IF BIGGER is better, then the proposed merger between Glaxo Wellcome and SmithKline Beecham (SB) threatens to exhaust the supply of superlatives. On its own, Glaxo is, by a whisker, the world's largest drug-seller, shifting $11.6 billion in prescription pills and other remedies in the year to September 1997. A Glaxo-SmithKline combination, split 60-40 between the two firms' respective shareholders, would dwarf even its colossal peers.
The new firm's share of the world drug market, at 7.5%, would tower over Merck's 4.5% and Novartis's 4.3%. Its research budget would be equivalent to a quarter of total private-sector R&D spending each year in Britain. And it would boast a market capitalisation of over £100 billion ($165 billion), making it the second-largest company in the world after America's General Electric. If it goes ahead, the merger would be the biggest corporate deal in history.
Investors seemed caught up in the excitement of it all. On February 2nd, in the first day's trading since the two firms announced their plans late on January 30th, their combined value soared by $15.7 billion. Partly, this was out of relief that SB had been saved from the clammy embrace of American Home Products (AHP), a plodding American firm currently facing lawsuits from customers who claim to have been injured by its slimming pill, Redux. Talks between the two were scuppered when Glaxo's chairman, Sir Richard Sykes, swooped on SmithKline.
The new match seems more equal: both Glaxo and SB are financially fit and scientifically energetic. Their bosses are friends. Analysts lauded the plan, and M&A specialists made drooling predictions of the consolidation the deal will provoke.
There are three reasons why drug mergers are so popular. The merged firms can usually cut costs by sacking administrative staff and closing the odd factory. Typically, managers seek savings equivalent to 10% of combined sales, which would come to $2.8 billion in the case of Glaxo-SmithKline. Many mergers fail to reach such targets, but Sir Richard and SB's chief, Jan Leschly, both have previous experience of mergers, which is cause for optimism. Sir Richard says that he is on target to save 9% of sales following Glaxo's 1995 merger with Wellcome. British trade unionists certainly take their bosses' promises seriously: on February 4th, the country's main white-collar union accused the two firms of treating their employees like “feudal serfs” for not consulting them about layoffs.
The second advantage of mergers is to extend the reach of firms' sales forces. Drug firms are reluctant to be seen as pushy marketers—they would rather the public believed that doctors prescribe their medicines simply because they are the best. However, doctors are more likely to learn of impressive data from clinical trials if it is brought to their attention. Glaxo's most successful drug, the ulcer pill Zantac, outstripped SB's Tagamet largely because it was promoted ingeniously. It would be better, Mr Leschly doubtless feels, to have Glaxo's 20,000 energetic sales staff working with SB's smaller team of 16,000 rather than against it.
The third, and greatest benefit of tie-ups is to increase a firm's R&D budget. Drug firms are still extremely profitable, but the time and expense of discovering and testing new drugs have risen relentlessly, leaving each pill with less time under patent to recoup the larger investment. Worse, cost-conscious national health services and managed-care organisations are increasingly unwilling to pay for “me-too” drugs—new pills that offer only slight improvements—which currently account for 80% of R&D spending. If their profits are to keep rising at the current clip of 10% a year in a market that is growing at only half that rate, drug firms must find more innovative medicines.
This is a formidable task, though probably not impossible for firms that can exploit new technologies for discovering drugs. Yet these are painfully expensive and unlikely to yield any new drugs for a decade or so. Merging helps by spreading the risk of this investment, especially for firms that are strong in complementary areas—as is the case with Glaxo and SB. Through its links with Human Genome Sciences (HGS), an American biotech firm, SB is a world leader in finding genes that cause disease, and which thus provide useful “targets” for drugs. Glaxo, through its acquisition of Affymax, a Californian firm, is a whizz at screening compounds for those that can hit such “targets”.
In theory, then, drugs mergers seem to make eminent sense. But in practice, there is less cause for optimism. Of the dozen or so large drug mergers and acquisitions over the past 30 years, not a single one has increased the combined market share of the companies involved.
In 1994, Glaxo and Wellcome together accounted for 4.87% of world drug sales. Since their 1995 merger, this has fallen to 4.6%. SmithKline Beckman and Beecham had a combined 3.44% of the market in 1988; this has now dropped to 2.9%. Celibate companies, by contrast, have done rather well. Merck, Pfizer, Johnson & Johnson, Abbott Laboratories, Astra and Schering-Plough all saw their share of the world market swell impressively in the 1990s. From 1990 to 1997, for instance, Merck's market share rose from 3.6% to 4.5%, and Pfizer's from 2.1% to 3.3%.
The profitability of merged firms has suffered too. The return over and above the cost of invested capital appears to fall after mergers. In the largest deals of the past decade, the returns achieved by the firms involved had on average fallen from over 12% to 4% three years after they were completed, according to AT Kearney, a consultancy.
True, profits in merged drug firms have generally increased, but the gains have been hard to sustain. As Barrie James of Pharma Strategy Consulting in Basle notes, a factory can be closed only once. Such short-term savings are offset by longer-term difficulties. The knotty task of integrating two huge research teams can distract both managers and scientists from the all-important quest for new drugs—a problem that will not show up in the balance sheet for several years. And differences in corporate culture can provoke destructive clashes, as happened when the laid-back Swedes of Pharmacia linked arms with the uptight Americans at Upjohn in 1995. Fed up with constant demands for progress reports and random blood-alcohol tests, gifted Scandinavians defected in droves.
This does not necessarily doom history's biggest merger. Previous marriages may have disappointed because the partners involved were already in decline. Nobody could argue that this is true of Glaxo or SB, or that there is sure to be cultural discord at the merged company. Indeed, the two firms' headquarters and main British research centres are almost within shouting distance of each other.
Nevertheless, the combined R&D operation may prove so unwieldy that the deal's much-vaunted synergies will be hard to realise. William Haseltine, head of SB's genomics partner HGS (and thus in no position to denigrate the deal), argues that the merged firm might do well to split its scientists into small, autonomous research teams, get them to compete against each other and motivate them with a share of the value they create—as happens at biotech companies. Such an idea might appeal to Sir Richard and Mr Leschly, who have both often praised the creativity of biotech start-ups. But to splice the virtues of small companies into the the genes of their gigantic new venture will take some wizardry.
This article appeared in the Business section of the print edition
Home » Case Studies » Strategy » Mergers, Acquisitions and Takeovers
Mergers, Acquisitions and Takeovers Case Study
GlaxoSmithKline (GSK): Post Merger Growth Strategies
Publication Year : 2004
Authors: Blesy Kirthi, G Srikanth
Industry: Health Care
Case Code: MAA0012
Teaching Note: Not Available
Structured Assignment: Not Available
GlaxoSmithKline (GSK) is one of the largest pharmaceutical companies in the world. It operates in two segments � pharmaceuticals and consumer healthcare. Since the merger of Glaxo Wellcome and SmithKline Beecham in 2000, the company has been reporting increasing financial returns. On one hand, the company is entering into collaborations, agreements and partnerships, restructuring its R&D (Research and Development) and expanding its product portfolio. On the other hand the company is facing stiff competition from its rivals and generic firms.
- To discuss GlaxoSmithKline's financial performance post-merger and the performance of its core products
- To discuss the initiatives taken for growth
- To discuss the future challenges and strategies ahead.
Mergers, Acquisitions, Alliances Case Study;GlaxoSmithKline Incorporated; Glaxo Wellcome and SmithKline Beecham; American pharmaceutical industry; Consumer healthcare; Jean-Pierre Garnier; Product pipeline; Nutritional healthcare products; Centres of Excellence for Drug Discovery (CEDD); Therapeutic areas; Generic competition; Over the counter products; Wellbutrin; Growth strategy; Patented products; US Food and Drug Administration
Core Productsof The Company
International Sales In 2003
Sales In The Us And Europe In 2003
Product Approvals In 2003
Collaborations, Partnerships, Alliances And Agreements