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SmithKline sells U.S. units
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February 9, 1999: 10:21 a.m. ET
Sale raises $2 billion; drug giant also cutting 3,000 jobs
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LONDON (CNNfn) - SmithKline Beecham confirmed Tuesday it will sell two U.S. subsidiaries for $2 billion. The strategic switch allows the company to focus on its core drugs and consumer healthcare business and will renew speculation about a major link-up.
The Anglo-American pharmaceuticals giant also plans to cut 3,000 jobs, or just over 5 percent of its total global workforce of 58,000 by the end of 2002.
The group will take a 750 million pound restructuring charge over the next four years, as management pushes through cost-cutting measures aimed at saving 200 million pounds annually by 2002.
SmithKline (SB.) is selling its blood diagnostic business, Clinical Laboratories, to competitor Quest Diagnostics for $1.025 billion. Although profitable, the margins are considerably lower than the rest of the group. As part of the deal, the U.K.-based company will take a 29.5 per cent stake in Quest, worth about $245 million.
SmithKline's pharmacy benefit business Diversified Pharmaceutical Services is being snapped up by Express Scripts, a U.S. rival in that field. The price tag, excluding a $300 million tax benefit, is $700 million, considerably lower than the $2.3 billion paid for the business in 1994. The acquisition then was a hedge against President Clinton's proposed reforms of U.S healthcare policy, which never materialized in the form anticipated. The business barely broke even.
"At the time it seemed like the right strategy when no-one knew what the outcome would be of Clinton's healthcare strategy, so you can't be too harsh on the management here," says Steve Abbott, pharmaceuticals analyst at Credit Lyonnais Securities.
The move has sparked strong speculation that the pharmaceutical giant could yet again become a takeover target. "That is certainly the case," says Abbott. He points out that before last year's merger between Zeneca (ZEN) of the U.K. and Sweden's Astra, the former announced the disposal of its specialty chemicals business. Shareholders of those two companies are set to vote on the merger next week.
John Reeve, pharmaceutical analysts at Paribas agrees that the move could put SmithKline back in play. The disposals make it much easier to value the company, he says.
"I think they are interested [in a merger] even though they say they aren't talking with anyone at the moment," he says. He fingers Glaxo Wellcome as the obvious bidder, despite the breakdown of talks early last year.
"SmithKline is central to the restructuring of the pharmaceutical industry that is going on at the moment. With a 2 percent share of prescription drugs they need to get bigger. But they are also the right size for some of the market leaders to find them attractive," says Reeve.
SmithKline's Chief Executive Jan Leschley earlier denied speculation of any link-up, saying the company is determined to remain independent.
SmithKline is number ten in the world in terms of its share of the prescription drugs market. Glaxo (GLXO) is number two, just trailing U.S. giant Merck & Co.'s (MRK) 5 percent market share, according to Paribas estimates.
The company announced its results at the same time, a week earlier than expected. Pre-tax profits were up 6 percent to 1.7 billion pounds on sales of just under 8.1 billion pounds.
SmithKline's shares were up 5.8 percent at 844 pence in London in mid-afternoon trading. 
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