Mergers and Acquisitions in the

Pharmaceutical Industry

Pamala Proverbs
Surrey, February 2005

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

Tables and Figures

Table 1.

Some Deals of Top 5 Companies

13

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.

History of Pharmaceuticals
According to Johnson and Scholes 2002, the pharmaceutical industry can be traced
back to the late 19th Century. Datamonitors 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 practitioners 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.

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 companys 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.

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
Pfizers 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.

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 Britains 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
doesnt 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 Americas most

profitable business and its 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.

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 Pfizers 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.

Mercks acquiring Medco, a Pharmacy Benefit Manager (PBM) in 1993 was thought
to be as a result of computer technology and gaining access to the PBMs 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

10

11
budgets needed by pharmaceutical companies and the need for consolidation to be
competitive.

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 industrys most
important customer. As stakeholders, governments have high power and high levels
of interest in the industry. As a customer a governments position is unique because
if prices are high it can effect legislation to influence a price drop. Datamonitors
(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

12

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 Lillys share of the mental disorder market between 1992 and 1998, after the
patent for Lillys 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.

12

13

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.)

13

14

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 its 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 Medtracks 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.

14

15

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 Pfizers 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

15

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 Johnsons 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 industrys response.

Datamonitor reports that Pfizer has now changed its approach to biotechnology from
alliance to acquisition. This is a step to help Pfizers 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.

16

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
companys.

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-Zenecas share price fell by 10%, shares
in GSK fell by 6% although Mercks share price hardly budged, traders have already
knocked $40 billion off the firms 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.

Pfizers 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) Pfizers 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.

17

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.

18

19

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 companys 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
Pfizers 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)
Pfizers strength in sales and marketing make it an attractive partner for other
companies to market their drugs through.

19

20

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 Pfizers
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 Lillys share of the mental disorder market between 1992
and 1998, after the patent for Lillys 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
Pfizers future competitive advantage. Pfizers over-dependence on a few drugs and
therapy areas makes it vulnerable to adverse effects related to the individual products.
Mercks 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 Pfizers large size restricting its growth.
Pfizer has chosen a strategy of shedding units to focus on its core business for

20

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 Pharmacias merger, contributing to Pfizer achieving critical
mass and hence increasing its competitive advantage. According to Datamonitor
Pfizers 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 companys 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. Pfizers 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

21

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 Mercks 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.

22

23

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.

23

24
Other recommendation for the industry includes:

Invest enough to remain cost competitive and technologically progressive.

Pharmaceuticals is a innovative intensive industry, and although as Pfizers
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.

24

25

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]

25

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]

Piachaud B. S. and Moustakis, F. (2000) Is There A Valid Case for Mergers Within
the Defence and Pharmaceutical Industries? A Quantitative Analysis, The Journal
of World Affairs and New Technology, 3(4).

Porter, M.E. (1979) How Competitive Forces Shape Strategy, Harvard Business
Review, Mar Apr, pp137-145.

Relman, A. S. and Angell, M. (2004) A Prescription for Controlling Drug Costs,

The Journal of World Affairs and New Technology 3( 4).

Savings to Government and Industry resulting from OECD Environmental Health

and Safety Programme (1998) available at
http://www.oecd.org/dataoecd/62/11/1875931.pdf accessed [14/12/04]

26

27
The Pharmaceutical Industry, From Bad to Awful, (2004) The Economist,
373(8403), pp63-64.

Third World Biotechnology, Southern comfort, Eastern Promise (2004) The

Economist, 373 (8405), pp82-83 .

Thomas, H., Porter, M. E. and Rudden E. (1982) How Global Companies Win Out,
Harvard Business Review Sept./ Oct. pp98-107.

Thompson Jr., A. A. and Strickland III, A.J. (1998) Strategic Management Concepts
and Cases, 10ed., Boston, Irwin/Mc Graw-Hill.
Wechsler, J. (1998) China Pharmaceutical Executive, 18 (1), p82.

www.oecd.org/dataoecd/62/11/187593.pdf accessed 2004-12-14

27