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. Last Updated: 07/27/2016

U.K. Firms to Form Drug Giant

LONDON -- Glaxo Wellcome PLC and SmithKline Beecham PLC said Monday they had agreed to merge to form the world's biggest pharmaceuticals group, worth pounds 114 billion ($187 billion).

The two British companies - which tried and failed to merge two years ago - said the deal would give them the scientific and financial clout to be the most efficient drug discovery and marketing machine in the industry.

The merger is structured as an offer by Glaxo for SmithKline, with 0.4552 new shares swapped for each SmithKline share, valuing the transaction at around pounds 46.5 billion.

Glaxo shareholders will own 58.75 percent and SmithKline investors 41.25 percent of the new group. The merger is expected to become effective in the summer.

The new company, to be known as Glaxo SmithKline, will be headed by Jean-Pierre Garnier, currently No. 2 at SmithKline, who will take the role of chief executive while Glaxo head Richard Sykes will be nonexecutive chairman.

Garnier said he foresaw no major regulatory hurdles either in Europe or the United States.

"It is too early to speculate what the FTC [the U.S. Federal Trade Commission] and the European Commission will demand of the new company, but that should not be a major obstacle to the completion of the merger," he said.

He would not comment on the new group's earnings potential.

Glaxo's John Coombe will be finance director and SmithKline's Tadataka Yamada head of research.

Robert Ingram, currently Glaxo chief executive, will become chief operating officer and president of pharmaceuticals, while Glaxo R&D head James Niedel takes on the role of chief science and technology officer.

"With this merger we are bringing together two world-class organizations with complementary technologies and scientific knowledge," Sykes said. "The new organization ... will be at the forefront of an industry which will continue to undergo rapid scientific and economic change."

Trading in both firms' shares was mixed early on. Opening gains that added to Friday's sharp rise were quickly wiped out amid profit-taking.

By midmorning, Glaxo was down 4.6 percent at pounds 17.38 ($28.50), while SmithKline was off 6.3 percent at 794 pence ($13.02), in line with the value of the Glaxo offer.

The new company - which will have a global market share of 7.3 percent - will be headquartered in London but will be largely run from a new operational base in the United States.

It will have annual sales of pounds 15 billion and a research budget of pounds 2.4 billion. It expects to achieve annual cost savings of pounds 1 billion within three years, of which pounds 250 million will be reinvested in research.

The total cost of achieving these savings will be pounds 1.1 billion.

The companies said some job losses were inevitable but there were no plans to close any R&D centers.

However, British unions fear the tie-up will mean up to 15,000 job losses worldwide out of a work force of 107,000, and they are worried about the shift of operations to the United States.

"Staff have been kept completely in the dark and we need to now know how a company whose chief executive is going to live in the United States is going to have the same commitment to a company that has traditionally been the jewel in the British pharmaceutical crown," Roger Lyons, general secretary of the Manufacturing Service Finance union, said on BBC television. Based on Friday's close, Glaxo was capitalized at around pounds 66 billion and SmithKline at about pounds 48 billion.

The planned merger will bring together mainly complementary product lines, including treatments for major diseases such as asthma, diabetes, AIDS and depression.