has been cleared by the EU but still has one final hurdle in the form of the British High Court. A ruling is expected on Wednesday 20 December. Assuming this hurdle is cleared, trading in the shares of the new group, GlaxoSmithKline, will begin on Wednesday 27 December. The combined group is forecast to make profits before tax of around £5.3b for the year 2000 and will be the largest drugs company in the world with 7% of global prescription sales but the second largest in the terms of market value. At today's market prices its value will be £117b, considerably lower than Pfizer's (NYSE: PFE) Viagra-induced £195b. The new company will account for around 8% of the FTSE 100 index. Comment Could the end finally be in sight? It's three years since the first merger discussions between the two companies. The initial talks were terminated due to management differences and the current merger terms were announced some 11 months ago. The two companies expect to save around £1b a year in costs over the next three years and the group is expected to increase earnings at around 14% for the next couple of years. The share prices of the two companies are about the same as they were two years ago and investors are looking for their long-term growth trends to resume. The shares are valued at about 32 times earnings for 2000, falling to around 19 times in 2003 if the earnings and cost saving targets are hit. That's not especially cheap but the prospect of reliable earnings growth will attract many investors in the current climate. Where Next? Glaxo Wellcome discussion board | SmithKline Beecham discussion board
