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Global Mergers, Local Effects - Views on News from Equitymaster
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  • Dec 23, 2000

    Global Mergers, Local Effects

    The latest in the series of global pharmaceutical acquisitions took place last week when Knoll AG was acquired by Abbott Inc. This infact would be the 13th acquisition over the last five years that have taken place among the top global pharma majors. What has prompted this global consolidation? What would be the impact of such consolidation on the local domestic companies? How would it impact shareholders of MNC pharma companies?

    The global consolidation has been primarily led by the increasing costs of Research and Development (R&D). It costs anywhere between US$ 240 million to US$ 450 million to discover a new drug. While companies earlier could use price increases to boost bottomlines and there by reduce the pressure on themselves to bring new drugs to the market, customers are getting more and more price conscious. Besides, research efforts did not have to translate naturally into new products as the costs of discovery could be absorbed thanks to healthy profits. That is no longer the case now. With older products constantly under a threat from generics apart from newer, better ways of treatment international companies need to have access to wider portfolio of products apart from a healthy product pipeline.

    Glaxo–Wellcome had justified its merger with SmithKline Beecham on precisely these grounds: (a) a powerful R&D capability combining both companies’ expertise with a budget of approximately US$ 4 billion (b) an enhanced platform to discover and develop new medicines more efficiently (c) an extensive product pipeline with a total of 30 new chemical entities (NCEs) and 19 vaccines in clinical development (phase II/III), of which 13 NCEs and 10 vaccines are in the late stage development (phase III) and (d) a marketing force of 40,000 employees globally including over 7,200 sales representatives in the USA. Even earlier, during the Ciba–Sandoz merger, Ciba gained access to Sandoz’s product pipeline, which it did not have.

    These global mergers imply increasing consolidation in select therapeutic areas in the domestic market. For instance Glaxo–SmithKline will emerge as a market leader in four of five largest therapeutic categories: anti–infectives, central nervous system (CNS) drugs, respiratory and alimentary, a leading position in the vaccines market apart from a strong position in the over the counter medicines. Similarly Novartis (formed from the merger of Ciba and Sandoz) has emerged a strong player in the anti–TB market.

    Acquirer Acquiree Merged Company
    Glaxo Plc. Wellcome Plc. Glaxo–Wellcome
    Hoechst Marion Merrel Dow Hoechst Marion
    Pharmacia Upjohn Pharmacia & Upjohn
    Ciba Sandoz Novartis
    Hoechst Marion Roussel Hoechst Marion Roussel
    Astra Zeneca Astra Zeneca
    Hoechst Marion Roussel Rhone Poulenc Aventis
    Glaxo–Wellcome SmithKline Beecham Glaxo–SmithKline
    Pharmacia & Upjohn Monsanto Pharmacia Corpn.
    Novartis Agro Zeneca Syngenta
    Pfizer Warner Lambert Pfizer
    Abbott Inc. Knoll AG Abbott–Knoll

    It also implies lesser opportunities for Indian companies to enter into alliances with international companies. One reason for this would be that the marketing forces of say a Glaxo–SmithKline combine would give it enough strength to take on a Ranbaxy in the anti–infectives arena. (At present, Glaxo and Ranbaxy have an alliance for the marketing of cephalexin. Whether this arrangement would hold after the merger, remains to be seen.)

    And how would it impact shareholders in MNC companies? While existing shareholders would definitely benefit from a dominant player in its specialised therapeutic area, an unwanted side effect of these mergers is that almost every MNC pharma company has ended up with a 100 percent subsidiary. The takeover of Warner Lambert (known as Parke Davis in India) by Pfizer and the presence of a two parallel 100 percent subsidiaries in India has led to a uncertainty about the prospects of Parke Davis thereby affecting its valuations. Similarly, Knoll already has another vehicle for introducing its products into India viz. its parent’s wholly owned subsidiary. Whether, Abbott, which so far did not have a 100 percent subsidiary, will inherit this, remains to be seen. SmithKline Beecham Asia, a 100 percent subsidiary of SmithKline group is likely to serve as the 100 percent arm of the merged Glaxo–SmithKline. There is an apprehension that new products would be introduced through these wholly owned subsidiaries rather than through the listed company. And since for a pharmaceutical company, anywhere between 25 percent – 40 percent of the turnover accrues from new products introduced over the last three years, it would imply a stagnating topline for the listed companies, a couple of years down the line. The relatively higher valuations that MNC pharma companies have enjoyed over the last 25 years could then be a thing of the past.



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