62751745 GSK a Merger Too Far Combined

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GSK- A MERGER TOO FAR

Group members Akanksha Shrivastava (10IB-007) Chhavi Agarwal (10IT-013) Pratima Rao Gunta (10IT-021) Rajesh Mohan (10FN-088) Rudra Shankar Chowdhury (10FN-097) Shamindra Mukherjee (10FN-138)

PHARMACEUTICAL INDUSTRY

Europes pharmaceutical companies- Locked in high stakes multibillion dollar struggle with their US rivals to stay in business. Increased takeover economies of scale activity, Companies seeking

ABPI estimated the cost of bringing a new drug to market

In 2001- 350m In 2004- 500m

Poor outcome of costly R&D investment

In 2001, only 24 genuinely new drugs were launched in US followed with even poor performance in 2002 with 17 genuinely new drugs

MERGERS & ACQUISITIONS IN PHARMACEUTICALINDUSTRY

In Europe

Hoechst (Germany)-Rhone-Poulenc (France)-(1999)amalgamation AmalgamationsNovartis (1996) AstraZeneca (1999) Sanofi-Synthelabo (1999)

In US

AcquisitionsMonsanto by Pharmacia & Upjohn to create Pharmacia(2000) Warner-Lambert (2000) and Pharmacia (2003) by Pfizer.

Amalgamations

Pharmacia & Upjohn (1995)

COMPANY BACKGROUND- GLAXO WELLCOME

Resulted from merger of two leading UK pharmaceuticals ( Glaxo and Wellcome) in 1995. This merger offered possibilities to dissipate risk and ensure availability of resources for R&D. Increased sales volume. Glaxo

Origins in dried milk business Most sales in antibiotics, respiratory drugs and nutritional supplements Top product- zantac (anti ulcer drug) 43% contribution to revenue Top industry position in 1994 with 5,656 million sales (3.6 % of world market) Strong marketing muscle Hard-nosed, commercial and control driven culture Academic approach to pharmaceuticals Strong science but weak marketing Laid back management style (Laissez-faire) Wellcome foundation - Owned 40% stake in Zantac, 39% Wellcomes share capital

Wellcome

SWOT ANALYSIS

Strengths:Zantac blockbuster product of Glaxo. Worlds highest selling drug. Glaxo marketing expertise. Wellcome R&D focus. Highest sales volume in the world. Worlds largest pharmaceutical research firm 54,000 employees.

Weaknesses:Over-reliance on 1 drug (Zantac) 43% of Glaxos revenue. Patent expired in 1997. Integration issues. Clash between radically different management styles of Glaxo and Wellcome. Unimpressive drug pipeline.

COMPANY BACKGROUND- SMITHKLINE BEECHAM

Formed by merger of SmithKline Beckman and Beecham. SmithKline Beckman:

Blockbuster drug Tagamet. Efforts to replace income stream failed. Aggressive sales force in US.

Beecham:

Consumer goods company. Successful in antibiotics research. Old school British in its ways. Neither size nor competencies to become serious pharma player.

Both companies felt threatened as takeover targets. Lengthy amalgamation process. Combination of benchmarking and process re-engineering. Top management invested great time and effort to create a new culture.

SWOT ANALYSIS

Strengths:

SmithKline Beckman had aggressive sales force in US. New culture SB Way. New methods to reward performance, managers saved best of each group etc. Laid-back approach replaced by process oriented approach. Grew and developed in new markets. Rocketing share price. R&D expenditure lagged behind top firms like Glaxo. Some managers felt SB Way initiative was becoming less effective.

Weaknesses:

GLAXO SMITHKLINEFailed attempt at merger in 1998. Merger eventually took place in 2000. Jean-Pierre Garnier (SmithKline Beecham) appointed CEO and Richard Sykes (Glaxo Wellcome) appointed non-executive Chairman. Garnier known to be cold, arrogant and tough with people. Delays caused by US regulators. Over 10 months of negotiations. Merger process backtracked twice. Staffs morale affected. Corporation yet to be formed involved in process full of mishaps.

SWOT ANALYSISStrengths 1. Strong sales and marketing infrastructure 2. Industry-leading early to mid stageR&D pipeline 3. Robust sales growth forecast for launch portfolio 4. Industry-leading player with regard to implementation of life-cycle management strategies 5. Demonstrated ability to drive cost elimination Opportunities 1. Potential for CEDD-inspired R&D pipeline to deliver strong growth 2. Movement into biologics specifically antibiotics segment 3. Potential to increase sales growth in RoW/emerging markets 4. Continued cost elimination Weaknesses 1. Mature portfolio of marketed products becoming increasingly exposed to generic competition 2. Lack of blockbuster product launches since merger 3. Failure of R&D pipeline to deliver initial commercial expectation

Threats 1. Impact of generic erosion to sales generated by key product franchises 2. Further development setbacks impacting late stage R&D pipeline

PREVIOUS MERGER ATTEMPTSIn 1998, the merger between the two top British drug companies seemed virtually complete with Glaxo Wellcome shareholders having 59.5 per cent of the new group, leaving 40.5 per cent to SmithKline Beecham (SB) shareholders. Apprehension of Galxo Wellcome on having Jan Leschly(CEO, SB) as the chief executive of the group. Leschy announced retirement in mid-1999, which renewed interest in the merger talks.

STRATEGY DRIVERS

Cost Reduction Breaking up the pipeline

Effectiveness of R & DEconomies of Scale

COST REDUCTIONTop executives anticipated the combined company would save an annualised 1 billion after 3 years. These savings would come on top of previously announced restructuring at both companies, expected to cut a combined 570 million a year. Analysts were disappointed by the companys estimates-They estimated the savings to be between 1.1 billion to 1.5 billion. Savings were 1.8 billion after two and a half years Cost savings increased the trading profit margins to 35%

BREAKING UP THE PIPELINETo deliver the most cost efficient research organization in the pharmaceutical industry. Glaxo Wellcomes investment in technology to automate the chemistry of developing drugs combined well with SBs leaderships in genomics

SB had an existing pipeline of 4 promising drugs in final stages of developments

This was attractive to Glaxo Wellcome who relied heavily on its blockbuster drug Zantac.

PERFORMANCE IMPROVEMENTReengineering of R&D and marketing operations. Innovation for the future strategy. Combination of Centralization and Decentralization. New semi-autonomous chemical entitiesconcentration on Traditional activities and Genetics. Emphasis on genetic research. CEDDs planned drug discovery process

to avoid the hassle of bureaucracy, associate with a large global player maintain the agility, creativity, entrepreneurial spirit and individual accountability

ECONOMIES OF SCALESThe cost of developing drugs is way up, especially with the moves into genomics and gene therapy

There needs to be critical mass for better research and development and a global sales staff for these important drugs

This merger provided large enough research budget to get economies of scale.

CO-OPERATION ACROSS BUSINESS UNITS

PROBLEMS FACED

THE ACTUAL STORY- POST MERGER

SPIRIT OF GSK

CRITICAL ANALYSIS

FUTURE OPPORTUNITIES

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