Mergers and Acquisitions in the Pharmaceutical Industry

Mergers and Acquisitions in the Pharmaceutical Industry Pamala Proverbs Surrey, February 2005 2 Table of Contents Introduction.......................
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Mergers and Acquisitions in the Pharmaceutical Industry

Pamala Proverbs Surrey, February 2005

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Table of Contents Introduction....................................................................................................................5 History of Pharmaceuticals ............................................................................................6 Early Characteristics of Pharmaceuticals...............................................................6 Key Definitions..............................................................................................................7 Review of Mergers, Acquisitions and Alliances....................................................7 Paradigm Change for the Industry .................................................................................8 Macro Environmental Analysis .............................................................................8 Industrial Forces...........................................................................................................11 The bargaining power of customers.....................................................................11 The Threat of Substitute Products........................................................................12 Jockeying for position..........................................................................................12 Strategic Global Markets .............................................................................................13 How some of the major deals have restructured the Market .......................................14 Implications for Firms..................................................................................................16 Question 2 ....................................................................................................................19 Competitive Advantage ...............................................................................................19 Analysis of Pfizer.........................................................................................................19 Strengths ..............................................................................................................19 Weaknesses ..........................................................................................................20 Opportunities........................................................................................................21 Threats..................................................................................................................21 Summary ......................................................................................................................23 Recommendations........................................................................................................23 References....................................................................................................................25

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Tables and Figures Table 1.

Some Deals of Top 5 Companies

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Introduction The pharmaceutical industry can be broken down into two major sectors pharmaceuticals and biotechnology. Datamonitor (2003) highlights, that “in the past five years, the market has experienced high levels of consolidation, as major players have sought to expand their portfolios and market share.”

The industry, which until the early 1980s was dominated by national, multinational and regional companies now comprises huge global giants such as Pfizer Inc., GlaxoSmithKline (GSK), Merck Corporation and Johnson and Johnson, who were listed in 2003 by the Association of the British Pharmaceutical Industry (ABPI) as being number one to four in world with sales in the billions of dollars.

The paradigm of merger, acquisition and alliance activity has come as a result of environmental forces from the macro-environment and from within the industry itself. The deals have been among equals: (Glaxo/SmithKline 2000); bigger firms have taken over smaller firms (Johnson & Johnson/Scios Inc. 2003); firms outside the industry, but in some way complementary, have been acquired (Merck/Medco 1993) and firms have integrated vertically through both forward and backward integration (licenses and sales and marketing agreements).

This paper looks at the reason for acquisitions and mergers in the pharmaceutical industry, focusing on the case of Pfizer. It analyses how some of the major deals have restructured the industry and gives recommendations for the industry as a whole.

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History of Pharmaceuticals According to Johnson and Scholes 2002, the pharmaceutical industry can be traced back to the late 19th Century. Datamonitor’s profile on Pfizer Inc. (2004) dates this company back to 1849. Warner Lambert which was acquired by Pfizer in 2000 traces its history back to 1800. (www.pfizer.com) Datamonitor also lists German company Boehringer Ingelheim GmbH as dating back to 1885, Merck and Co., Inc. 1887, Bayer 1863 and GlaxoSmithKline formed from Glaxo and SmithKline as going back to 1873 in the case of Glaxo, and 1830 for SmithKline, demonstrating the maturity of the pharmaceutical industry and the longevity of companies in the industry.

Early Characteristics of Pharmaceuticals Early characteristics included: “The firm establishment of Research and Development (R&D) within the sector, permanent patent protection with a time from discovery to launch between 3 to 5 years, lax regulatory controls on development and marketing, and healthcare spending booms as economies prospered. A unique feature of the industry around this time was that the final consumer (i.e the patient) had little or no say in the choice of drug and treatment. Specialists and general practitioners were the customers of the pharmaceutical companies because they were ultimately responsible for purchasing decisions.

Pharmaceutical companies’ marketing efforts targeted

physicians, building on individual representatives that would alert practitioners of new products through one-to-one sessions at the practitioner’s office.” (Johnson and Scholes, 2002)

Piachaud and Moustakis (2000) further summarised the industry as “oligopolistic market structures, high differentiation, and competition that is based on new product development rather than on price.”

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Key Definitions Alliance/Joint Development “A joint development is where two or more organisations share resources and activities to pursue a strategy.” (Johnson and Scholes, 2002)

Acquisition “An acquisition occurs when one company uses its capital resources – such as stock, debt, or cash – to purchase the other.” Hill and Jones (2004)

Merger “The union of two companies to form a single new business. The firms are usually more similar in size and the arrangement is more collaborative. A merger is somewhat akin to a marriage.” (Griffin and Ebert, 1991)

Strategy “A company’s strategy is the “game plan” management has for positioning the company in its chosen market arena, competing successfully, pleasing customers, and achieving good business performance.” (Thompson and Strickland, 1998)

Mergers, alliances and acquisitions are corporate level strategies of horizontal integration. (Hill and Jones, 2004)

Review of Mergers, Acquisitions and Alliances According to Hill and Jones (2004), horizontal integration became popular about a decade ago in a number of industries from aerospace, to pharmaceuticals and banking. “The most recent wave of mergers and acquisitions peaked in 2000 when US firms spent some $1.6 trillion on 11,000 mergers and acquisitions up from $300 billion in 1991.”

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Paradigm Change for the Industry The pharmaceutical industry then, like other major industries at the time started on a strategy of wide scale horizontal integration and strategic alliances. To analyse what accounted for this activity the macro environment and the industrial forces will be examined.

Macro Environmental Analysis According to Johnson and Scholes (2002) the PESTEL framework (political, economic, social, technological, environmental and legal) is used to look at forces outside the control of the organisation.

Political / Legal Forces Johnson and Scholes (2002) list two major development in the 1970s that started the paradigm change in the pharmaceutical industry as firstly “tighter regulatory controls on clinical trials greatly increasing time-to-market and development costs and the enactment of legislation allowing the introduction of ‘generic’ medicines by setting a fixed period on patent protection. (A generic product is a drug manufactured after patent expiry by another company and usually sold at a cheaper price).”

The effect on the industry has been large research and development budgets with a limited time to recoup investment due to patent expiry. MedTRACK this year list Pfizer’s R&D spend as $7655 million and GSK as $5,086 million.

The fact that the government was the most powerful purchaser of pharmaceuticals meant that they were in a position to control healthcare expenditure. “For example, in 1985 the British government introduced its ‘black list’, a group of patented drugs that the government would not pay for… Prior to the introduction of the black list, Roche, was in the top ten companies within the pharmaceutical industry, but fell to the forties within the industry when its two major products were delisted.” Pharmaceutical companies at this time, according to Johnson and Scholes (2002), had little or no public or political clout to prevent changes.

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9 Hill and Jones (2004) note that an important motive of horizontal integration is that it may help the company gain bargaining power.

ABPI reports

that the UK

pharmaceutical industry brings that economy an industry surplus of nearly £3 billion a year and is one of Britain’s most important industrial sectors employing around 70,000 people. The UK Government, recognising the importance of the industry to the economy, set up a Pharmaceutical Industry Competitive Task Force, to identify steps that could be taken to retain and strengthen the UK as an attractive business environment for an innovative pharmaceutical industry.

Economic According to Relman and Angell (2004), the US, unlike other advanced countries doesn’t regulate drug costs and costs are rising at “annual rate of 10-12 percent – more than four times the rate of inflation.” This favourable economic climate has allowed pharmaceutical companies in the US to thrive. The top ten American drug companies made a medium profit margin of 17 percent, compared with less than 3.1 percent for the other Fortune 500 industries.” These factors may account for the fact that five out of the top ten companies listed by ABPI for 2003 are US ( Pfizer, Merck, Johnson

and

Johnson,

Bristol-Myers

SQB

and

Abbott)

Holt

on

bettermanagement.com notes that the pharmaceutical industry is “America’s most profitable business and it’s still a business that is growing.”

The economic climate in the UK on the other hand is tightly regulated. According to ABPI “prescription medicines are subject of government controls and intensive competition. Pharmaceutical prices have grown at a slower rate than consumer prices as a whole and in real terms are 12.4 percent cheaper than they were ten years ago.”

Socio-cultural Relman and Angell (2004) noted that for these reasons public pressure may soon force the US government to allow drug imports from Canada and Europe. As noted earlier the final customer the patient had no say in drugs. However as Piachaud and Moustakis (2000) describe, this is changing as there is a demand by customers for more cost effect drugs as patients get more suave.

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10 Technological Johnson and Scholes (2002) list two key technological developments of the 80s which impacted on the industry as the emergence of biotechnology firms and greater use of computer power. Hill and Jones (2004) notes that ‘technological changes can make established products obsolete overnight’, the successes of biotech companies such Amgen, and Biogen pose competitive threats to pharmaceutical and there are over “300 publicly traded companies in the US developing novel medicines using biotechnology”. Medtrack list Amgen as the top Biotech company with a share price of $63.95 compared to Pfizer’s share price of $27.09, indicating the strength of this new sector.

Biotechnology is posing a competitive threat in foreign markets as countries in the developing world use this technology to develop cheaper drugs relevant to their health care issues.

The December Economist (2004) listed six countries: Brazil, China,

Cuba, Egypt, India and South Africa as investing in biotechnology. It noted that Cuba “for all its political and economic travails, has created an internationally successful biotech sector from its earlier development of an innovative home grown vaccine for meningitis.”

Merck’s acquiring Medco, a Pharmacy Benefit Manager (PBM) in 1993 was thought to be as a result of computer technology and gaining access to the PBM’s data bases which would help to direct their R&D and also control the drugs used under this scheme. (Johnson and Scholes, 2002)

Environmental The

Organisation

for

Economic

Co-operation

and

Development

(OECD)

environmental committee policy document (1998) reported that the “economic as well as health and environmental consequences of major problems involving chemicals (like the Minamata disease in Japan cause by mercury or the ubiquitous presence of PCBs in man, animals and the environment which cause a variety of anomalies) have convinced everyone that preventing chemical risks is far cheaper than to “react and cure”. As such chemical testing and regulations required in different territories result in significant cost for the industry. This factor contributes further to the large R&D

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Industrial Forces The macro environment may have been the catalyst which sparked the strategies that led to initial changes in the structure of the pharmaceutical industry but it has been the competitive forces within the industry that accounts most for the continuing spate of mergers, alliances and acquisitions characteristic of the industry today.

Porter (1979) argues that “the nature and degree of competition in an industry hinge on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitutes products or services and the jockeying among current contestants.”

It is the bargaining power of customers, the threat of substitute products and the jockeying among current contestants which appear to be the most powerful of the forces within the pharmaceutical industry.

The bargaining power of customers The governments around the globe are today still the pharmaceutical industry’s most important customer. As stakeholders, governments have high power and high levels of interest in the industry. As a customer a government’s position is unique because if prices are high it can effect legislation to influence a price drop. Datamonitor’s (2004) analysis of products for GSK in terms of European show that “European turnover was up just 2% of total pharmaceutical sales. Performance in the region was negatively affected by government reforms on healthcare spending.”

A SWOT analysis of Merck lists as a threat “pricing pressures, both in the US and abroad, including rules and practices of managed care groups, judicial decisions and government laws and regulations related to Medicare, Medicaid and health care reform, pharmaceutical reimbursement and pricing in general as having adversely affected those operating in the sector. A number of companies have been charged with artificially inflating prices and given considerable fines.” (Datamonitor, 2004 ) 11

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The Threat of Substitute Products Generic substitutes pose a real threat to the pharmaceutical industry contributing to the industry leaders using a number of strategies manoeuvres including legal battles to stretch out the life of their patents or acquiring the companies. Datamonitor reported that GSK at it annual results meeting blamed generic competition for decline in sales for its leading antidepressant, Paxil which had suffered a 40% decline in sales from $597 million in Q3 2003 to $325 million in Q4 2003.

The threat of substitute products has caused pharmaceutical companies to bolster their product portfolios developing their own generic drugs. Pfizer taking away of 40% of Eli Lilly’s share of the mental disorder market between 1992 and 1998, after the patent for Lilly’s antidepressant drug Prozac had expired for its own drug Zoloft is a good example of how fragile the competitiveness of companies in the industry are based on patents and the development of substitute productions by other pharmaceutical companies. (Hill and Jones, 2004) The threat then comes not only from biotechnology but from within the sector itself.

Jockeying for position The consolidation trend has created a new breed of pharmaceutical superpowers: Astra-Zeneca, Aventis, Pfizer, Pharmacia and

GlaxoSmithKline.

competitors are now five. Bogan and Summers (2001)

Ten major

Since that year ten has

become four with the Pfizer/Pharmacia Corporation merger.

A key global strategy of pharmaceutical companies has been horizontal integration and strategic alliances.

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Strategic Global Markets Of the international markets the US is the most important as it accounts for 47% of the global pharmaceutical revenue, Europe generates 47%, Asia Pacific 16.20% and the rest of the world 12.5%. (Datamonitor, 2003) The US reportedly spent £462 per person in drugs in 2002 twice as much as the nearest country Japan, followed by European countries. (www.abpi.org.uk)

Companies in search of critical mass have stretched their operations to fit the different nuances that exist in different markets. Koberstein (1998) reported that “China ranks right after Japan as the most important pharmaceutical market in Asia.” Wechsler (1998) noted a number of obstacles present in China including “price controls, patent erosion, and changes in the healthcare system,” and protection of the local industry. For these reasons the Asian market has been dominated by domestic companies however because of the size of these populations there are targets for strategic alliances. (Datamonitor reports that “China has one million people infected with HIV, 20 million persons with chronic Hepatitis B and a total of 4.5 million cancer patients. Two million cancer patients are diagnosed every year.”)

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How some of the major deals have restructured the Market The major pharmaceutical deals have restructured the market by firstly making companies into global entities operating in a dynamic market place. According to Johnson and Scholes(2002) in 1997 Pfizer was listed as number seven in the world, by the year 2000 after its Warner Lambert merger it was propelled to number two in the world in terms of sales and market share. ABPI shows Aventis who was not in the top ten in 1997 was propelled to fifth place following it’s merger with Sanofi Synthelabo. Pfizer is now number one in the world after its mega merger with Pharmacia in 2003. This phenomenon has shortened the lifetime of companies as the industry cannibalise e.g Warner-Lambert around since the 19th Century is no more.

On the other hand Medtrack’s industry statistics (2004) list Merck, who in 1997 was number two in the world, as number nine with a market value of $63, 733.39 million. Datamonitor reports that Merck has chosen a strategy of organic growth with modest M&A activity.

Pfizer on the other hand has aggressively pursued competitive

advantage through merger and acquisition and has become the number one company with a market value of $204,014.65 million. Table 1 list some of the major deals of the top five companies.

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Table 1. Some Deals of Top 5 Companies (Top 5 as listed by ABPI) -

Gathered from different Sources

Company

Major Deals

Pfizer

1983 Acquisition of Taito(Japan) 2000 Warner Lambert Merger 2001 IBM & Microsoft deal to launch Amicore 2002 Sold Cadbury Schewepp and Schick-Wilkinson Sword business 2003 Pharmacia Corporation Merger 1929 (Smith/Kline/French) 1989(Beckman/Smithkline) 2000(Glaxo/Wellcome/SmithklineBeecham) Merck Sharp & Dohme 1993 Medco Containment Services 2002 License with Japanese Taisho 2003 Bought Japanese Banyu Pharmaceutical Co. 2004 Acquisition of Aton Pharma, biotech 1991 Janssen, purchased in Belgium 1997 Biopsys Medical Inc. 1998 DuPuy, 1999, Centocor, a biopharmaceutical 2001 BabyCentre LLC 2002 Tibotec –Virco, 2003 Scios Inc. a biopharmaceutical company 1996 Created by merger of Sandoz and Ciba-Geigy

GSK

Merck

Johnson and Johnson

Novartis (Swiss)

Secondly, mergers, acquisitions and alliances restructured the industry in that pharmaceuticals despite major R&D spend are dependent on biotechnology companies for new innovative drugs, leading to widespread strategic alliances as the biotech companies benefit from the deep pockets and marketing capabilities of the pharmaceutical companies.

Datamonitor reports that Merck e.g. “focuses on

collaborative agreements with small innovative biotechnology companies such as Delta Biotechnology, Sunesis Pharmaceutical and NeoGenesis” which provide new drugs to their pipeline.

According to Datamonitor, the relationship between

biotechnology companies and pharmaceuticals is under strain as demonstrated by the CAT/Abbott dispute over royalty payments and Pfizer’s new strategy to acquire biotech companies in preference to alliances.

Thirdly the deals have also restructured the market by narrowing the therapeutic focus of the top companies. Datamonitor reports that pharmaceutical companies focus on treatments where there are expected high rates of return e.g central nervous system

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16 (CNS) and cardiovascular disease which are the major causes of death in the Western World. The top companies also have specialty areas which they excel in outside CNS and cardiovascular disease for example Johnson and Johnson’s medical devices brought in 35% of their revenue in 2003 and Novartis’ consumer products 36%.

Finally the deals have impacted on the geographical importance of the companies operations. For examples Johnson and Scholes 2002 reported that GSK for one after completing its merger (Glaxo/SmithKline Beecham) considered moving its headquarters to the US because of the strategic importance of the US to the industry in terms of revenue generation against all other markets.

Implications for Firms The implication for firms is that they are forced to respond to forces in the industry due to such factors as technological advances or deregulation that create threats to their profitability.

The entrance of biotechnology was such a threat for

pharmaceuticals and the responding spate of mergers, acquisitions and alliances was the industry’s response.

Datamonitor reports that Pfizer has now changed its approach to biotechnology from alliance to acquisition. This is a step to help Pfizer’s pipeline, giving it access to new technology and at the same time bolstering its product offering, as a number of its block buster drugs are facing patent expiry. The downside to this for Pfizer, as explained by Datamonitor, is that there could be “leakage of staff and loss of R&D momentum that are key to innovation” which is characteristic of merged companies.

The search for critical mass, according to Piachaud and Moustakis (2000), is an important driver for M&A within the industry “since the market share of even the largest pharmaceutical manufacturers is often considered too small to maintain a strong competitive position.” The M&A activity is thus expected to continue.

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17 Firms participating in M&A can reduce cost. Piachaud and Moustakis reported the “Astra-Zeneca merger in 1998 was an attempt to save that company $1.1 billion in revenue as derived from a reduction in the work force.”

According to Hill and Jones (2004) gaining bargaining power over buyers and suppliers is important to creating profitability at their expense rather than the company’s.

As demonstrated earlier with the UK companies their size and

importance to the economy has gained them recognition and bargaining power with governments.

In the US pharmaceuticals are under scrutiny.

According to The Economist,

(November 2004) The Food and Drug Administration (FDA) itself was under attack when one of its scientist was called upon to testify before the Senate on the sudden withdrawal of Merck’ drug Vioxx, a pain killer that may have damaged the hearts of more than 100,000 Americans since its approval by the FDA in 1999. The scientist testified that the “FDA overvalues the benefits of drugs and seriously undervalues, disregards and disrespects drug safety.” According to The Economist the results of this case reeked havoc in the market “Astra-Zeneca’s share price fell by 10%, shares in GSK fell by 6% although Merck’s share price hardly budged, traders have already knocked $40 billion off the firm’s value.” (Interestingly the two companies affected are not US)

The FDA is expected to react to this mark on their reputation, by putting more stringent testing in place. According to The Economist this may mean more R&D spend for the drug companies and longer time to market for drugs. “It now takes 1015 years and on average $879million to bring a new drug to market.”

Pfizer’s rise from number seven to number one in just six years also demonstrate how M&A helps to manage rivalry though acquiring the competition and delivers competitive advantage. According to Bogan and Symmers (2001) Pfizer’s actions to acquire Warner Lambert and Monsanto was that the target companies carried the multibillion dollar blockbuster products Lipitor and Celebrex which made billions of dollars for Pfizer.

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18 According Bogan and Symners (2001) M&A however have their draw back as statistics have shown that: “75 percent of large mergers fail to create shareholder value greater than industry averages; productivity drops 50 percent following the announcement of a merger; leadership attrition soars to 47% within three years following mergers; 80 percent of employees feel senior management cares more about economics than about product quality or people. The research thus shows that many M&A that look attractive during the negotiation stage are not always fruitful.” Bogan and Symner however suggest that despite these risks, “companies continue to merge because the payoff of accelerated growth can be enormous.” In the pharmaceutical industry the payoff in the form of block buster drugs accounts for billions of dollars in revenue.

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Question 2 Competitive Advantage “A company is said to have competitive advantage over its rivals when its profitability is greater than the average profitability for all the firms in its industry. The greater the extent to which a company’s profitability exceeds the average profitability for its industry, the greater is its competitive advantage. A company is said to have a sustained competitive advantage when it is able to maintain aboveaverage profitability for a number of years.” (Hill and Jones, 2004)

According to Hill and Jones (2004), the four main building blocks of competitive advantage are efficiency, innovation, responsiveness to customers and quality of product or service offering.

Analysis of Pfizer The case of Pfizer demonstrates that mergers, acquisitions and alliances can deliver competitive advantage. To sustain the advantage because of the volatile nature of the industry with the major players consistently jockeying for position, is the challenge. A look at the number one company Pfizer, in terms of its strengths, weaknesses, opportunities and threats as highlighted by Datamonitor since its acquisition of Pharmacia, reveals that this acquisition has catapulted Pfizer way ahead of the other leading companies giving it a competitive advantage.

Strengths Pfizer’s strengths as listed by Datamonitor include strong sales and marketing capabilities which, because of it sheer size “means that it can target prescribing physicians in each of its therapy areas,… it can launch huge direct-to-consumer campaigns” which benefited it in the launch of Viagra, by raising awareness to erectile dysfunction as a disorder that can be effectively treated.( Datamonitor) Pfizer’s strength in sales and marketing make it an attractive partner for other companies to market their drugs through.

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Patents are a very important strategic capability for the pharmaceutical industry. According to Danzon et al, ethical drugs “enjoy patent protection which on average last for roughly 12 years after market approval.” Another strength of Pfizer which could be a direct correlation to its large successful sales and marketing capabilities has been its blockbuster drug portfolio. “14 products marketed by Pfizer remained at the top of their respective therapeutic categories in 2003, more than any other company” (Datamonitor).

Pfizer horizontal strategies to acquire these capabilities

have given it competitive advantage.

A key strength and capability of Pfizer, a direct result of it M&A activity is it large R&D spend which is the industry largest of $7.1 billion in 2003. Despite this Pfizer’s still depend on alliances to bring new block buster drugs to market. As Datamonitor indicates a number of blockbusters on its portfolio are from joint arrangements which demonstrates that large budgets in the pharmaceutical industry does not guarantee blockbuster drugs. Its innovativeness and R&D however improves its probability in bringing new drugs to market and it gives Pfizer a complete value chain of activities. Pfizer manages all elements of its value chain. It discovers, develops, manufactures and markets its drugs.

Weaknesses A weakness of Pfizer is that a number of its blockbusters are facing patent expiry. Its taking away of 40% of Eli Lilly’s share of the mental disorder market between 1992 and 1998, after the patent for Lilly’s antidepressant drug Prozac had expired for its own drug Zoloft is a good example of how frail the competitiveness of companies in the industry is based on patents. (Hill and Jones 2004) This factor will threaten Pfizer’s future competitive advantage. Pfizer’s over-dependence on a few drugs and therapy areas makes it vulnerable to adverse effects related to the individual products. Merck’s voluntary recall of its blockbuster arthritis drug Vioxx demonstrates the weakness the downside of problems with a blockbuster.

A final weakness listed by Datamonitor is Pfizer’s large size restricting its growth. Pfizer has chosen a strategy of shedding units to focus on its core business for

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21 example it sold of its Tetra Fish Food Supplies business for $238.5 million to Triton Fund and Schick-Wilkinson Sword shaving products for $930 million in cash to Energizer Holding Ltd which it had acquired with Warner – Lambert acquisition. (Datamonitor) These divestment help to slim Pfizer while temporary boosting its profitability.

Opportunities Despite its weaknesses M&A have given Pfizer opportunities for international expansion driven by the Pharmacia’s merger, contributing to Pfizer achieving “critical mass” and hence increasing its competitive advantage. According to Datamonitor “Pfizer’s merger with Pharmacia consolidated its overseas presence, propelling it from fourth to first position in Europe, from third to first in Japan and from fifth to first in Latin America.”

This expansion comes from the company’s increasing

presence in non-core therapeutic markets such as neurology, oncology and urinary incontinence.

As a global company its ability to operate in foreign markets contributes to its competitive advantage. To mitigate fall out associated with M&A Pfizer profiles itself as a good corporate citizen in the countries it operates in. Pfizer’s vision and values reads “to achieve our purpose and mission, we affirm our values of integrity, respect for people, customer focus, community, innovation, teamwork, performance, leadership and quality.” (www.pfizer.com)

According to its website Pfizer

contributes to the societies in which it operates. “Pfizer Foundation committed $3 million over three years beginning in 2003 to support a highly domestic HIV/AIDS grant making initiative in Southern States. It team up with the Edna Mc Connell Clarke Foundation in public health out reach to eliminate trachoma a disease that is absent in the US but causes blindness in people in developing countries. It employees are also encouraged to participate in community outreach initiatives.”

Threats The threats that Pfizer face are relevant to all pharmaceutical companies. Datamonitor list them as firstly the delay to the approval of its epilepsy treatment

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22 pregablin which it is trying to get to market before the expiry of its patent on Neurontin to get a jump on generic competition which is a strategy companies uses.

There is also the slowing down to core franchises due to competitive entries and consolidation among industry peers encroaching on Pfizer post-merger size advantage.

A clear and imminent threat to pharmaceuticals in the US according the November Economist is that the companies may face another layer of regulatory control coming on the heels of the Merck’s Vioxx recall and the subsequent bad publicity for the FDA. “Soaring healthcare costs and bumper profits mean that big drug firms are widely regarded as exploitative and regarded almost as unfavourably as tobacco and oil firms." US companies may thus see their profitability growing at a slower rate.

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Summary Mergers, alliances and acquisition have changed the nature of the pharmaceutical industry from a predictable industry comprising small and medium size players spread throughout the world, to a dynamic industry dominated by twenty or so major global players as listed by ABPI. The implication of this for the firms is that there has been a constant jockeying of position, through mergers and acquisitions and an intricate web of alliances in the areas of research and development and sales and marketing.

This change has been sparked by forces outside the industry e.g. expiry dates introduced on patents and governmental controls, but it has been the activity within the industry itself, (the race for new drug therapies, the search for critical mass, the buying out of strategic capabilities and the need to collaborate to grow) that has maintain the proliferation of mergers, alliances and acquisitions.

Recommendations Two recommendation for industry leaders as stated byThompson and Strickland (1998) are relevant to the pharmaceutical industry:

1. “Stay-on-the-offensive strategy - Offensive minded leaders stress being firstmovers to sustain their competitive advantage (low cost or differentiation).” Pfizer practices differentiation of products through it continual pursuit of block buster products. (Datamonitor)

2.“Fortify-and-defend-strategy – The goals of a strong defence are to hold to the present market share, strengthen current market position, and protect whatever competitive advantage the firm has.

Specific defensive actions can include:

attempting to raise the competitive ante for challengers and new entrants by increased spending for advertising, higher levels of customer service, and bigger R & D outlays.”

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Invest enough to remain cost competitive and technologically progressive. Pharmaceuticals is a innovative intensive industry, and although as Pfizer’s case demonstrate large R&D budgets do not guarantee block buster drugs it increases the probability.



Be on the constant watch for activities in biotechnology and form alliances to extent product pipeline.



Foster relationships with governments to soften drug controls which impact on profitability.

Oligopoly Watch (2003) notes that the old way of doing

business is slipping thanks to price resistance, fuelled by ever increasing drug prices and that politicians are no longer as accommodating as governments healthcare budgets are under pressure. •

To mitigate the vital human resources lost due to M&A Grensing-Pophal (2004) suggest that companies need to involve Human Resources in the “integration plan early so that they are integrally involved in the post-merger integration process”, looking at how to reward and treat people humanely especially if there is going to be downsizing.

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References Bogan C. and Symmers, K. (2001) ‘Marriages Made in Heaven?’ Pharmaceutical Executive, 21(1) pp52-60.

Danzon, Patricia, Eptein, Andrew and Nicholson, Sean (2003) ‘Mergers and Acquisitions in the Pharmaceutical and Biotech Industries’ available at http://hc.wharton.upenn.edu/nicholson/pdf/merger_Sept03.pdf accessed [02-12-04]

Datamonitor (2004) GlaxoSmithKline Plc Company Profile, Ref.1547.

Datamonitor (2003) Global Pharmaceuticals & Biotechnology Industry Profile, Ref.0199-2125.

Datamonitor (2004) Merck & Co. Inc, Company Profile, Ref 1088.

Datamonitor (2004) Novartis AG Company Profile, Ref. 1232.

Datamonitor (2004) Pfizer Inc. Company Profile, Ref. Code: 1316.

‘Facts and Statistics from the Pharmaceutical Industry’ available at http://www.abpi.org.uk/statistics/section.asp?sect=1 accessed [15/11/04] Grensing-Pophal, L. (2004) ‘Successful Mergers’, Credit Union Management, Dec, pp50-54.

Griffin, R.W. and Egbert, R. J. (1991) Business, 2ed., Englewood, Prentice- Hill Inc.

Hill, C. W. L. and Jones, G. R. (2004) Strategic Management Theory an Integrated Approach, 6ed., Houghton Miffin Company. ‘Industry brief: Pharmaceuticals’ available at http://www.oligopolywatch.com/2003/05/25.html accessed [08/12/04]

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26 Johnson, G. and Scholes, K. (2002) Exploring Corporate Strategy, 6ed., Essex, Pearson Education Limited. Koberstein, W. (1998) ‘Regional Structures’, Pharmaceutical Executive, 18(1), pp64. Medtrack ‘Industry Statistics’ available at http://www.lifescienceanalytics.com/research/Istats.asp#list1 accessed [14/12/04] Koenig, M. and Mezick, E “Impact of Mergers and Acquisitions on Research Productivity within the Pharmaceutical Industry” available at http://knowledgeagency.com/.../PharmcoMergers-ScientometricsArticle.PDF [accessed:02/12/04]

‘More Drug Consolidation’ available at http://www.oligopolywatch.com/2003/10/24.html accessed [08/12/04]

‘Pfizer Inc.’ available at www.pfizer.com accessed [02/12/04]

‘Pharmaceutical Alliances and Co-Promotions’ available at http://www.best-inclass.com/pharma accessed [02/12/04]

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