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Dealing with the urge to merge

Dealing with the urge to merge


As pharmaceutical companies attempt to increase productivity and remain financially viable, the prospect of a merger or acquisition is always on the horizon.
Last Updated: 27-Aug-2010

As pharmaceutical companies attempt to increase productivity and remain financially viable, the prospect of a merger or acquisition is always on the horizon. In particular, the problem for the major pharmaceutical companies is that investors have become accustomed to double-digit growth performance and thus there is pressure to develop an ever-greater number of new products with high sales potential. However, the rising costs and risks of drug development combined with the lengthy drug development timescales and increasing competition have made it difficult for companies to keep pace with such expectations. The pharmaceutical industry is also coming under increasing pressure over its pricing and is often the target of government cost containment measures. This means that even if a pharmaceutical company has a promising product on the market there is no guarantee regarding its future revenue.


External pressure

One of the issues for the pharmaceutical industry is that external observers encourage merger speculation based on their observation of other major industry sectors. There has been a proliferation of mergers and acquisitions in other industries and as some of the companies created in this manner have gone on to dominate their sector there is an expectation that pharmaceutical companies might be able to do the same if they take this route. Many of those in favour of mergers make such decisions in order to gain a rapid return on their investment and tend to dwell less on the long-term productivity consequences. There is also a tendency to focus heavily on the cost savings that can be achieved through a merger. The problem for the pharmaceutical industry is that as a business it has much in common with other industry sectors, but at the same time it may not wish to be subject to every trend that occurs in those sectors.


Furthermore, many of the major shareholders in listed pharmaceutical companies are not from the same industry and thus may have a different opinion about how the company they have invested in should progress in the future. Such views may or may not always match those from within the organization. For example, when Sanofi-Synthélabo first expressed an interest in tying up with Aventis, it was important for the company’s executive chairman, Jean-François Dehecq, to gain the backing of Sanofi-Synthélabo’s biggest shareholders. Total, the world’s fourth-biggest oil and gas company, held a 24% stake in Sanofi-Synthélabo and L’Oréal, the world’s largest cosmetics company, held a near 20% stake (1).


Mergers great and small

When GlaxoSmithKline was formed, it was expected to achieve a global market share of 6.9%, marginally behind Pfizer's 7% (2). These two top two companies were able to open up a gap between themselves and other competitors (2). Although the scale of this market share was considered impressive in some quarters, when compared with the achievements of global corporations in other industry sectors it appears modest. In some major industry sectors it is not uncommon to find companies with well over 10% of the market, although they will need to show that their dominant position does not stifle competition in the market. For those examining the pharmaceutical sector from a purely market share perspective there would appear to be further scope for mergers.


For smaller companies mergers may also be the best route if they are to remain financially viable for the time period necessary to launch a new drug. In particular, the biotech sector has experienced considerable consolidation as companies reassess their chances of achieving success on their own. Many biotech drugs are focused on difficult disease targets for underserved medical conditions and so the R&D process is expected to be lengthy. The difficulty for companies involved in biotech research is that as the R&D process lengthens, so does the cost. They may feel that is in their better interests to be part of a larger set-up with different project options rather than trying to achieve success through a single project.


Good, bad or indifferent

Recently the FT Research Centre and law firm Linklaters, surveyed senior pharmaceutical industry executives and analysts to gain their views on consolidation in the industry (3). In general, respondents had a negative view of mergers, as they believed they led to uncertainty and disruption of the companies’ activities (3).


One of the big problems for merged companies is attempting to reduce any duplication of activities. Unfortunately this usually necessitates laying off staff and so companies end up losing talented individuals as they strive to meet short-term targets such as cost savings. In the longer-term, the loss of these individuals will be to the detriment of the company as the smooth running of projects depends on people as much as it does on finance and technology. When large companies have merged and have introduced staff cuts, smaller companies have often benefited from hiring these experienced industry people.


Interestingly, the survey respondents did acknowledge that some mergers had resulted in benefits for the companies concerned. AstraZeneca was described as having 50% more drugs in the early stages of development compared with the previous year, because of the reorganization of the Astra and Zeneca research units (3). However, this improvement did come at a price because it occurred five years after the merger, when an estimated 6,000 people had changed jobs (3). GlaxoSmithKline was also viewed positively because it had attempted to decentralize its R&D into six autonomous units and had placed heavy emphasis on acquiring new technologies (3).


In the US, Med Ad News runs an annual poll for the world’s most admired health-care companies and its latest survey attracted votes from around 15,000 pharmaceutical industry professionals (4). Pfizer easily won the title for most admired pharmaceutical company in the 2004 survey, indicating that people within the industry believe that its round of mergers and acquisitions over the last few years have proved beneficial (4). According to Med Ad News, Pfizer’s development portfolio of new molecular entities grew about 20% within a one-year period and its number of employees has tripled in the last four years to 122,000 (4). The company could be in a position to submit 20 new drugs for regulatory approval by the end of 2006 (4). In the biotech category, Amgen and Biogen Idec Inc., which have both been involved in mergers and acquisitions, featured in the top three (4).



Mergers and acquisitions will continue to occur in the pharmaceutical and biotech sector, but opinions vary on whether they are an advantage or disadvantage to companies. For every company that has expressed views that mergers will help them meet their commercial and productivity objectives there are others that suggest that mergers are not necessary for them to achieve their targets. New drug output for the pharmaceutical industry has been dropping for a number of years and the contribution of biotech companies, in terms of marketed products, has been inconsistent. Therefore only time will tell if companies that have chosen the merger and acquisition route have made the right decisions for long-term success.



  1. Anon (2004). Sanofi May Struggle to Boost Aventis Bid Amid Novartis Talks. Bloomberg.
  2. Anon (2001). Pfizer Still Ahead Following GlaxoSmithKline Merger. IMS Health.
  3. Firn D (2004). Consolidation hides R&D crisis. 17 October 2004. Financial Times.,stream=FTSynd,s01=2.html
  4. Humphreys A (2004). Fourth Annual Special Report: Most Admired Companies. Med Ad News. Vol 23. No. 10. October 2004.