Business Outlook: Leschly on to a winner in going for an encore

Bigger and more ambitious still grow the consolidating mergers of industry and finance. After months of fevered stock market speculation, Jan Leschly, chief executive of SmithKline Beecham, finally admitted publicly for the first time yesterday to plans for the big daddy of them all - a prospective merger with American Home Products to form a pharmaceuticals and health care products goliath with a combined market capitalisation of pounds 77bn. Just to put this in perspective, that's getting on for double the annual GDP of Ireland.

This is the world's most ambitious merger to date and it would be silly to try and belittle it in any way. All the same, by the end of the year we are going to have seen a lot more of these things, both domestic and like this one cross border in nature. It is all too likely that soon it will be eclipsed by something even bigger. The backdrop to this growing wave of mergers, not just in pharmaceuticals but across industries, sectors and frontiers, is well rehearsed. Globalisation, rapid technological change and a relentless pressure on managements for enhanced returns, is forcing the pace as never before.

Even so, it is somehow appropriate that it should be Mr Leschly who is out of the hatch first this year. He was not the architect of the original merger between Beecham and SmithKline, but he is credited with being the one who made it work, adding hugely to shareholder value in the process. Now this tough talking Dane is intent on performing an encore. He knows how to do these things and he knows how much value they can create.

Pharmaceuticals is in many respects already a truly global industry, in the sense that any company which can offer a medical advance will find its product used all over the world. Despite this and some already wopping pharmaceutical mergers, such as that between Glaxo and Wellcome three years ago, it is still a surprisingly fragmented industry, with no single company accounting for much more than 5 per cent of the world prescribed drugs market.

Actually what SmithKline is attempting here is not so much a quantum leap in size for pharmaceutical companies as a catching up with the market leaders. Even if Mr Leschly pulls this off, he still won't be quite as big as Merck. Nor will he be significantly larger in terms of sales and market capitalisation than Novartis, Pfizer and Glaxo Wellcome. But what he does do is achieve their economies of scale, and, just as important in this industry, their level of spend on research and development.

It is still sometimes the case that the boffin in his end of the garden shed will stumble across some new breakthrough in medical science. The biotechs are good examples of how this random approach to the blockbuster pharmaceutical product can still work. But on the whole this is not how it is done these days. New treatments for common ailments are achieved via very costly, systematic and targeted research into particular molecular structures, compounds and substances. Moreover, the costs of bringing a promising new compound from discovery to market are generally too big for anyone but the biggest players. So size matters.

The idea that there is no room any longer for the middle-ranked player, strongly locked into a particular domestic market, has become a bit of a business cliche. Companies have to be either the big global operator, with the distribution, spending and marketing clout to reach out to the mass markets of the world, or they they must position themselves as small niche players, sniping at the soft underbelly of the international monopolists. Perhaps unfortunately, it is nonetheless true. Mr Leschly is aiming to put SmithKline Beecham firmly in the first category.