In the short-run, the company needs to deal with a weak drug pipeline and the challenge of combining one-hundred thousand em­ployees into one operation. In the long-run, the new company is going to have to strive to benefit from its new size, rather than falling under its weight 4.

GlaxoSmithKline, as the new company is called, will be a worldwide sales leader in four key areas: anti-infective drugs and vaccines, treatments for gastrointestinal and metabolic diseases, drugs for central ner­vous system disorders, and drugs for respiratory disease. Eight-four percent of the merged companies prescription sales last year were composed of these four drug areas. Currently, the two companies have more than twenty new potential drugs and seventeen vaccines in clinical development, with approximately half of them in the final stages. The lack of product overlap made the merger attractive from the beginning.

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Except for a few areas, mainly neurological products, there is not a lot of overlap between the two compa­nies by product areas. However, each company has also faced its own setbacks. In late 2000, a promising Glaxo drug for irritable bowel syndrome was taken off of the market and the trial work of a SmithKline heart and stroke drug was stopped due to safety issues. Both companies have had poor luck with research and development during the past few years. However, this poor luck has been the result even though both companies together spend more than anyone else in the industry in research and development efforts. The research budget of the new company is four billion dollars. This amount of money will allow the company to invest in expensive, high-tech screening processes, robots, and new genetic tools.

These investments will enable the company to identify more disease targets and generate new compounds faster. When this early research is promising, the work will be assigned to one of the special groups for further development. The company will use its size in conducting huge, global clinical trials on new drugs, at­tempting to receive regulatory approvals. If approved, the company will have the strength of forty thousand sales and marketing employees to assist in the marketing of the new drug. However, even with the size of the new company and its resources, it needs to produce new products and get them to market. The two companies both lacked momentum, and, as a result, it was critical for them to complete the deal.

In the near term, the combined company lacks new products coming from its pipeline. As a result, it is predicted that GlaxoSmithKline will begin to announce product licensing deals with other companies in order to help with revenue. It is necessary for the company to look outside to fill this gap in the short-term.

2. Pfizer and Warner-Lambert:

In fact, the size of the new Pfizer includes approximately twelve thousand researchers in six different places on all continents and twenty-one thousand sales representatives world­wide.

Pfizer’s hostile bid for Warner-Lambert resulted from Warner-Lambert’s attempt to merge with American Home Products. Actually, Pfizer was not looking at taking over Warner- Lambert and was happy with them as an independent company. However, Warner-Lambert’s actions put the company “at play.” The result of the hostile merger resulted in Pfizer as the clear leader of the two companies. The difficult merger included the trading of stock for stock and the breaking up of the other deal.

Warner-Lambert was also happy as an indepen­dent company. However, even though the merger was hostile, Warner-Lambert did seem to like Pfizer’s products, reputation, and values. Pharmaceutical research involves large numbers of compounds and the screening of them against thousands of receptors looking for a “match.” If a company finds a match, it tries to turn it into an actual drug product. Pfizer has a huge compound library and, working with other companies, also has a large library of receptors. With many targets, the probability of Pfizer bringing a new drug to market is increased. Although the large nature of Pfizer works in its favor, Pfizer also acknowledges’the critical role that small science-based companies play.

In fact, Pfizer has a rotating portfolio of approximately sixty biotech partners through licensing or equity positions. The results achieved determine which companies enter, re­main, or exit the portfolio. Pfizer is constantly looking for new information and breakthroughs, whether in informatics, robotics, or receptors. However, Pfizer sees the greatest promise in technologies focused on the human genome. As a result of the merger, Pfizer estimates that it will achieve approximately $1.2 billion in cost synergies in 2001 and expects to exceed $1.

6 billion in savings in 2002. In addition, Pfizer expects annual earnings per share growth of twenty-five percent or more during 2000-2002. As a result of ongoing productivity initiatives and cost savings from the Warner- Lambert integration, Pfizer’s operating margin has improved more than eight full percentage points since 1995.

This is one of the best performances in the industry. The margin improve­ments have come while product support and research and development efforts have been fully funded to maximize the potential at Pfizer. As a result of in-line products, new product launches, the absence of regulatory withdrawals and limitations, and improved performances in the Consumer and Animal Health businesses, Pfizer anticipates a return to double-digit reported revenue growth in 2001.


J&J (Johnson and Johnson) Andalza:

The most recent pharmaceutical merger involved Johnson and Johnson (J&J) and Alza. In early 2001, J&J agreed to acquire Alza in a stock deal valued at approximately twelve billion dollars. The deal represents a thirty-nine percent premium over Alza’s value before the news of the deal was public. The Alza deal represents the biggest acquisition ever for J&J, who has previously avoided the megamergers in the pharmaceutical industry. J&J offered a fixed exchange ratio of 0.49 share for each of Alza’s 294.

7 million shares outstanding, which includes options and debt that will be converted to equity. In addition, Alza brings approximately $1.8 billion in cash to the books of J&J. As a result of the trans­action, J&J plans to dilute its earnings this year by fourteen cents and next year by five cents, after excluding for one-time charges. It is expected that the merger will begin to add to earnings in 2003. J&J has recommended that analysts reduce their earnings’ forecasts for this year by ten cents and to make no changes to their 2002 forecast. After passing the antitrust review, the deal will most likely be completed in the third quarter of 2001.

The facts that Alza is much smaller than J&J and that the companies’ operations do not overlap very much suggest that there will be few, if any, regulatory issues to hold back the deal. As part of the merger, Alza will remain as an independent unit of J&J. As a result, integra­tion risks and the chance of large layoffs are removed. In addition, Alza will continue to develop new products and collaborate with rival drug makers, such as Pfizer and Bayer, which both sell drugs that use Alza’s drug-delivery technology. Alza’s collaborations are important to the company’s operations. In 2000, sales totaled $199 million, including $36.8 million in contract manufacturing. In addition.

Alza generated $69.3 million in royalties and fees. These joint projects contribute to further advances in Alza’s technology. A chal­lenge facing J&J will be how it chooses to market Alza’s drug-improvement technologies to direct competitors. It will be a challenge for J&J to expand some parts of certain businesses in which they will be competing with their clients. In addition, the deal has a $180 million break-up fee attached to it.

Alza would be respon­sible for the fee if J&J terminates the deal because Alza’s board changes or withdraws its recommendation of the deal in response to receiving a better proposal and then enters into the other proposal within twelve months of the termination. In addition, the longstanding marketing relationship between J&J and Alza was an attraction for both companies to the deal. J&J licensed Duragesic from Alza. Duragesic is a patch that delivers the painkiller Fentanyl through the skin. The patch could provide about seven-hun­dred million dollars in sales to J&J this year. The prior marketing relationship between the two companies was predicted to assist with the cultural fit between them as a result of the acquisition.