Part1- The merger with Smithkline Beecham
When one considers the current and then state of the pharmaceutical industry it becomes apparent that there was in fact the need for a merger or other form of change in order to remain competitive. Following the 1997 expiry on the patent of blockbuster drug Zantac, the company merged with Wellcome and reaped rewards through marketing existing products. However, due to a shortage of new products in the pipeline, the firm began to experience dangerously low profit margins. Thus it can be argued that Glaxo Wellcome sought a cost cutting and rationalisation strategy in order to increase efficiency and to focus on those activities which add value.
Although the bargaining power of suppliers of `organic chemicals' in the pharmaceutical industry is relatively low as so many suppliers of the commodities used in the manufacture of pharmaceuticals exist, horizontal integration by Glaxo Wellcome would have strengthened the company's position as a buyer of these supplies as the firm could benefit from purchasing
economies, and possibly negotiate better trade agreements with its suppliers. The merger itself would give the firm greater flexibility and therefore should a supplier have decided to vertically integrate forward, Glaxo would be in a position to eliminate this competition via the synergies achieved from a combined market share of 7.1%. (Table 2) However given expenditure on R&D in this industry, which averaged £2.7bn in 1999 (Table1) it is unlikely that a new firm will be able to overcome this barrier of entry due to high capital requirements.
Consumers individually have little bargaining power in the pharmaceutical industry; buying branded goods, particularly when a company such as Glaxo is taking advantage of its monopolistic market prior to the expiry of patents. It is important to note that in this industry, power of consumers is replaced by organisations such as the NHS, and the government who impose policies in order to monitor and control the pricing of products. The power held by these customers put pressure on Glaxo to reduce its prices in order to make them affordable by the NHS and other such organisations. Horizontally merging with Smithkline Beecham would enable the merged company to better deal with the downward pressure put on prices as unit cost should be reduced following rationalisation of the firm's activities thus allowing the firm to charge lower costs whilst retaining a premium on their prices.
The merger with Smithkline Beecham would increase the R&D expenditure available for developing innovative new products; this motive as a justification for the merger is backed by great deal of evidence. Table 1 shows that the...