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. Last Updated: 07/27/2016

NEWS ANALYSIS: Merger Mania Hits Drug Sector

LONDON -- Glaxo Wellcome's planned acquisition of rival drugmaker SmithKline Beecham would do more than create the world's largest pharmaceutical company.

The deal, worth about $76 billion in stock, is a clear sign that the trend of mergers and buyouts reshaping telecommunications, banking and other industries is now engulfing the fragmented global pharmaceutical business.

Just last week, Pfizer emerged as the likely winner in the battle for U.S. drugmaker Warner-Lambert, while Monsanto is in the process of merging with Pharmacia and Upjohn. Industry analysts say other blue-chip names in drugmaking, including Eli Lilly, Bristol-Myers Squibb and even merger-averse Merck, won't be far behind.

"I think that eventually about six to 10 companies will own the pharmaceutical market," said Hemant Shah, an independent industry analyst based in Warren, New Jersey.

That's a far cry from the mosaic of firms currently vying for the consumer's dollar.

The deal announced Monday would form a company called Glaxo SmithKline that would lead the pack of competitors with a 7.3 percent share of global pharmaceutical sales. Its combined market value would equal pounds 114 billion ($182.4 billion).

Analysts say consolidations are gathering momentum because drugmakers are pinched between the ballooning costs of developing new blockbuster drugs and the demands of investors and shareholders that they deliver double-digit growth in profits.

"To succeed in this industry, you must be top-tier, and preferably, you must have market leadership,'' Glaxo Wellcome chairman Sir Richard Sykes said at a news conference.

Glaxo Wellcome and SmithKline Beecham said their union would yield pounds 1 billion pounds in pretax cost savings after three years. They said job cuts were expected, but that they were still deciding where to make them.

The two companies plan to keep their corporate headquarters in London, but open a new operational headquarters in or near New York City.

They would keep their U.S. businesses separate. SmithKline has a research and development unit based in Philadelphia and a consumer healthcare business in Pittsburgh. Glaxo's American operations are headquartered in Research Triangle Park, North Carolina.

Their union, which came two years after previous merger talks collapsed, still awaits regulatory approval.

The British-based Glaxo Wellcome and SmithKline Beecham have long pondered a deal, but the apparent success of Pfizer's hostile bid for Warner-Lambert gave new impetus to the idea, said Kevin Wilson, an analyst at Salomon Smith Barney in London.

"Pfizer-Warner-Lambert has acted as a catalyst,'' he said. "I could easily imagine them saying, 'Look, this is a good idea. We might as well get on with it now.'"

Glaxo SmithKline would have worldwide pharmaceutical sales of an estimated $15 billion, based on 1998 annual figures. But a combined Pfizer-Warner-Lambert would be close behind with a 6.7 percent market share, Wilson said.

As firms grow, drugmakers such as Eli Lilly, Schering-Plough, Bristol-Meyers Squibb, Novartis, Roche and American Home Products are all seen as candidates for consolidation.

American Home Products has failed three times to combine with other drug companies and looks like an increasingly attractive takeover target for a European company, such as Bayer, that might be aiming to expand its U.S. pharmaceuticals business, said Andy Penman, an analyst at London brokerage Greig Middleton.

Even Merck, which has sworn off mergers in the past, might have its hand forced if it wants to keep up with more financially powerful rivals.

"There's no question that Merck is the best in the business in terms of developing new drugs, but it's going to be very difficult to compete when there are companies with R and D budgets that are twice that of Merck,'' said Shah, the New Jersey-based analyst.