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 Europe’s pharmaceutical companies- Locked in high

stakes multibillion dollar struggle with their US rivals to stay in business.

Increased takeover activity, Companies seeking economies of scale

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 PHARMACEUTICAL INDUSTRY

In Europe- Hoechst (Germany)-Rhone-Poulenc (France)-

(1999)-amalgamation Amalgamations

Novartis (1996) AstraZeneca (1999) Sanofi-Synthelabo (1999)

In US- Acquisitions

Monsanto 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

Wellcome - Academic approach to pharmaceuticals Strong science but weak marketing Laid back management style (Laissez-faire) Wellcome foundation - Owned 40% stake in Zantac, 39% Wellcome’s share

capital

SWOT ANALYSIS

Strengths: Zantac – blockbuster product of Glaxo. World’s

highest selling drug. Glaxo – marketing expertise. Wellcome – R&D

focus. Highest sales volume in the world. World’s largest pharmaceutical research firm –

54,000 employees. Weaknesses:

Over-reliance on 1 drug (Zantac) – 43% of Glaxo’s 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.

Weaknesses: R&D expenditure lagged behind top firms like

Glaxo. Some managers felt SB Way initiative was

becoming less effective.

GLAXO SMITHKLINE

Failed 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.

Staff’s morale affected. Corporation yet to be formed involved in process

full of mishaps.

SWOT ANALYSISStrengths1. Strong sales and marketing

infrastructure2. Industry-leading early to mid

stageR&D pipeline3. Robust sales growth forecast for

launch portfolio4. Industry-leading player with

regard to implementation of life-cycle management strategies

5. Demonstrated ability to drive cost elimination

Weaknesses1. 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

Opportunities1. Potential for CEDD-inspired R&D

pipeline to deliver strong growth2. Movement into biologics

specifically antibiotics segment3. Potential to increase sales growth

in RoW/emerging markets4. Continued cost elimination

Threats1. Impact of generic erosion to

sales generated by key product franchises

2. Further development setbacks impacting late stage R&D pipeline

PREVIOUS MERGER ATTEMPTS

In 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 & D

Economies of Scale

COST REDUCTION

Top 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 company’s 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 PIPELINE

To deliver the most cost efficient research organization in the pharmaceutical industry.

Glaxo Wellcome’s investment in technology to automate the chemistry of developing drugs combined well with SB’s 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 IMPROVEMENT

Reengineering of R&D and marketing operations. Innovation for the future strategy. Combination of Centralization and

Decentralization. New semi-autonomous chemical entities-

concentration 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 SCALES

The 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

RECOMMENDATIONS

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