COMPARING TWO ACQUISITIONS: Frequent acquisitions: High-profile mergers occur MARION MERRELL DOW (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.