Glaxosmithkline is a global leader in the market of pharmaceutical goods and services, currently holding 7% of market share in this field. Formerly Glaxo Wellcome plc, the firm merged in December 2000 with Smithkline Beecham, a leading manufacturer of medical and consumer healthcare goods. , however there is much dispute over the motives behind the merger and what Glaxo Wellcome sought to gain through the collaboration. This is of particular concern as following the merger, many shareholders and city analysts have criticised the firm for not yielding the predicted benefits from the merger, particularly with regard to an innovative product pipeline. It has been argued that the purpose of the merger was to serve as a method of consolidating Glaxo Wellcome's position in the pharmaceutical market, following competitive threats from generic products and reports of stifled profits. However, others have argued that the reason behind the merger was to facilitate the production of innovative pharmaceutical products; through strengthening the firm's core competences, given the lack of new products in the product pipeline. The aim of this report is to ascertain which strategy Glaxo Wellcome sought to pursue through merging with Smithkline Beecham.
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...
The New York Times, May 4, 2003 pBU4 col 01 (29 col in) `For Glaxo, the Answers Are in the Pipeline
The Sunday Times - Business0x01 graphic
July 21, 2002
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