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As Deal Two Falls Apart, Wall Street Starts to Question SBH Management

The backlash against

SmithKline Beecham

(SBH) - Get Sally Beauty Holdings, Inc. Report

and SBH. Though everyone initially thought that the merger provided a graceful exit for Jack Stafford, chairman, president and chief executive for AHP, when those talks collapsed the spin was that it was AHP's fault and that Stafford wanted to hang on. Hmm. See a pattern here?

SmithKline, and especially its chief executive, the charismatic salesman Jan Leschly (for whom "former tennis star" is a Homeric epithet), is a perennial favorite among investors, while Glaxo has been facing deep suspicions and worry following the expiration of the company's anti-ulcer drug



And GLX is still on the mend. Its estimated top-line growth rate over the next four years is projected on average in the mid-single digits, according to


estimates, while analyst Steve Scala estimates SBH at a more respectable 12%. In midafternoon trading, Glaxo was down 7 11/16, or 12%, to 54 3/4 and SmithKline was down 6 1/8, or about 9%, to 59 7/8. The drug sector as a whole was hurt modestly Tuesday by the failure of the talks. Bellwether


(MRK) - Get Merck & Co., Inc. Report

was off 1.6% and


(PFE) - Get Pfizer Inc. Report

was down about 2.7%.

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Though SmithKline has opted to diss Glaxo and AHP after megamergers failed to materialize, some on Wall Street believe that SBH's management has overreached on both occasions.

"SmithKline management is aggressive to the point of being abrasive. It spooked the people at Glaxo, who are more cerebral," says one sell-side analyst speaking, understandably, off the record.

SBH is always next year's company, the story stock of Big Pharma. In reality, it has problems developing drugs through the clinic, a few contrarians charge. Biotech investors point out that SBH hasn't put any drugs into the clinic that were generated by the

Human Genome Sciences


database. SBH has a longstanding agreement to mine Human Genome's database for genomics-derived drug leads. HGS Chairman and Chief Executive Bill Haseltine has long suggested that the reason no drugs have yet been developed from the database is that medicinal chemistry "is still more of an art than a science," as he said in a recent interview.

But perhaps SBH has trouble developing drugs. Most of its big-selling drugs have been licensed from others, rather than developed. The company has had some high-profile disappointments, including an Alzheimer's drug,


, and an asthma drug in the same class as Merck's recently approved






, a hypertension drug, received a limited label from the

Food and Drug Administration


Investors are hopeful that SBH eventually finds a partner -- perhaps coming back to AHP -- or has the pipeline to go it alone. Several investors said it was highly unlikely that AHP and SBH would get back together, given the acrimony associated with the previously failed courtship.

Not all SBH investors are participating in the emerging backlash. Many are counting on the company's diabetes drug that's in the same class as




, which is in late-stage clinical trials. One major drug stock investor dismissed the notion the SBH has had trouble developing drugs. "They've had some drug failures, but all companies have failures.

The diabetes drug will eventually sell over a billion," he says.