COMPARING TWO ACQUISITIONS: Frequent acquisitions: High-profile mergers occur (1989) frequently in the current competitive environment. Many reasons underlie the acquisition activity: AND GLAXO WELLCOME (1995) • Consolidation of European markets with the growth of economic unification in Western Will Mitchell Europe Duke University, The Fuqua School of Business • International expansion by European, Japanese, Revised November 2009 1 and American firms • Need of established pharmaceutical companies to This note assesses two acquisitions: (1) Merrell acquire new biotechnology skills Dow’s purchase of Marion in 1989, which created • Attempts to create efficiency through greater the ninth largest drug company worldwide at that R&D and marketing scale time, and (2) Glaxo’s purchase of Wellcome in 1995 • Attempts to obtain new blockbuster drugs as to form Glaxo Wellcome. Both deals are part of existing lead products come off patent extensive acquisition activity in the pharmaceutical • Attempts to gain negotiating power with health- industry, both at the time of the case and since those maintenance organizations and other big buyers acquisitions occurred. Worldwide acquisitions activity in the industry grew THE PHARMACEUTICAL INDUSTRY dramatically during the 1980s, according to data from Thomson-SDC, from 16 in 1980 to 240 in 1989. The global pharmaceutical industry represents one of Tables 1 to 3 report examples of acquisitions in the the great financial and social success stories of the U.S., Europe, and Japan around the time of the case. twentieth century. Advances in science and technology made remarkable impacts on life The 15 largest companies accounted for about 70% expectancies and quality of life. At the beginning of of total prescription drug sales during the 1990s. In st the 21 century, changes within the pharmaceutical turn, these dominant players were developing industry are creating new challenges and increasingly large armies of sales representatives. opportunities for pharmaceutical companies as they Each of the top ten companies in the mid-1990s strive to continue generating above-average (American Home Products/Wyeth, AstraZeneca, shareholder returns and positive social impact. Aventis, Bristol-Myers Squibb, Glaxo Wellcome, Merck, Johnson & Johnson, Pfizer, Schering-Plough, Filling the pipeline through R&D: Scientific and SmithKlineBeecham), for example, had U.S. advances – in particular, the study of the human sales forces with more than 4,000 reps genome – are leading to an improved understanding of the genetic causes of diseases, enabling companies IMS HEALTH data show that consolidation in the to develop new drugs for previously untreated global pharmaceutical industry has had a substantial conditions. At the same time, though, a single effect on the market shares of the top pharmaceutical blockbuster drug can represent 30% to 50% – or companies. In 1990, the sales of the leading ten more – of a company’s pharmaceutical sales. When pharmaceutical companies accounted for 28% of the such a drug comes off patent, the company faces global pharmaceutical market. Ten years on, that major challenges to replace the sales. Moreover, proportion had reached 45% and was accelerating; it development costs have increased as companies have has continued to accelerate since then. The success of sought the new skills they need to respond to some of the merged companies has been mixed, technological change. however, with some flourishing while others have struggled. The importance of marketing: Marketing and sales activities are critically important in the industry. Despite the mixed success, acquisitions activity has Pharmaceutical firms are increasingly pursuing become vital to firm growth in the industry. Leading consumer-oriented marketing strategies. Indeed, firms that de-emphasized acquisitions during the selling and administration expenses typically exceed 1990s in favour of more internally-focused growth research and development expenditures, often by a strategies, such as Merck and Eli Lilly, declined in factor of 2:1. pharmaceutical sales rank during the 1990s.

At the same time, acquisitions activity is not a new phenomenon in the industry. Pharmaceutical 1 The note uses information available from public sources.

1 acquisitions have been common since the early 20th MMD. The company planned to draw key century. Most of the leaders in the 1980s and 1990s management of the new company from both Merrell acquired many rivals and smaller firms during the Dow and Marion. past decades. Thus, although the scale and frequency of acquisition activity was greater in the 1990s and The new company had 1,500 sales representatives in 2000s, the industry has long experience with the United States and a significant marketing acquisition as a means of growth and expansion. presence in foreign markets. In addition to its prescription drug business, the new company also MARION MERRELL DOW ACQUISITION had a small over-the-counter sales force, with 23 full- time and 200 part-time salespeople for consumer The Dow Chemical Company’s Merrell Dow unit products (of MMD’s 1991 sales, $110 million were acquired a controlling share of Marion Laboratories sales of nonprescription drugs). in 1989, creating Marion Merrell Dow (MMD). The companies announced the agreement on July 18, The company stated that it did not expect layoffs as a 1989. In the first step of the two-stage deal, Dow result of the merger. bought 39 percent of Marion's 150 million outstanding shares at $38 each, or about $2.2 billion. Analysts saw the deal as part of a continuing About a year later, the chemical company acquired consolidation in the drug business. On announcement another 28 percent of Marion's stock for $3.3 billion, of the deal, Marion shares rose $8.25 to $33.50, while giving Dow a 67 percent interest in Marion for a cost Dow Chemical shares at first fell $1.50 to $88.375 of $5.5 billion. In addition, Dow Chemical and then quickly recovered (see Figure 1). At the subsequently incurred a contingent liability stemming same time, some doubts also surfaced in the from the acquisition that resulted in a further pay out investment community: Robert Uhl Jr., an analyst exceeding $1 billion. This payout arose from the with Salomon Brothers in New York, noted that structure of the deal, whereby Dow issued a security "there could be generic competitors for any of their called a Contingent Variable Right that essentially major products." gave an option to Marion shareholders to sell their stock to MMD for $45.75 at some point in the future. History of the Companies Because the stock did not rise to this level, Dow incurred the additional liability. In the process, Dow Marion: Ewing Marion Kauffman started Marion increased its stake in MMD to 72% by 1992. Laboratories in 1950 in the basement of his St. Louis, Missouri home. The company introduced its first The new company planned to operate as an product for calcium supplementation, Os-Cal®, made independent publicly traded company. The deal was from oyster shells, in 1951. In 1989, the company the largest transaction until that date in a series of was headquartered in Kansas City. drug company acquisitions, although subsequent purchases of SmithKline by Beecham and Squibb by Marion had 1989 sales of $930 million, with a net Bristol-Myers soon surpassed the MMD price. The income of $227 million. Marion’s success in the combination of two mid-sized companies created the 1980s had been driven largely by its popular United State’s third largest and world’s ninth largest cardiovascular drug, Cardizem (diltiazem), which pharmaceutical concern at that time. The acquisition Marion began selling in 1982 under license from was part of a recent series of combinations in the Tanabe Seiyaku Co. of Japan. Cardizem provided industry (see Table 2). treatment for high blood pressure and angina. Cardizem generated sales of $600 million for Marion The new company, Marion Merrell Dow, was based in 1989, up from $441 million in 1988. The company in Kansas City with annual revenues of $2.1 billion had just introduced Cardizem SR, a time-release and 10,000 worldwide employees, of whom 2,252 version of Cardizem. Their ulcer drug, Carafate were in research. Marion Merrell Dow's $350 million (sucralfate), accounted for $200 million sales in research budget ranked it in the top six companies in 1989. Marion licensed Carafate from another terms of pharmaceutical research spending. Japanese firm, Chugai Pharmaceutical Co., and introduced the drug about 1983. Carafate had Joseph G. Temple Jr., executive vice president of recently gone off patent in the U.S., while Cardizem Dow Chemical and chairman and chief executive was scheduled to go off patent in 1992. Marion was officer of Merrell Dow Pharmaceuticals, became the considered to have an aggressive sales force, chairman and CEO of MMD. Fred W. Lyons Jr., particularly in the ulcer and cardiovascular markets. president and CEO of Marion, became president of

2 Merrell Dow: William S. Merrell founded Merrell Drugs, a drug manufacturer and retailer in Cincinnati, Acquisition Rationale Ohio, in 1828. Dow Chemical bought the company in 1981, combining it with a small existing Dow Marion perspective: Fred W. Lyons Jr., President pharmaceutical business. In 1989, Dow operated and Chief Executive officer of Marion Laboratories, Merrell Dow within Dow’s Consumer Specialties noted that mid-sized companies were having unit, along with agricultural chemicals, personal care, difficulty competing in the drug industry and food protection (such as Ziploc bags), and cleaning believed that the merger would help Marion go into products (such as Fantastik cleaner). Other Dow the 1990s with a much stronger competitive position. Chemical segments included chemicals and Most importantly, the deal injected new products into performance products, plastics, and hydrocarbons. a company that would face stiff competition from Dow Chemical had sales of $17.6 billion in 1989, generic drugs when Cardizem and Carafate’s with net income of $2.49 billion. exclusivity expired. In addition, Marion’s shareholders would receive a substantial bonus for Merrell Dow had 1989 sales of about $1.2 billion and their shares. net income of $141 million. The company had a small U.S. sales force – about 500 people – as well as Merrell Dow perspective: Merrell Dow viewed the sales operations in Europe. In 1989, Merrell Dow had acquisition as providing three complementary about 1,200 people engaged in R&D, about a third of marketing and research strengths. First, the whom had joined the company within the past eight acquisition gave Merrell Dow access to Marion's years. In 1989, Merrell Dow’s headquarters were in highly regarded sales staff, including a sales force of Cincinnati, with additional facilities in Britain and about 1,000 field representatives. Moreover, the elsewhere in Europe. marketing arms of the two companies complemented each other, as Merrell Dow had a stronger presence Merrell Dow’s leading pharmaceutical sector internationally, while Marion fielded most of its sales products included the anti-allergy pharmaceutical people in the U.S. Indeed, Marion's sales staff would Seldane () and the (nicotine triple Merrell Dow's sales presence in the U.S. polacrilex) smoking cessation gum. Merrell Dow introduced Nicorette to the U.S. in 1984 and Seldane Second, Marion had skill in testing, refining, and in 1985 (after a 1982 introduction in Europe). winning FDA approval for drugs based on licensing- Seldane was particularly successful, reaching world- in compounds, as it had shown with Cardizem and wide sales of $150 million in 1986, $240 million in Carafate. Although Marion did not conduct basic 1987, and $400 million in 1989 ($226 million in the research, its development spending was higher than U.S.). Seldane’s patent was due to expire in 1994. the R&D commitment of many drug companies. By Nicorette reached sales of $80 million in 1989, contrast, Merrell Dow had concentrated on basic showing gradual growth from a $60 million position research, with its patent filings rising to 157 in 1988 in 1987. Nicorette’s patents would begin to expire in against an average of 56 for the company in the 1992. Lorelco (probucol), an anti-cholesterol drug 1980s. that Merrell Dow introduced about 1980, was third with $77 million sales in 1989, down from $96 Third, Merrell Dow planned to develop a portfolio of million in 1988. Lorelco’s patent would expire in new products, although it did not have likely 1995. The company’s other major product was the blockbusters in the pipeline. With Marion's U.S. Cepacol mouthwash. marketing strength, Merrell Dow expected to be in a better position to introduce new drugs. Thus, the Merrell Dow had been a pioneer with direct-to- combination expected to leverage Merrell Dow’s consumer advertising for Seldane. The company research strengths and marry it with Marion’s marketed the drug, which was the first non-drowsy entrepreneurial sales and marketing capabilities. , with an aggressive $10 million annual "[Marion] fits very well with Merrell Dow, because ad campaign. For instance, the company created a there are good product names with Merrell," said television advertisement in which a judge wanted a analyst Scott Stephenson of B. C. Christopher medicine that would keep her opinions clear-eyed Securities in Kansas City. without causing drowsiness. "You can put your hay fever to sleep while you stay awake," assures a The acquisition also satisfied a desire by Dow Merrell Dow nurse in the ad: "See your doctor." By Chemical, Merrell Dow’s corporate parent, to 1989, the product had become the 14th largest selling diversify and expand its pharmaceutical interests to prescription drug in the U.S. counter cyclical swings in chemicals and plastics,

3 analysts said. “A very important thing for Dow is to products division of MMD’s U.S. division, required a get a much bigger base over time outside of the move to Kansas City from Cincinnati, where his three commodity chemicals and plastics business," said grown children and their families lived. After four Joseph Temple Jr., who became chief executive of months on the job, Catino decided to leave MMD. Marion Merrell Dow. Temple had spent 40 years at Other executives balked at the requirement that they Dow Chemical, most recently as Chair and CEO of relocate to Kansas City from Merrell Dow’s British Merrell Dow Pharmaceuticals. "Between the Dow facilities. Elanco deal in agricultural chemicals [a plant science and industrial pest control joint venture with Eli Ultimately, eight top executives and several other key Lilly], and the Marion Merrell Dow deal, both done employees left the company. Some people were able in 1989, I think Dow has taken a giant step," said to pursue other opportunities because of the financial Steven Bernard, an analyst with Edward D. Jones & rewards from owning Marion Laboratories stock, Co. in St. Louis. “Dow had been trying to get out of which culminated with the payout from the Merrell the commodity chemical business into something Dow acquisition (several Marion employees cashed that's more value-added." out after the merger and a few became multi- millionaires). For instance, Harley L. Tennison, the Post-Acquisition Activities President of Marion's U.S. division, was one of the highest-level executives to leave the company. Acquisition integration Tennison retired soon after the acquisition – Tennison said he had always hoped to retire at 55, but MMD quickly assigned several executives to new that he was financially able and ready to leave a full- jobs in Kansas City and elsewhere. The executives time job to pursue his interest in leisure travel at the had the responsibility to carry out the daily tasks of age of 53 owing to the acquisition bonus. integrating Marion and Merrell Dow and deciding which people should stay, who should be reassigned, Nonetheless, many Marion and Merrell Dow and who should leave the company. employees welcomed the combination, viewing it as an opportunity to gain critical scale in the industry Headquarters and branch locations: The and to increase their chances of moving forward in company’s new headquarters was in Kansas City, their careers. At the same time, some industry Marion’s home locale. Both Joseph Temple and Fred analysts suggested that the acquisition reward to Lyons operated out of this location. In parallel, Marion's sales force might reduce the aggressiveness Merrell Dow’s Cincinnati facility remained the key of some people who remained with the company, center for manufacturing and research. Both cities are believing that some salespeople now lacked the “fire located in the U.S. Midwest. in the belly'' that had motivated them during Marion's fast growth in the 1980s. Post-acquisition layoffs: Merrell Dow stated that one of the key reasons it acquired Marion was for its Cultural change: The two companies had sales and marketing capabilities. In announcing the substantially different cultures. Dow Chemical had a acquisition, the company predicted that no major hierarchical culture and tended to be formalized and layoffs would occur, particularly among sales and structured. By contrast, Marion’s corporate culture marketing personnel. Moderate work force reductions was much more of an “adhocracy”, with a high did occur soon after the acquisition, as worldwide degree of flexibility and individuality. employment at MMD dropped from 9,850 to 9,150 jobs. The Kansas City workforce of Marion Employees from both companies needed to change Laboratories dropped by 5 percent, to 2,600 their working styles to reflect the differences. Marion employees; layoffs occurred primarily in the sales employees found that they worked for a much larger and marketing department. company, with both a powerful distribution worldwide network and an extensive basic scientific Executive turnover: At the time of acquisition, research department. The company's largest Merrell Dow stated that it expected most senior shareholder was no longer “Mr. K.”, but instead a executives to remain with the company. Nonetheless, chemical powerhouse named Dow. On the other several senior people left. For example, Theodore A. hand, Merrell Dow employees saw their company Catino, who had worked 26 years with Merrell Dow transformed from a relatively quiet subsidiary of in Cincinnati, decided to take early retirement at the Dow Chemical to a high-profile publicly traded age of 50. Catino said his new job, as Vice President company. They also found themselves working at of Marketing Development in the prescription one of Kansas City's most revered corporate citizens.

4 patents began to expire in 1992, sales fell 13% in New products 1993 and remained flat in 1994, with Cardizem CD and SR accounting for $708 million of the Cardizem With the merger, MMD’s strongest products now family’s total sales of $933 million in 1994. were Cardizem from Marion and Seldane from Merrell Dow, followed by Marion’s Carafate and MMD also introduced new versions of Seldane in Dow’s Nicorette. Japan, Europe, and Australia. These launches gained substantial sales, although Seldane was facing In December 1991, the company received FDA growing international concern about . In approval to introduce Nicoderm (nicotine transdermal 1993, the FDA warned that the drug could cause life- system), the first nicotine transdermal patch for threatening abnormal heartbeats in some patients. smoking cessation. Nicoderm was developed by Sales of the Seldane family of products fell by 7% to Alza, a pioneer in the development of transdermal $698 million in 1994 as the pharmaceutical came off drug delivery technology. Alza planned to patent and consumers concerns rose in North manufacture the product, while Marion Merrell Dow America and Europe. At the same time, though, sales would market it and pay royalties to Alza. The of Seldane products increased in the Pacific region. Nicoderm introduction was a successful use of The FDA’s concerns led MMD to hold off on plans Marion’s drug-development skills, in taking licensed for an over-the-counter version of Seldane as a means compounds through the FDA approval process. In of addressing generic competition. turn, in 1994, MMD applied for over-the-counter status for Nicoderm. To support its Japanese expansion, MMD purchased 90% of Kodama Ltd., a Japanese pharmaceutical Smoking cessation products faced an uncertain corporation, for a cost of about $125 million. MMD future, holding potentially high growth but facing already had a Japanese unit with more than 800 some troubling signs resulting from consumer people, including 400 in sales and 100 in R&D. questions about use and effectiveness. Ciba-Geigy, Kodama had 550 people, with 250 sales staff and 60 Lederle Laboratories (American Cyanamid), and R&D personnel. Kodama would add scale to MMD’s Warner-Lambert all had competing products either in Japanese sales and development efforts. Seldane was the market or nearing introduction. By 1992, sales of MMD’s primary current product in Japan. The Ciba-Geigy’s Habitrol nicotine patch had caught up company hoped to introduce Nicorette and Nicoderm to Nicoderm ($300 million v. $275 million), with and its new Sabril anti-epilectic, as well as other Lederle’s Prostep and Warner-Lambert’s Nicotrol products, to Japan. following ($75 million and $50 million respectively). By the end of 1993, sales of the Nicoderm patch and MMD also received U.S. approval to apply Carafate Nicorette gum had declined, to a total of $156 million to new anti-ulcer indications, as well as approval for ($91 million for Nicoderm and $65 million for a liquid form of the drug. The combined sales of the Nicorette). Carafate family reached $203 million in 1992, $177 in 1993, and $147 in 1994. In order to shore up Cardizem, Marion Merrell Dow introduced a more advanced time-release formulation The company had several new products in the of the drug, Cardizem CD (the new formulation pipeline. In 1993, MMD launched Pentasa allowed patients to administer the drug once daily, (mesalamine), for patients with ulcerative colitis. The rather than two to four times a day). The new market for this product was estimated at perhaps $70 formulation faced competition from Pfizer’s million a year. In 1994, MMD applied for approval to Procardia (nifedipine) and from Merck’s generic market Sabril (vigabatrin), an epilepsy drug; the drug version of Cardizem. Some analysts viewed the new required additional testing in the face of concerns formulation as a strong step forward, while others about psychiatric side effects. The company also was were more doubtful about its prospects. A Salomon seeking over-the-counter status for products in its Brothers analyst commenting on the Cardizem Nicorette anti-smoking family. extension said, "It's not that great as an anti- hypertensive. It's expensive. It's a highly competitive At the same time, the new CEO, Mr. Temple, marketplace. And you're having the Procardia XL encouraged the company to focus on long-term come in [from Pfizer] and it's just cleaned their research and product development. clock." Nonetheless, Cardizem CD successfully boosted sales, with total sales of the Cardizem family reaching $1.1 billion in 1992. As the Cardizem

5 Immediate After-Effects before a wave of near-identical pills comes through the door. Industry analysts noted that drugstores The acquisition immediately struck a successful note usually buy the first low-cost generic alternative to a as Marion Merrell Dow reported strong financial branded product, and then rarely switch to other performance for its first full year. Revenues increased generic alternatives once customers get used to it so 11 percent as the two companies’ sales forces long as the product is priced competitively. This combined efforts, and profits grew by 23 percent in contrasts with the much longer development cycle in 1990. For instance, the combined U.S. sales force of the traditional pharmaceutical industry, as well as 1,100 representatives was able to increase Cardizem with sales strategies that emphasize contact with SR sales five-fold in 1990 compared to same-period physicians with the goal of convincing them that the sales in 1989. Sales continued to grow to $3.3 billion products are uniquely effective. MMD operated in 1992, with strong profitability (return on sales of Rugby’s laboratories, manufacturing facilities, and 21%). MMD sales and profitability fell to $2.8 billion sales activities as a separate unit, with little change in in 1993 (13% ROS) as Cardizem came off patent, but staffing or leadership. In 1994, as part of MMD, the company’s sales recovered to $3.1 billion in 1994 Rugby achieved sales of $296 million, with limited with the introduction of new versions of Cardizem operating profit. (profitability held at 14% ROS). Corporate strategy Generic Expansion At corporate headquarters, meanwhile, Dow In order to complement its prescription-drug Chemical was undergoing a substantial change in business, MMD entered the generics business. Using strategy. Following the diversification efforts of the the name Blue Ridge Laboratories, MMD produced a early 1990s, the company was facing challenges generic version of Cardizem, which they would sell across many of its segments, coupled with stagnation via the U.S.’s largest generic distributor, Rugby in the commodity chemical and plastics businesses Laboratories. In October 1993, MMD then purchased that were caught between weak selling prices and Rugby for about $275 million after Rugby’s parent, rising feedstock costs. the Darby Group, became caught up in a corruption and fraud scandal with the FDA. In 1992, Rugby’s 950 employees (700 in its seven marketing and THE GLAXO-WELLCOME ACQUISITION distribution facilities, plus 250 in its R&D lab and two manufacturing facilities) had achieved sales of Glaxo PLC acquired Wellcome PLC in 1995 for about $280 million, with a net loss of about $9 about $15 billion. If the acquisition succeeded, it million. could propel Glaxo Wellcome to the top sales spot among the world's pharmaceutical giants with overall Several other established pharmaceutical companies market share of about 6 percent, potentially leap- were entering the generics market. Warner-Lambert frogging the then-leader Merck. At the time of the had created the Warner-Chilcott generics unit in acquisition, the combined company employed 62,000 1986. Bristol-Myers and Squibb both had generic people worldwide (45,000 from Glaxo and 17,000 operations prior to their 1989 merger. Schering from Wellcome), including 17,000 in the UK. The entered generics in 1993, with Warrick new firm owned 76 operating companies and ran Pharmaceuticals. Merck undertook operation of the more than 50 manufacturing sites worldwide. After Endo Pharmaceuticals generics business in 1991, in the acquisition, combined sales in 1995 reached partnership with DuPont, and was planning to create $11.5 billion (net income of $2.5 billion). Glaxo a separate generics business unit in 1994. American Wellcome described itself less as a maker of drugs, Home Products was rumoured to be in the market for but rather as "one of the world's leading research- American Cyanamid Corporation and its Lederle based pharmaceutical companies" with an annual Laboratories generics unit. In Europe, Bayer and research and development budget of £1.2bn. Ciba-Geigy had recently become active in the generics market. Wellcome executives viewed the acquisition offer as a hostile takeover. Wellcome management, led by The generics business differed in important ways CEO John Robb, would have strongly preferred to from the branded pharmaceutical market. Generics remain independent. Recognizing that an acquisition firms need to be quick-footed and reach market first was inevitable, now that they were in play, the with each new drug as it comes off patent, and company’s management sought a white knight to quickly convince pharmacists to stock the drug counter Glaxo’s offer, hoping to find a buyer that

6 would permit more autonomy than Glaxo would vitamin D preparation, in 1924. A steep drop in allow. However, no suitors emerged that were willing antibiotic prices in the mid-1950s led Glaxo to to top Glaxo’s offer. "It is obviously disappointing expand internationally by acquiring Allen & that neither of the two remaining potential counter Hanburys Ltd., a British pharmaceutical firm bidders decided to make an offer," noted John Robb. originally established by Quakers in 1715. Glaxo also "It is particularly frustrating that the trust refused to acquired companies that manufactured vaccines, seek directions privately in court, which might have vitamins, veterinary products, medical instruments, facilitated the higher offer, which was so weed killers, insecticides, and fertilizer. Glaxo tantalizingly close." launched U.S. operations in 1978. In the 1980s, Glaxo shed its non-drug operations to concentrate on Despite the reservations of the company’s top pharmaceuticals. By 1994, Glaxo had achieved management, Wellcome’s largest shareholder, the global sales of $8.4 billion, second only to Merck, charitable foundation (which held and had created a sales force of 17,000 people. almost 40% of Wellcome), accepted Glaxo’s bid. The offer was worth about 40% more per share than the Glaxo’s success in the 1980s stemmed from the anti- Trust had received in 1992 when it reduced its ulcer blockbuster, Zantac ( hydrochloride). shareholding from 74% to 40%. Glaxo addressed The company discovered the drug in 1976 and concerns of the Trust by assuring the Trust that the introduced it to European markets in the late 1970s. combined company would continue to follow A 1981 marketing campaign launched Zantac in Wellcome’s research mission. In addition, the competition with SmithKline's Tagamet in the U.S., Wellcome Trust said that it could create 1,000 new where Glaxo's had little sales at the time. The research jobs as a result of having an extra £50 company increased its sales reach by contracting to million a year income from the sale of its stake. use Hoffmann-La Roche's sales staff in the U.S. Co- promotion, which was a new marketing concept at The acquisition was part of a series of recently that time, allowed Roche's experienced sales force to completed and in-process combinations in the rapidly disseminate information on the newly industry (see Table 3). Nonetheless, analysts did not introduced Zantac, substantially intensifying the expect competing bids, despite management attempts efforts of Glaxo's small sales team. The companies to identify alternatives. The two largest European created several novel marketing strategies, including drug companies with acquisition strategies, Hoescht public-service announcements, celebrity media tours, and Roche, were focused on other issues, as Hoescht and consumer-awareness bulletins, which brought the carried through a series of board changes and Roche drug to the public and encouraged consumers to seek digested a recent acquisition of Syntex. Moreover, advice from their doctors. The ads stressed that Glaxo had the flexibility to increase its offer should physicians and patients should prefer Zantac to competition emerge, which discouraged others from Tagamet because Zantac had a more convenient beginning a bidding war. dosing schedule (twice daily, rather than four times) and a promoted a superior drug interaction side-effect The market had mixed reactions to the acquisition. profile. Investors were initially negative about the deal as Glaxo shares lost almost 7% of their value on the Although late to the market, Glaxo priced Zantac announcement day (January 23, 1995), while 15%-25% higher than Tagamet. Patients wanted what Wellcome rose 8%. Concerns over the patent they believed to be the best available product, expiration issue of Zantac had driven down the regardless of the cost, and most insurance carriers value of Glaxo shares since 1992, and covered the cost of prescription drugs. Zantac's sales announcement of the acquisition caused an attained 9% of the histamine-2 receptor market in the additional decline as analysts doubted Glaxo’s United States only one month after launch. Moreover, ability to integrate a major target. The stock rallied the H2-blocker market expanded by 15% in the first as the firm outlined the rationale for the deal, month after Zantac was launched, indicating that however, and continued to rise throughout 1995 (see direct to consumer promotion would increase the size Figure 2). of the market as well as Zantac's portion of it. After one year, Zantac had 24% of the U.S. market share of History of the Companies H2 blockers.

Glaxo: Glaxo originated in New Zealand, where The Zantac sales assault gave Glaxo leadership in US Joseph Nathan founded a general trading company in anti-ulcer drug sales as Zantac became the largest- 1873. The firm produced its first medical product, a selling drug in history. In 1994, Zantac accounted for

7 about 40% of Glaxo’s sales. The initial patents for markets outside the U.S., typically with market Zantac were due to expire in 1994, though, and there shares in excess of 75%. With its increasing growth was substantial doubt about whether the company’s outside Britain, Glaxo introduced the product to the follow-on patents, which did not expire until 2002, U.S. in 1981. In addition to using its own sales force would stand up to legal challenges. Moreover, Zantac in the U.S., Glaxo also licensed the drug to Schering- appeared to have reached market maturity, as sales Plough, which marketed the Ventolin inhaler under for the second half of 1994 had declined 4% from the their own trade name, Proventril. The drug reached previous period. global sales of over $300 million in 1983 and remained at that level through the 1980s. With the Glaxo was converting Zantac to OTC status in company’s growing international sales coverage, several markets, including both the UK and the US, Ventolin sales then increased during the early 1990s, in anticipation of going off patent. However, sales despite the loss of patent protection in 1987. and margins would suffer once generic competition Combined sales of Ventolin and Proventril reached emerged. In addition, Glaxo had only limited OTC $1 billion in 1993, but had declined to $882 million sales presence and was co-marketing the OTC in 1994 as it came under increasing challenge from product with Warner-Lambert and Wellcome (via the generics. Warner Wellcome joint venture), which meant that the company would share OTC revenues with its Although Glaxo had a strong stable of products, none partners. of the drugs was likely to reach a blockbuster level that would replace Zantac when it went off patent in In addition to Zantac, Glaxo had several other 1994. The Flixotide asthma treatment and Imigran substantial products in the respiratory (anti-asthma), migraine treatment were viewed as the highest antibiotic, anti-nausea, migraine, and dermatological potential stars among the recent introductions, each categories. with the potential to reach sales levels as high as $1 • Respiratory drugs included Ventolin billion a year, but they would not approach the (; $800 million sales in 1994), Zantac level. Becotide ($575 million), Serevent (Salmeterol xinafoate; $171 million) and Flixotide Glaxo`s research emphasized eight broad therapeutic ( propionate). Ventolin came off areas, including three in which it was currently a patent in 1987. Becotide had come off patent in market leader: gastro-intestinal diseases, respiratory the early 1990s. Serevent, which was introduced ailments, and infectious diseases. The company had in 1992, had patent life until 2004. Flixotide, several products on the near-term introduction which received UK introduction in 1993, horizon, and analysts viewed the company’s pipeline remained on patent until 2003. as strong. The company had 30-plus products and • Its antibiotics, including Fortaz and Ceftin projects under development, including promising ( axetil), brought in $1.4 billion. compounds for anti-infective and cancer drugs, as Fortaz, which Glaxo had licensed from BTG, well as agents for psychiatric, metabolic, and had come off patent in the 1980s, but Ceftin cardiovascular disorders. The FDA was reviewing would have patent protection until 2000. Epivir (3TC), an HIV/AIDS drug that Glaxo had • The anti-nausea drug Zofran (), for licensed from Biochem Pharma in Quebec. Glaxo use in cancer treatment, was worth $629 million had also licensed for hepatitis B from a year. Zofran was introduced about 1992 and Biochem Pharma in 1994. In addition, Glaxo planned had patent life until 2004. to launch a drug called Tritec (Ranitidine bismuth • Imigran, an injectable drug for migraine citrate) as a combined ulcer-healing and anti H pylori treatment (known as Imitrex in the U.S.), had therapy in 1995. Nonetheless, despite the strong sales of $375 million. Imigran was introduced in pipeline, no product appeared likely to replace 1991 and had patent life well into the future. Zantac’s presence in the company. • Dermatological treatment products, including Betnovate, were worth $285 million. Wellcome: American pharmacists Silas Burroughs and founded Burroughs Wellcome The respiratory drug Ventolin’s history illustrates and Co. in England in 1880, with the goal of selling Glaxo’s historical approach to developing and McKesson-Robbins' products outside the U.S. The marketing successful products. Glaxo’s Allen & company began making its own products two years Hanburys subsidiary launched Ventolin in the UK in later. The company established a U.S. subsidiary, 1969 and later expanded sales to Australia, Canada, Burroughs Wellcome Co., in 1906. The British parent and Europe. The anti-asthma product dominated company became the Wellcome Foundation in 1926.

8 As a result of Sir Henry Wellcome’s 1936 will, the received approval so far as a treatment for shingles, company became a registered charity governed by the while Zovirax was approved for oral and genital Wellcome Trust, which used its profits to fund herpes as well as shingles. The company, which throughout the world. The Trust predicted sales of $28 million in 1995, planned to viewed Wellcome as both a commercial enterprise apply for extended approvals. Some analysts and a research-driven institution with an important predicted peak sales of about £250 million for the social mission in developing new pharmaceuticals. new drug, slightly below company projections. Table Throughout its existence, Wellcome had maintained 4 reports sales history and projections. this vision as a pioneering medical research firm and had fostered Nobel Prize-winning researchers. The Wellcome's research focused mainly on its antiviral Trust sold 20% of its equity to the public in 1986, and anti-infective program, but also addressed with the goal of diversifying its investment portfolio; cardiopulmonary disease and other therapeutic areas. the Trust further reduced its stake to 40% by 1992. In In addition to its current products, Wellcome had two 1994, Wellcome had global sales of about $3 billion, products in the near-term pipeline. with a sales force of 3,000 people • Navelbine, a treatment for lung cancer, had just received FDA approval for U.S. introduction as a By the 1990s, Wellcome led the world in anti-viral treatment for non-small-cell lung cancer; the medicines. In 1994, Wellcome’s main products were FDA was also reviewing application for use in both anti-viral agents: Zovirax for herpes (launched advanced breast cancer therapy. in 1981) and Retrovir (, also called AZT) • Panorex, a treatment for colorectal cancer, for HIV/AIDS (launched in 1987). The company also received German approval for post-operative offered the anti-epilepsy drug Lamictal (launched adjuvant therapy in 1994. about 1992). Wellcome had at least eight other products in clinical Zovirax, which accounted for almost 40% of trials. Wellcome’s sales in 1994, had reached market • Three drugs in Phase III: A muscle relaxant, maturity. The drug would lose patent protection in Nimbex; the sustained-release product the US in 1997. Wellbutrin; and a Hepatatis C treatment, Wellferon. Retrovir had sales of $322 million in 1994, down • Four drugs in Phase II: A bipolar-disorder from $379 in 1993. The drug's sales dropped about product, Lamictal; an anti-migraine treatment, after a controversial study suggested that people 311C; an HIV treatment, 1592U; and a colon who were infected with the AIDS virus but were not cancer drug, 776C. showing symptoms of the disease received little • One drug in Phase I: An HIV/Hepatitis B benefit from AZT. The company expected sales to treatment, 524C. rebound in light of new clinical data. A year’s supply of the drug cost upwards of $2,600 Wellcome also had formed an OTC joint venture (Wellcome offered a patient-assistance program to with Warner Lambert in 1994, called Warner people who could not afford the treatment). Wellcome. The venture provided access to the OTC Wellcome’s patent would extend until about 2003. market and offered a platform for OTC switches as Barr Laboratories had received US approval to products reached patent expiration. In 1994, introduce a generic version of Retrovir, but Wellcome’s sales of non-prescription products Wellcome had filed patent lawsuits in opposition. amounted to £414 million (up from £322 million in Barr was attempting to overturn the Wellcome 1993), including their £300 million share of Warner patent but had already lost two patent suits. Wellcome. By comparison, sales of prescription products totaled £1.8 billion in 1994. Non- Lamictal had received approval for U.S. launch in prescription products included Wellcome's Actifed February 1995. Anti-epilepsy was one of the fastest and Sudafed branded cough remedies and its growing segments of the central nervous system children's analgesic, Calpol. (CNS) market. Lamictal had reached 20% market share in the UK and Ireland in its three year history. Acquisition Rationale

Wellcome was also on the point of introducing Wellcome perspective: The Wellcome Trust viewed Valtrex (vaclciclovir) in the UK and Ireland, as a Wellcome as simply too small to continue to achieve herpes treatment. The new drug held the potential to its research and commercial missions. With $3 billion be a successor to Zovirax, although Valtrex had only in revenues, the Trust believed that Wellcome lacked

9 the research and distribution heft needed to compete Marketing scope: The combined marketing group in key markets. Moreover, the company had recently would offer a substantially larger scope, particularly failed in an attempt to switch Zovirax to the OTC for selling Wellcome’s products. Moreover, the market in the U.S., when the FDA rejected the expanded product lineup would help Glaxo application, which raised concerns about future sales. Wellcome bundle drugs for sale to managed-care In addition, the Trust viewed the income from the firms that bought products in combination. sale as a source of investment funds for pursuing its research goals throughout the world. R&D scale and scope: Glaxo expected the acquisition to offer both scale and scope Glaxo perspective: In part, the impetus for the opportunities in research. Sykes emphasized the acquisition stemmed from a recent leadership change potential economies of scale through combining at Glaxo. Longtime Chairman Sir , who overlapping research departments, hoping that this avoided acquisitions and major alliances in favour of would allow the new group to produce "two or three internal development, retired in 1989. His initial molecules a year instead of one every two or three successor as CEO, Ernest Mario, had sought to shift years”. In addition, Glaxo would extend the scope of the company’s emphasis from prescription drugs to its research efforts with Glaxo’s skills in new the OTC and retail drug market but resigned in 1993 therapeutic areas, particularly anti-virus research. in the face of internal opposition to his recommendation that the company purchase Warner Beyond the opportunities for product, market, and Lambert in order to grow in the OTC market (Mario research extensions, the acquisition offered then became CEO of Alza, an American producer of substantial potential to realize efficiencies in drug delivery systems). Mario’s successor was Sir administration, research, and marketing. Much of Richard Sykes, a former research scientist for Glaxo the savings would come through reduced staffing and Bristol-Myers Squibb. During 1993 and 1994, Sir and Glaxo estimated that it would reduce payroll by Richard had already aggressively pursued ventures as many as 15,000 people over the next three years. with biotechnology companies and marketing partners to broaden Glaxo's reach. Administrative savings: The two companies both had headquarters, which they could combine for Sir Richard stated that the company settled on a moderate saving. Wellcome as an acquisition target because of its product and research synergies with Glaxo, as well as R&D savings: The combination offered savings in potential efficiencies in R&D and marketing. The net R&D expenditure. The two companies had some company predicted initial acquisition savings of overlaps in research, at facilities in southeast England about $1.1 billion during the first four years. That and . Overlapping research areas figure could rise to as much as $2.4 billion if Glaxo included diseases affecting the central nervous Wellcome undertook a major reorganization. system (CNS), cancer, infectious diseases, anesthesia, and cardiopulmonary disorders. Analysts estimated Product pipeline expansion: Glaxo believed that that consolidating operations could save as much as their product pipeline needed blockbusters to replace $800 million in research spending and in avoiding Zantac. Glaxo received temporary relief on the duplicate clinical trials. Glaxo also had pioneered regulatory front when the company won an extension advanced robot screening methods in which as many from January 1996 to July 1997 for its U.S. patent for as 50,000 different models could be processed Form 1 ranitidine, Zantac's key chemical ingredient. overnight, which previously had been a four-week At that point, however, the product would become job for a full-time employee. The company expected vulnerable to attack from generic drugs. to expand the use of such techniques throughout the combined labs. Glaxo believed that Wellcome offered a good product fit. Wellcome would provide immediate sales from Marketing savings: The new company would be able Zovirax and Retrovir/AZT. More importantly, the to reduce marketing personnel in overlapping areas, company also offered future sales from products in such as anti-migraine sales. Wellcome’s product pipeline. In addition, there was an emerging growth opportunity via a potential “gold Impact on medicine: The Glaxo-Wellcome standard" of HIV/AIDS treatments that combined combination might affect the range of treatments therapy with a dual-drug “cocktail” of Wellcome’s available for colorectal cancer, as there were fewer AZT and Glaxo's 3TC. manufacturers competing in that part of the market. Roche, Bristol-Myers and Pfizer were the main

10 competitors, all of which Wellcome management had Many of the task forces subdivided into smaller units, solicited as alternative buyers following the Glaxo each including people from both pre-acquisition bid. Whether the impact would be positive or companies. There were no initial detailed cash-saving negative was not clear, though. The negative or job-cutting targets. Instead, the groups took a potential was most obvious, stemming from the broad view of the cost reductions possible, based on possibility of lower total investment and a smaller published data, and then went about asking for ideas range of research projects in the combined company about specific opportunities. than in the aggregate activities of the two independent companies. On the other hand, there was At a level immediately above the task forces was a potential for positive research impact if the combined guidance team of nine senior executives. These were firm could draw more effectively on a pool of the only people who were officially working full-time interdisciplinary research and development expertise. on the integration. The guidance team was the In addition, Glaxo planned to expand the use of original nucleus of the management of the acquisition recent research technologies such as computer implementation, established just after Glaxo's bid and simulation, genetics, miniaturization, and robotics. working closely with the management consultants.

Post-Acquisition Activities The guidance team initiated several immediate actions. First, it used information from the task forces Sir Richard Sykes continued as CEO of the combined to map a matrix whereby the new company matched company, while Wellcome’s John Robb left the its newly combined product portfolio with the company to become chair of UK Nuclear. The two combined sales force. Second, Glaxo Wellcome companies had substantial cultural differences. attempted to rationalize their main administrative Wellcome was viewed as a “quiet” company that, services. Third, the company eliminated what they protected by a friendly trust, lavished attention and viewed as duplication in research and development. spending on its researchers. By comparison, Glaxo had a more aggressive and market-driven culture. As early as January 1995, before the acquisition took place, Sir Richard stated that the takeover would Glaxo carried out extensive post-acquisition result in plant closings and substantial job losses in integration. The companies quickly initiated an research and development and marketing. implementation plan. They built an infrastructure of Preliminary analysis suggested that as many as task forces, sub-groups, co-ordination teams, 10,000 to 15,000 out of the two companies' joint integration executives, and specialty ''platforms'' that workforce of 65,000 could lose their jobs, with the drew people from both firms. During the peak period, axe falling heavily on research and development 20 “task forces” were operating. Twelve task forces laboratories in south-east England. By mid-1996, were geographic, devoted to regions such as Britain, there had been 7,500 job cuts, coupled with plant the U.S. Italy, and Latin America. The other eight closings and divestitures throughout Glaxo were functional, dealing with tasks such as Wellcome’s combined holdings in Europe and North manufacturing, marketing, and central financial and America. R&D staff declined from 11,500 to 9,700 administrative activities. and R&D projects from 160 to 93.

The task forces each drew on the services of seven Top executives spoke in something close to centrally-provided ''platforms”. The platforms were apologetic tones over the cuts that were to be made. groups of specialist advisers in areas such as law and ''We're only humble pharmacy managers, not mergers finance. and acquisitions experts,'' they said. Proportionally, most cuts occurred at Wellcome facilities, although The task forces also received help from the Boston many also affected Glaxo employees and facilities. Consulting Group management consultancy, which Glaxo hired to help plan the purchase within days of Immediate Impact the January 23 bid for Wellcome. BCG counseled strongly that Glaxo should behave as if it were in a Early financial results were positive. Sales from new friendly takeover, even when the Wellcome board products from both the Glaxo and Wellcome rejected the initial bid. ''Working with someone is pipelines in 1995 and 1996 exceeded the drop in sales always better than working against them, especially if of Zantac. you are at the lower end of the scale,'' remarked one person.

11 Figure 1. Dow Chemical Price Trends Around July 18, 1989

Figure 2. Glaxo Share Trends Around January 23, 1995

12 Table 1. Examples of pharmaceutical acquisitions in the U.S., Europe, and Japan Acquisition Year Value Searle by Monsanto 1985 $2.7 billion Sterling by Eastman Kodak 1988 $5.2 billion Medco (distribution to managed care) by Merck 1993 $6 billion

Table 2. Examples of 1989-1990 acquisitions Acquisition Target pre-acquisition sales (profits, Acquisition price $ million) Marion Laboratories by Dow Chemicals Sales $752 million $5.5 billion (profit $150 million) SmithKlineBeckman by Beecham Sales $4.7 billion $7.7 billion (profit $618 million) Squibb by Bristol Myers Sales $2.6 billion $11.5 billion (profit $425 million) A.H. Robins by American Home Products Sales $933 million $3.3 billion (profit $58) Lyphomed by Fujisawa Sales $159 million (0 profit) $770 million Shaklee (vitamins) by Yamanouchi Sales $330 million (profit $27) $392 million Rorer by Rhone Poulenc Sales $1.2 billion (profit $86) $3.2 billion Genentech by Hoffman La Roche Sales $400 million (profit $44) $2.1 billion Pharmavite (vitamins) by Otsuka Sales $50 million $60 milloin

Table 3. Examples of 1994-1995 acquisitions Acquisition Year Value Target sales Target profits Sterling Winthrop (OTC) by SmithKlineBeecham 1994 $3 billion $2.1 billion Diversified Pharmaceutical Services by SKB 1994 $2.3 billion American Cyanamid by American Home Products 1994 $9.7 billion $4.3 billion $1.1 bln loss Syntex by Roche 1994 $5.3 billion $2.1 billion $287 million by Rhone Poulenc Rorer 1995 $2.9 billion $2.0 billion $755 mln loss Marion Merrell Dow by Hoescht 1995 $5.1 billion $3.1 billion $433 million Upjohn by Pharmacia 1995 $13 billion $3.3 billion $491 million Wellcome by Glaxo 1995 $15 billion $3.5 billion $630 million

Table 4. Historical and projected sales of Wellcome's main products, January 1995 (£1 = US$1.56)

Actual Actual Projected Projected Projected Projected $ million 1993 1994 1995 1996 1997 1998 Zovirax 1,226 1,391 1,466 1,383 1,041 930 Retrovir 347 322 369 447 524 610 Lamictal 19 44 120 219 324 417 Valtrex 0 0 28 199 345 434 Total($ mln) 1,592 1,757 1,982 2,248 2,234 2,392 Total (£ mln) 1,023 1,129 1,274 1,445 1,436 1,537 Corporate total (£ mln) 2,041 2,276

13