Pharmaceutical Mergers: What’s the Rush?

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Villanova University

College of Commerce and Finance Spring, 2001
MBA 8439 – Contemporary Topics in Finance Dr. W.L. Dellva

Darren Snellgrove

Pharmaceutical Mergers: What’s the Rush?
Drivers of Recent and Future M&A Activity

TABLE OF CONTENTS

i) Executive Summary

ii) Introduction
iii) Industry Structure
iv) Reasons for Recent M&A Activity
v) Analysis of Two Recent Mega-Mergers
– Glaxo Wellcome / SmithKline Beecham – Pfizer / Warner Lambert

vi) Do Drug Mergers Really Work
vii) Possible Future Mergers
viii) Implications of Biotechnology & Genetic Mapping ix) Conclusions
x) Bibliography
xi) Appendix

i) Executive Summary

OBJECTIVE: Explain what social-political-economic factors are driving the recent step-up in pharmaceutical merger activity, and determine whether or it makes sense. METHOD:
□ Analyze industry data, focusing on the recent pressures that explain recent merger activity. □ Consider general research and two recent mergers to see whether they are likely to succeed. □ Assess whether this trend will continue.

Industry Stage / Structure
□ Relatively mature, and yet constantly changing industry. Complex financial challenges.

Reasons for Recent M&A Activity
□ Major drug reimbursement issues, political pressure and concerns over pricing. □ Patent expirations / generic competition.
□ Profitable industry, but growth slowing.
□ Sales growth issues / global expansion.
□ R&D pipeline gaps / R&D synergies.
□ DTC campaigns / sales rep. coverage / channel access.
□ Biotechnology / Gene Mapping.
□ Management greed / agency factors.
□ Changing M&A accounting regulations.

Analysis of Two Recent Mergers
□ Overall, results are mixed. Portfolio balance and strategic fit are the key success factors. □ Glaxo / SmithKline - likely to achieve some success through pipeline synergies and cost savings. □ Pfizer / Warner-Lambert - the most likely to succeed due to strategic fit, operating efficiencies, pipeline synergies, and the fact that this was a hostile purchase. □ Size may be good up to a point, but some of these mergers may be going too far:

|Advantages of size: |Disadvantages of being too big: | |Clinical trial economies of scale |Diseconomies of scale / control issues | |Sales rep. Coverage |Lack of focus | |Regulatory / filing power with the FDA |R&D / commercial disconnects | |Lobbying power (political and with wholesalers etc.) |Loss of entrepreneurial environment | |Balance risk in pipeline / product portfolio |May not deal with emerging areas | | |(biotech and genomics) |

Conclusions

□ Size and growth are being used to defend against increasing industry pressures, i.e. Reimbursement, political pressure, patent expirations, growth issues, R&D pipelines, ad. economies. □ It is not clear that merging is the answer. Evidence to date suggests only minimal success, & a temporary solution. Can’t “guarantee” discovery. Size issues e.g. R&D/commercial disconnect. □...
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