$182 billion merger of Smithkline Beecham and Glaxo Wellcome cleared by FTC

Combined firm would be world's largest research-based pharmaceutical manufacturer; agreement will be subject to public comment until January 17, 2001

On December 18, the Federal Trade Commission (FTC) accepted a proposed consent order that would allow the merger of pharmaceutical manufacturers SmithKline Beecham plc ("SB") and Glaxo Wellcome plc ("Glaxo"), while addressing a range of competitive concerns that would have resulted from the transaction as originally proposed. Through the proposed order, the companies would be required to make divestitures in six significant product markets, including:

1. antiemetics (drugs used in chemotherapy to reduce the incidence of side effects);
   
2. the antibiotic ceftazidime;
   
3. oral and intravenous antiviral drugs for the treatment of herpes, chicken pox and shingles;
   
4. topical antiviral drugs for the treatment of cold sores;
   
5. prophylactic vaccines for the treatment of genital herpes; and
   
6. over-the-counter H-2 blocker acid relief products.

In three markets where competitive overlaps exist due to existing agreements with other research and development firms, the consent order addresses: 1) topoisomerase I inhibitor drugs used to treat certain tumors; 2) drugs for treating migraines; and 3) drugs to treat irritable bowl syndrome. Following the merger, the newly formed company, Glaxo SmithKline plc, will have an estimated market capitalization of $182 billion and annual sales of $26 billion.

Agreement directly addresses significant product overlaps
According to the FTC's complaint, the transaction as originally proposed would have violated Section 5 of the FTC Act and Section 7 of the Clayton Act by substantially lessening competition in nine separate markets. These markets are:

• 5HT-3 antiemetic drugs, administered to cancer patients undergoing chemotherapy and radiation treatments, which help reduce or eliminate nausea and vomiting;
  
• Ceftazidime, an injectable antibiotic used to treat hospitalized patients who are critically ill and at risk of contracting strains of potentially life-threatening pseudomonas infection;
  
• Oral and intravenous antiviral drugs to treat herpes;
  
• Topical antiviral cold sore (Herpes) drugs used orally to treat herpes infections on the mouth, commonly referred to as cold sores;
  
• Prophylactic Herpes vaccines;
  
• OTC H-2 blocker acid relief products, a class of over-the-counter drugs designed for acid relief;
  
• Topoisomerase I inhibitor drugs used to treat ovarian, non-small cell lung, colorectal and other types of solid-tumor cancers;
  
• Migraine treatment drugs; and
  
• Irritable bowel syndrome drugs.

What are the terms of the proposed order?
The proposed order calls on Glaxo and SB to:

1. divest all of SB's worldwide rights relating to its antiemetic drug Kytril to F. Hoffman LaRoche;
   
2. divest SB's U.S. rights to manufacture and market ceftazidime to Abbott Laboratories;
   
3. divest SB's worldwide rights relating to its antiviral drugs Famvir and Denavir (including the rights to the base active ingredients penciclovir and famciclovir) to Novartis Pharm AG and Novartis Pharmaceuticals Corporation;
   
4. return to Cantab Pharmaceuticals all rights to use Cantab's DISC technology to develop a prophylactic herpes vaccine, allowing Cantab to pursue a prophylactic indication for the vaccine developed by the joint venture using its DISC technology;
   
5. divest Glaxo's U.S. and Canadian Zantac trademark rights to Pfizer, thereby removing restrictions on the ability of Pfizer's Zantac 75 to compete in the OTC H-2 blocker acid relief market;
   
6. assign all of Glaxo's relevant intellectual property rights and relinquish its reversionary rights to the topoisomerase I inhibitor being developed by Gilead Sciences, Inc.;
   
7. assign all of SB's relevant intellectual property right and relinquish all options to regain control over frovatriptan to Vernalis Ltd.; and
   
8. assign all of SB's relevant intellectual property rights and relinquish all options to the IBS treatment drug renzapride to Alizyme plc.

With respect to its divestiture of Kytril, the 5HT-3 antiemetic product, if it is not sold to Roche, the FTC may appoint a trustee to sell either Kytril or Zofran, Glaxo's 5HT-3 antiemetic product that is currently the market leader. In addition, if any interruption arises in its supply of Kytril to Roche before Roche has obtained FDA approvals for the manufacture of Kytril on its own, the Commission may appoint a trustee to sell Zofran.

With respect to Kytril, Tazicef (ceftazidime), and the antiviral drugs Famvir and Denavir, Glaxo SmithKline would be required to submit all confidential information and know-how to the corresponding purchaser, ensure that the former sales force and management who participated in marketing the drug maintain the confidentiality of this information, prohibit former sales and marketing personnel from selling competing products (as specified in the agreement) for between six and twelve months, and require Glaxo SmithKline to contract manufacture the drugs until each purchaser obtains FDA approval to manufacture the drug for itself.

Transfer of intellectual property to be unimpeded
With respect to the remaining technologies, in addition to the divestitures detailed above, the proposed order would require Glaxo SmithKline not to impede the transfer of intellectual property to, or development and implementation of, these processes by the purchasing entities.

The proposed order also allows the FTC to appoint a monitor trustee to ensure Glaxo SmithKline's compliance with its terms, along with a divestiture trustee if the company fails to divest any of the assets as required. Finally, Glaxo SmithKline is required to meet certain reporting requirements until it has fully complied with the divestiture requirements.

A summary of the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment until January 17, 2001, after which the FTC will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, NW, Washington, D.C. 20580.

Edited by Bob Arguero, Managing Editor, GovCon