GlaxoSmithKline's acquisition strategy will concentrate on medium-sized pharmaceutical and biotech companies with a pipeline, CEO J.P. Garnier told analysts during a Feb. 22 meeting in London.

"This is a question of looking at companies that have a pipeline and acquiring them to grab the pipeline," Garnier declared. "We want to buy pipelines and products with some degree of exclusivity."

"We might look at biotech companies with a quasi-pipeline. We might look at medium-sized pharmaceutical companies with a pipeline."

During GSK's first post-merger meeting with the investment community, Garnier wasted no time in returning to the theme of consolidation in the pharmaceutical industry championed separately by Glaxo and SmithKline over the past several years.

In the year since the Glaxo/SmithKline deal was announced, the noise about large drug mergers has subsided slightly - in part because the Glaxo and SmithKline execs were not publicly making the case for more consolidation.

During the Feb. 22 meeting, Garnier emphasized the factors driving consolidation during his prepared remarks, and then used an inevitable question about GSK's acquisition priorities to provide a detailed and specific analysis of several possibilities - after first issuing a disclaimer that he cannot comment on GSK's targets (¹ see chart: 'I Really Can't Comment'?).

DuPont and Biogen are receiving open acquisition attention, Garnier said, as companies that have "officially said they are on the block [with] books...circulating."

DuPont announced in December that it will spin-off its pharma business (² Also see "DuPont Spinning Off Rx Business As Cozaar Profit-Share Trigger Nears" - Pink Sheet, 18 December, 2000.). Garnier indicated that GSK does not have significant interest in DuPont. "We'll look at it," he said, "but, frankly, we're more interested in products than in companies."

Biogen has not been as public in its search for a buyer as DuPont. Garnier was not as openly dismissive of interest in Biogen.

In terms of pipeline, most attention regarding Biogen is focusing on the Phase III stage psoriasis treatment, Amevive. The company's sole marketed product, the MS therapy Avonex, loses orphan exclusivity in 2003.

By highlighting Biogen to the London analysts, Garnier in essence put the company into play.

The GSK CEO similarly ensured that Schering-Plough will receive heightened attention as a takeover target.

"Every investment banker has called me to say Schering-Plough is now in play," Garnier declared. "Maybe they are, maybe they are not." The speculation "has to do with the times we are in," added Garnier, a Schering exec before he joined SmithKline.

Schering is a perennial favorite for acquisition rumors, and the announcement that manufacturing compliance difficulties will hurt earnings in 2001 and delay the approval of Clarinex (desloratadine) makes further speculation inevitable (³ Also see "Schering-Plough Clarinex NDA Approval Awaits Resolution Of GMP Problems" - Pink Sheet, 19 February, 2001.).

Schering is also GSK's largest competitor in the respiratory products market. If Garnier added to Schering's management burdens and distractions by stoking merger interest, he may be also helping GSK as it plans to launch a new asthma product, Advair.

Garnier ruled out two categories for acquisitions: generic companies and biotech platforms. In the latter category, Garnier identified GSK's partners Incyte and Human Genome Sciences as companies it will not buy.

GSK is participating in the current hunt for a Japanese merger partner. Garnier said that GSK's post-merger bulk offers an advantage against other bidders in that search.

"Everybody asks about Japan," Garnier commented. "There is an issue with Japan: the [price-to-earnings] ratios are still fairly high for the good companies, and therefore the dilution is a killer for many of the people participating in this."

"Our size allows us to look at dilutive deals which would be very dilutive for a midsize company and not so dilutive for the large financial monster we have become," Garnier declared.

Garnier pointed out that the largest Japanese company, Takeda, "is actually a small player" relative to GSK, with $5.8 bil. in sales in 2000. GSK ranks Takeda as the 14th largest pharmaceutical company in the world. The company stretched the typical top 15 chart to the top 16 to pick up Sankyo with $3.2 bil. in sales. Sankyo recently cleared away its relationship with Pfizer (originally with Warner-Lambert) which would leave it less encumbered for a new offer.

Bristol-Myers Squibb is among the companies that have publicly declared an interest in a Japanese acquisition. Garnier's comment about bulk and ability to handle a large deal may have been aimed to make GSK appear better suited than Bristol in the race.

Bristol told analysts in September that it wants to use "external development" to become "a major player in Japan" (⁴ Also see "Bristol Rx Expansion Plans Include Biologics Manufacturing" - Pink Sheet, 2 October, 2000.).

Bristol also is interested in adding biologics manufacturing capacity. Biogen sees its manufacturing capacity as an asset in attracting partners (⁵ Also see "Biogen Believes Biologics Production Capacity Will Lure Partners" - Pink Sheet, 30 October, 2000.).

GSK R&D Chairman Tachi Yamada told the London analysts briefing that biologics manufacturing capacity is not a pressing need for the company. GSK has a capacity for biosynthesis that exceeds most other firms, he maintained.

In addition to the merger route, GSK maintains that its size and commercial infrastructure makes it the "partner of choice" for smaller companies. Garnier noted that the combined company has inlicensed nine clinical stage NMEs during the past 12 months.

"We have proven already, although the company wasn't technically formed, that we are an attractive partner," Garnier declared.

The GSK exec drew a distinction between the value of licensing deals for earlier stage candidates rather than for near-term launch opportunities like AstraZeneca's Crestor. Garnier said the late-stage deals are less attractive because "all the risk has been taken out."

"If you do" late-stage deals, "the marginal value of those deals to the partner company is not comparable to...an asset coming out of your own pipeline," Garnier said. "We will not see any more [of] the Lipitor-type agreement," where Pfizer received about 50% of the profits from the Warner-Lambert drug.

"More and more now the company that owns the asset will insist on zero payment until a certain threshold of sales is reached," Garnier explained. "I think the deals that involve threshold and the like are deals that you do out of desperation when your sales force doesn't have enough work." Garnier noted that SmithKline did a desperation deal with Merck in the early 1990s for Zocor.

"I think if you have your own molecules that can benefit from an incremental sales push, you are not going to chase those kinds of deals," Garnier continued. He cited GSK's antiepileptic Lamictal, Parkinson's agent Requip and congestive heart failure therapy Coreg as products with much higher sales potential with stronger promotional support.

A pending indication for Paxil in generalized anxiety disorder represents another opportunity, Garnier said. "GAD is bigger than depression," he said. "You have a choice. You can launch GAD as a sort of, 'Oh, by the way doc, Paxil got another indication on the label,' or you can launch it like there's no tomorrow."

"We really don't need anything else," Garnier concluded. "If somebody comes to us and gives us a fair share and a fair price for a new product that we feel has a great potential...we'll be glad to expand our sales force to do it." However, for opportunities like Crestor, "there are just some people who want to do it for a lower price than we would."

GlaxoSmithKline Is Mouthful But Still Hungry: Is Next Course Japanese?

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