Table of Contents
The Merging Reality
An Analysis of Three Recent Pharmaceutical Mergers
Merger #1: Glaxo Wellcome and SmithKline Beecham
Merger #2: Pfizer and Warner
Merger #3: J&J and Alza
Outlook for 2001
The Merging Reality
The payoff of growth resulting from a merger can be enormous for pharmaceutical
companies. However, some statistics about me
rgers and acquisitions across industries and
in general communicate the inherent risks in choosing to proceed with the integration of
two different companies. Some of the researched statistics, noted in Pharmaceutical
Executive in January 2001, are as fol
75% of large mergers fail to create shareholder value greater than industry
Productivity drops 50% following the announcement of a merger
Leadership attrition soars to 47% within three years following a merger
Employee satisfaction drops 14
% following mergers
80% of employees feel senior management cares more about economics than
about product quality or people
It is important for the merger or acquisition of two companies to be appealing both prior to
and after the deal. Otherwise, if not
attractive after the deal, the combination will fail to
term value, producing frustration for employees, customers, and shareholders.
In addition, it is important for pharmaceutical companies to realize that bigger is
not always better. Many
corporate mergers were the result of a defensive competitive
move or the pressure to consolidate. The complexity in managing people, product
portfolios, research and development projects, facilities, territories, and technology
increases with the company’
s size, resources, and employee population.
As a result, it is
critical for merger and acquisition activities to support an underlying business strategy in
order for them to create added value and increase long
holder value. The
synergy of the merger or acquisition is aided by the presence of a commitment to three key
creating goals: cost reduction, operational integration, and accelerated growth
Despite the merger activ
ity in the pharmaceutical industry, it is interesting to note
that the industry as a whole remains rather fragmented.
In fact, Pfizer, the leader in
worldwide prescription drug sales, owns only seven percent of the market. In addition, the
top ten drug
makers have forty
five percent of the market. As a comparison, in the auto
industry, General Motors alone has twenty
nine percent of the United States car sales. The
fragmentation of the industry may impact the future consolidation activity.
When considering a merger or an acquisition, pharmaceutical companies must
question whether or not the action will truly deliver the anticipated results and the
economic benefits of consolidation will be achieved
. The latest round of mergers in the
industry (Pfizer and Warner
Lambert, Monsanto/Searle and Pharmacia, and Glaxo
Wellcome and SmithKline Beecham) involved much complexity and took place in an
environment of significant social, economic, and regulatory change. For example, among
gs, the industry needs to deal with the following, as noted in Pharmaceutical
Executive in February 2001
Rapid transformation of research and development that must incorporate
processes for recombinant and
genome/protein based drug development
Need to accommodate remarkable increases in discovery research yield and its
implications for development capacity
Move away from significant reliance on “blockbusters” to greater reliance on
“category killers,” indiv
idual therapies that will deliver more focused
therapeutic impact to narrower segments of the population
Need to justify funding for discovery, development, and commercialization in
an environment of external pricing constraints and shrinking profit margin
Based on these issues, will mergers truly be able to result in productivity, savings, and
profit? In general, the industry is currently striving towards process innovations and cost
controls, irregardless of mergers
herefore, pharmaceutical companies must question
whether a merger will really be able to provide more cost savings than those savings that
each company could have separately. Also, a merger will result in the erosion of product
prices and additional costs
related to post
merger integration activities. Therefore, the
savings resulting from a merger need to be substantial in order to offset these merger
results. In defining organizational complexity, Pharmaceutical Executive of February
2001, writes that “
A successful merger has a lot to do with managing “complexity” so that
the benefits of scale are not lost or reversed and the value of the merger is not destroyed.
This requirement must be made manifest in most functional areas and across most
f the organization.”
As a strategy for advancing business goals and addressing
shareholder needs, pharmaceutical companies consider mergers, acquisitions, and
alliances. Pharmaceutical companies need to consider “committ
ing to the unification of
practices and processes, eliminating or outsourcing all functions and processes that are not
of strategic importance, and forging external partnerships that reduce complexity and allow
a focus on strategic initiatives and the buil
ding of organizational competence” as they
compete in an industry that is expected to see more consolidation
An Analysis of Three Recent Pharmaceutical Mergers
Merger #1: Glaxo Wellcome and SmithKline Beecham
billion dollar merger of Glaxo Wellcome and SmithKline Beecham
was completed at the end of 2000. The merger created one of the world’s largest drug
companies, with annual sales of more than twenty
five billion dollars and key operational
SmithKline Beecham’s offices in Center City, Pennsylvania
. The new
company is expected to control about seven percent of the world’s pharmaceutical market,
making it equal with Pfizer for the world’s largest drug company
. In the short
company needs to deal with a weak drug pipeline and the challenge of combining one
hundred thousand employees into one operation. In the long
run, the new company is
going to have to strive to benefit from its new size, rather tha
n falling under its weight
GlaxoSmithKline, as the new company is called, will be a worldwide sales leader
in four key areas: anti
infective drugs and vaccines, treatments for gastrointestinal and
metabolic diseases, drug
s for central nervous system disorders, and drugs for respiratory
four percent of the merged companies prescription sales last year were
composed of these four drug areas
Currently, the t
wo companies have more than twenty new potential drugs and
seventeen vaccines in clinical development, with approximately half of them in the final
. The lack of product overlap made the merger attractive from the b
Except for a few areas, mainly neurological products, there is not a lot of overlap between
the two companies by product areas. However, each company has also faced its own
setbacks. In late 2000, a promising Glaxo drug for irritable bowel sy
ndrome was taken off
of the market and the trial work of a SmithKline heart and stroke drug was stopped due to
. Both companies have had poor luck with research and development during
the past few years. How
ever, this poor luck has been the result even though both
companies together spend more than anyone else in the industry in research and
Pierre Garnier, the CEO for SmithKline, will lead the combi
ned company. He
plans to form six research concentrations. Each concentration will focus on a different
therapeutic area. The groups will be required to compete for resources and rewards within
the company, similar to the way small, entrepreneurial busi
nesses do in capital markets.
This plan is an attempt by Garnier to address the complaint that big is bad.
The research budget of the new company is four billion dollars.
This amount of
money will allow the company to invest in expensive, high
tech screening processes,
robots, and new genetic tools. These investments will enable the company to identify
more disease targets and generate new compounds faster. When this early research is
romising, the work will be assigned to one of the special groups for further development.
The company will use its size in conducting huge, global clinical trials on new drugs,
attempting to receive regulatory approvals. If approved, the company will have
strength of forty thousand sales and marketing employees to assist in the marketing of the
However, even with the size of the new company and its resources, it needs to
produce new products and get them t
o market. The two companies both lacked
momentum, and, as a result, it was critical for them to complete the deal. In the near term,
the combined company lacks new products coming from its pipeline. As a result, it is
predicted that GlaxoSmithKline will
begin to announce product licensing deals with other
companies in order to help with revenue. It is necessary for the company to look outside to
fill this gap in the short
Merger #2: Pfizer and Warner
The previous CEO of Pfizer, Bill Steere, retired from the company at the end of
2000. Although he was a critic of mergers in the industry and saw them as a sign of
weakness, he stated that “he has always believed
that only large
scale science and
marketing can drive the pharmaceutical enterprise. The bigger we are, the more
opportunities we have. So, we are convinced that scale is important in this business.” In
fact, the size of the new Pfizer includes approxi
mately twelve thousand researchers in six
different places on all continents and twenty
one thousand sales representatives
Pfizer’s hostile bid for Warner
Lambert resulted from Warner
Lambert’s attempt to
merge with American Home Products.
Actually, Pfizer was not looking at taking over
Lambert and was happy with them as an independent company
Lambert’s actions put the company “at play.” The result of the hostile merger
Pfizer as the clear leader of the two companies. The difficult merger included
the trading of stock for stock and the breaking up of the other deal. Warner
also happy as an independent company. However, even though the merger was hostile,
Lambert did seem to like Pfizer’s products, reputation, and values.
In fact, if this
merger is successful, it will have accomplished a critical feat. Prior to this merger,
basically all of the industry mergers of th
e past decade failed to increase, or even maintain,
market share and value.
Pharmaceutical research involves large numbers of compounds and the screening of
them against thousands of receptors looking for a “match.” If a
company finds a match, it
tries to turn it into an actual drug product. Pfizer has a huge compound library and,
working with other companies, also has a large library of receptors.
With many targets,
the probability of
Pfizer bringing a new drug to market is increased. Although the large
nature of Pfizer works in its favor, Pfizer also acknowledges the critical role that small
based companies play.
In fact, Pfizer has a rotatin
g portfolio of approximately
sixty biotech partners through licensing or equity positions. The results achieved
determine which companies enter, remain, or exit the portfolio.
Pfizer is constantly looking for new information and breakthroughs, whether in
informatics, robotics, or receptors. However, Pfizer sees the greatest promise in
technologies focused on the human genome.
Bill Steere, previous CEO of Pfizer, stated
that “an estimate of twenty
thousand of the one
dred thousand human genes have
relevance to drug discovery; all the medicines invented up to now address only about
seven hundred of those.”
Therefore, Pfizer has the possibility for quite an opportunity of
new findings i
n drug research.
As a result of the merger, Pfizer estimates that it will achieve approximately $1.2
billion in cost synergies in 2001 and expects to exceed $1.6 billion in savings in 2002.
addition, Pfizer expects annual earnings per share growth of
five percent or more
As a result of ongoing productivity initiatives and cost savings from
Lambert integration, Pfizer’s operating margin has improved more than eight
full percentage p
oints since 1995.
This is one of the best performances in the industry.
The margin improvements have come while product support and research and development
efforts have been fully funded to maximize the potential at Pfi
zer. As a result of in
products, new product launches, the absence of regulatory withdrawals and limitations, and
improved performances in the Consumer and Animal Health businesses, Pfizer anticipates
a return to double
digit reported revenue growth
Merger #3: J&J (Johnson and Johnson) and Alza
The most recent pharmaceutical merger involved Johnson and Johnson (J&J) and
Alza. In early 2001, J&J agreed to acquire Alza in a stock deal valued at approximately
twelve billion dollars. The deal represents a thirty
nine percent premium over Alza’s value
before the news of the deal was public.
The Alza deal represents the biggest acquisition
ever for J&J, who has previously avoided the megamergers in the pharmace
Vice President of J&J, William Weldon, described the merger as one that was
“built on strength, not a search for synergies.”
J&J offered a fixed exchange ratio of 0.49 share for each of Alza’s 294.7 m
shares outstanding, which includes options and debt that will be converted to equity.
addition, Alza brings approximately $1.8 billion in cash to the books of J&J. As a result of
the transaction, J&J plans to
dilute its earnings this year by fourteen cents and next year by
five cents, after excluding for one
time charges. It is expected that the merger will begin to
add to earnings in 2003. J&J has recommended that analysts reduce their earnings’
r this year by ten cents and to make no changes to their 2002 forecast.
passing the antitrust review, the deal will most likely be completed in the third quarter of
t that Alza is much smaller than J&J and that the companies’ operations do
not overlap very much suggest that there will be few, if any, regulatory issues to hold back
As part of the merger, Alza will remain as an independent unit of J&J. As a
integration risks and the chance of large layoffs are removed.
In addition, Alza will
continue to develop new products and collaborate with rival drug makers, such as Pfizer
and Bayer, which both sell drugs that
use Alza’s drug
collaborations are important to the company’s operations. In 2000, sales totaled $199
million, including $36.8 million in contract manufacturing.
In addition, Alza generated
$69.3 million in royalties and fees.
These joint projects contribute to further advances in
Alza’s technology. A challenge facing J&J will be how it chooses to market Alza’s drug
improvement technologies to direct comp
It will be a challenge for J&J to expand
some parts of certain businesses in which they will be competing with their clients.
In addition, the deal has a $180 million break
up fee attached to it.
responsible for the fee if J&J terminates the deal because Alza’s board changes or
withdraws its recommendation of the deal in response to receiving a better proposal and
then enters into the other proposal within twelve months of the termination. Alza w
also be responsible for the fee if either of the companies terminates the deal because it has
not been completed by the December 31
walkaway date or if Alza’s shareholders do not
approve the deal and Alza then accepts a better proposal within twelve
The two individual companies, prior to the merger, are described in the following
New Brunswick, NJ
Mountain View, CA
Ralph L. L
2000 Net Income
Consumer, pharmaceutical and
professional health care products
Urology, oncology, and central
During the past several years, Alza has grown to become significantly more than a
manufacturer for other companies of the NicoDerm patch for quitting smoking. In fact, it
has captured part of the pharmaceutical market by designing pills, capsules, implant
devices, and patches. It makes time
release capsules that allow people to take fewer pills
and systems that use electricity to push drugs through skin.
Alza’s products deliver
controlled doses of drugs to patients over a long time period, ranging f
rom several hours to
months. Alza has strived to discover new ways to deliver established drugs that are no
longer protected by patents. The application of innovative technology attracted J&J to
Alza as a takeover target.
When Alza began to market its
own drugs, Abbott Laboratories announced that it
planned to acquire the company. The 1999 deal would have been a stock deal worth
approximately seven billion dollars, significantly less than the recent deal with J&J.
owever, the deal did not happen due to the inability for the two companies to face terms
with the Federal Trade Commission. Afterwards, Alza became known in the industry as a
takeover target partly because it had agreed previously to the deal with Abbott.
In the past, J&J has looked to targeted acquisitions to capture strategic technology
or to increase product prospects when its own research and development have not been
resulting in successful outcomes.
A series of pr
omising products have failed in
development for J&J and several of their blockbusters are soon going to face tough
As a result, in this case, J&J was attracted to the promising new drugs and
the host of techniques for improving old drugs tha
t Alza could bring to the merger. J&J
hopes to use Alza’s technology for slowly releasing drugs into the bloodstream to create
new tablet forms of key J&J drugs. In fact, the acquisition of Alza brings drug
technology that is protected by appro
ximately three thousand pending or issued patents to
These patents could be used to bolster its portfolio. The acquisition is expected to
bring one and a half percentage points to the growth rate of J&J’s revenue d
uring the next
The gain will result primarily from the sales of new drugs, especially in J&J’s
pharmaceutical division, which represents about forty percent of the company’s revenues
and sixty percent of its earnings.
It is estimated that Alza will bring $1.2 billion in
revenue and that Alza’s sales will grow twenty
three percent in 2001.
growth rate is small in comparison to that of Pfizer, for example, it i
s better than what J&J
could have achieved for growth without acquiring Alza.
Alza provides J&J with notable
new product opportunities and the ability to extend product life
On the other hand, J&J will also ser
ve Alza in the deal. J&J believes that it can
increase the sales of Alza’s products through the expansion of its distribution. For
example, Alza does not have much presence in Europe. As a result, J&J hopes to expand
its overseas and United State market
ing in order to increase Alza’s sales. The Alza
products are expected to benefit immediately from J&J’s financial resources available for
research and development, its world
wide marketing strength, and its global distribution
infrastructure, especially i
n Asia, Latin America, and Europe.
More revenue will be
gained for Alza’s drugs than if they were marketed solely by Alza.
In addition, the longstanding marketing relationship between J&J and Alza was an
both companies to the deal. J&J licensed Duragesic from Alza. Duragesic is
a patch that delivers the painkiller Fentanyl through the skin. The patch could provide
hundred million dollars in sales to J&J this year. The prior marketing
onship between the two companies was predicted to assist with the cultural fit
between them as a result of the acquisition.
Outlook for 2001
During 2000, pharmaceutical revenues were aided by a
number of fast
products that helped the worldwide sales of pharmaceuticals grow 11.7%
. However, this
same performance is not expected to occur in 2001. The rollout of new products in 2000,
though important and helpful, did not match the blockbu
ster launches that occurred in the
late 1990s. In addition, the Unites States patents on several major drugs are set to expire.
As a result, an expected number of generic versions will hinder the industry’s growth.
During 2001, the pharmaceutical indust
ry, which has already experienced some mega
mergers, may face even more consolidation. Despite the challenges facing the industry,
global drug sales are expected to grow 8.8% in 2001 (to $385 billion)
. Although the
ent increase of sales is less than that from 2000, Norman Fidel, healthcare portfolio
manager at Alliance Capital Management LP, commented, “It is still a very good outlook.
We’ve had a period of unprecedented prosperity.”
Patent expirations will affect the industry significantly in the near future. It is
estimated that between 2000 and 2005, the expiration of United States patents and other
protections will occur on products with annual domestic sales of approximately $
The impact of generics in the market is evidenced by Merck and Company’s
drug, Vasotec, used to treat hypertension. This drug was worth $1.7 billion in annual
ever, in late 2000, annual sales of this drug fell due to the introduction of
generic products. Although many patients and health care companies desire cheaper
generics, which could help to decrease the rising costs at managed
care operators, the
venues from the presence of generics may force drug manufacturers to initiate new
deals among themselves. The recent combinations of four big players
Lambert, Glaxo Wellcome and SmithKline Beecham
may encourage other drug
small in comparison to these combinations, to consider new deals.
The pressure to merge is increased by patent expirations. Pharmaceutical
companies are attracted to the possibility of post
merger savings and the better and larger
research and developme
nt opportunities resulting from their increased scale. Analysts
have noted the benefits that may be noticed from the linking of Merck and Schering
Plough may face generic rivals of its allergy medicine,
Claritin, in a
few years. In addition, during 2000, the companies became closer, announcing that they
would create two new products, combinations of existing drugs or developmental
compounds already in their portfolios. In addition, Bristol
Myers may lo
ok to a deal with
one of its competitors in order to not have to survive on its own. In 2000, the company
encountered a major setback with its anticipated hypertension drug, Vanlev. As a result of
the delay, the product is not expected until at least 200
In addition to the pressure to merge, pharmaceutical companies will be challenged
to renew their product lines in 2001. In order to accomplish this, the companies are likely
to look to the biotechnology industry. Pharmaceutical companies are likely to
partnerships, rather than outright takeovers.
In the meantime, pharmaceutical companies
will continue to license biotechnology products. These deals are appealing to smaller
biotechnology firms lacking cash fo
r marketing campaigns. Larry Feinberg, managing
partner of health
care hedge fund Oracle Partners LP said, “One way or another, 2001 will
be a year of pipeline building, and the pipeline is clearly in the genomics and biotech
The drug industry is relying on genomics, the latest scientific revolution.
Genomics refers to the efforts to exploit all of the scientific information flowing into gene
databases around the world.
very big pharmaceutical company has genomics expertise,
but some companies, such as SmithKline, have made it central to their discovery and
development efforts. Other companies have been relying on external partnerships with
upstarts, such as Millenium Ph
armaceuticals and Celera Genomics Group. The impact of
genomics is conveyed in a statement made by Pfizer’s CEO, Henry McKinnell. He said,
“We have 10,000 to 15,000 genes that could be relevant targets. The scale of the
opportunity is enormous.”
Pharmaceutical companies await the large payoff of
genomics, but they need to be patient because it is not likely to come for several more
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