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Glaxosmithkline is a global leader in the market of pharmaceutical goods and services, currently holding 7% of market share in this field. Formerly Glaxo Wellcome plc, the firm merged in December 2000 with Smithkline Beecham, a leading manufacturer of medical and consumer healthcare goods. , however there is much dispute over the motives behind the merger and what Glaxo Wellcome sought to gain through the collaboration. This is of particular concern as following the merger, many shareholders and city analysts have criticised the firm for not yielding the predicted benefits from the merger, particularly with regard to an innovative product pipeline. It has been argued that the purpose of the merger was to serve as a method of consolidating Glaxo Wellcomes position in the pharmaceutical market, following competitive threats from generic products and reports of stifled profits. However, others have argued that the reason behind the merger was to facilitate the production of innovative pharmaceutical products; through strengthening the firms core competences, given the lack of new products in the product pipeline. The aim of this report is to ascertain which strategy Glaxo Wellcome sought to pursue through merging with Smithkline Beecham.
Part1- The merger with Smithkline Beecham
When one considers the current and then state of the pharmaceutical industry it becomes apparent that there was in fact the need for a merger or other form of change in order to remain competitive. Following the 1997 expiry on the patent of blockbuster drug Zantac, the company merged with Wellcome and reaped rewards through marketing existing products. However, due to a shortage of new products in the pipeline, the firm began to experience dangerously low profit margins. Thus it can be argued that Glaxo Wellcome sought a cost cutting and rationalisation strategy in order to increase efficiency and to focus on those activities which add value.
Although the bargaining power of suppliers of `organic chemicals in the pharmaceutical industry is relatively low as so many suppliers of the commodities used in the manufacture of pharmaceuticals exist, horizontal integration by Glaxo Wellcome would have strengthened the companys position as a buyer of these supplies as the firm could benefit from purchasing
economies, and possibly negotiate better trade agreements with its suppliers. The merger itself would give the firm greater flexibility and therefore should a supplier have decided to vertically integrate forward, Glaxo would be in a position to eliminate this competition via the synergies achieved from a combined market share of 7.1%. (Table 2) However given expenditure on R&D in this industry, which averaged Ј2.7bn in 1999 (Table1) it is unlikely that a new firm will be able to overcome this barrier of entry due to high capital requirements.
Consumers individually have little bargaining power in the pharmaceutical industry; buying branded goods, particularly when a company such as Glaxo is taking advantage of its monopolistic market prior to the expiry of patents. It is important to note that in this industry, power of consumers is replaced by organisations such as the NHS, and the government who impose policies in order to monitor and control the pricing of products. The power held by these customers put pressure on Glaxo to reduce its prices in order to make them affordable by the NHS and other such organisations. Horizontally merging with Smithkline Beecham would enable the merged company to better deal with the downward pressure put on prices as unit cost should be reduced following rationalisation of the firms activities thus allowing the firm to charge lower costs whilst retaining a premium on their prices.
The merger with Smithkline Beecham would increase the R&D expenditure available for developing innovative new products; this motive as a justification for the merger is backed by great deal of evidence. Table 1 shows that the percentage spent by an ethical pharmaceutical company on drug development increased between 172 and 1999 by 63 %. The reason behind this could be the need for advanced technology in order to maintain high standards of innovation which raises costs significantly. Thus a stronger R&D budget would put the combined firm in an advantageous position through reducing the threat of potential new entrants, who would experience significant difficulties in matching the R&D budget of the combined firm which was predicted to be Ј2.4 billion, second only to Pfizer, in comparison with the previous figure of Ј1bn. The predicted combined savings were valued at Ј1bn after 3 years.
The company could potentially experience organisational economies of scale through the merger, utilising specialist personnel from each area, reducing costs and resulting in a smaller, more efficient set of staff. This combined with the increased R&D budget available would strengthen the already significant barriers to entry of the ethical pharmaceutical market. However, as much restructuring was carried out following the Glaxo-Wellcome merger this would be a benefit perhaps not reaped by this merger. Despite this, Glaxo Wellcome predicted to save Ј570m in restructuring per company.
In addition, the participating partner in the merger specialised in genomics, allowing Glaxo Wellcome to enter new markets whilst reducing competitive rivalry in the prevalent oligopolistic market. The threat of new entrants to the market could also be further limited by the increased product differentiation which would be resultant of the combining of genomic and pharmaceutical expertise. GlaxoSmithkline would have a greater competitive advantage over rivals through the delivery of insightful new and innovative products to the market.
The major threat to Glaxo Wellcome was the increasing number of substitute products, namely by generic drug manufacturing companies, Reasons behind this large increase in figures is due to the expiration of patents after a certain number of years in the pharmaceutical market; enabling other companies to save money that Glaxo Wellcome would have spent earlier on Research and Development of the product and also the advances in technology which allow easier replication of goods. Another issue that is problematic for Glaxo is that after a product has been developed and approved, over half of the patent life has expired leaving Glaxo with a reduced amount of time to generate sales. The merger with Smithkline Beecham would have benefited Glaxo Wellcome as the combined firm would benefit from the product pipelines; Smithkline had 4 final stage products in the pipeline at the time of the merger as well as greater available funds for R&D.
Competition