Glaxo SmithKline Merger - Case Study Example

Glaxo SmithKline Merger The merger of Glaxo Wellcome Plc and SmithKline Beecham Plc became the most talked about merger of its time. All the business papers and journals carried their anticipatory articles regarding the merger. On July 5, 2000, when a joint letter was issued to the shareholders by Sir Richard Sykes (Chairman, GW) and Sir Peter Walters (chairman SB) announced their proposal of merger and said that it would help bring down the cost by 1 bn GBP by 2003. Out of this saving, 250 mn GBP were supposed to be reinvested for research and development. (The Pharmaceutical Journal, 2000) August 21 was set as the date, subject to approval by the shareholders and American Federal Trade Commission. The talk of merger had started three years before also but it failed due to clash of egos between Glaxo chief executive Sir Richard Sykes and chief executive of SmithKline Jan Leschly. In 1998, the merger was virtually complete with Glaxo holding 59.5 % leaving 40.5 % to SmithKline shareholders. Jan Leschly was slated to be the chief executive of the new group who was presently the CEO of SB. Sir Richard Sykes, the current CEO of Glaxo, was supposed to be the new chairperson. These negotiations went on for weeks and then it was suddenly called off. Glaxo said that it did not agree to the terms of merger and SB said that they did not agree on the choice of the head of the new company. This was not refuted by Glaxo officials. The pharmaceutical industry knew that both the heads had worked together in the past and had a rivalry among the two. Their management styles also clashed. These differences look personal but it pushed off the merger and caused a drop in the share prices and made a dent of $100 million according to The Economist. Although personal differences of the heads delayed the merger but the finanacial need of increasing funds allocation for R & D for new drugs was the main reason for SB to look forward for the merger and also tried it unsuccessfully with two other companies. In Mid -1999 the talks of merger with Glaxo were restarted when Jan Leschly announced his retirement. This was indeed a major barrier which was thus removed. On 18th December 2000, BBC announced clearance of the merger plans by the American Federal Trade Commission. The merger had been waiting for this clearance for so far. But the other factors that it had to clear was by US competition authorities who wanted to check out the products both the companies marketed for helping the smokers quit. Glaxo’s Zyban was a prescription drug while SmithKline’s Nicorette and Nicoderm were sold over the counter in US. The Federal Trade Commission felt that a sell-off of any of these products was necessary but gave them a clearance to ahead with the merger and to continue the review after that. In May, The European Union Regulators gave their clearance on the condition that some disposals were made and the shareholders gave their approval in August. To get approval from US, SmithKline had to sell some drugs like Kytril, Famvir and Vectavir/Denavir. This merger made them the biggest company of market value of 120 Bn, next only to Vodafone(BBC). Jean-Pierre Garnier who was the number two at SmithKline was appointed the chief executive of this company and Sir Richard Sykes, chief of Glaxo was appointed as the non-executive chairman. The Headquarters were to be based in London and US had its operational base. 27th December was set as the date for it’s listing on New York and London Exchanges. The most remarkable point of the merger was the announcement of an annual research and development budget of 2.4 bn GBP, the largest in the world so far. The merger seemed to bring together the top drugs for diabetes, asthma and aids and many traditional products like Lucozade and Ribena. It is important to understand the backgrounds of both these companies to understand the later implications. For more than two decades, Glaxo Wellcome was one of UK’s most successful companies. Glaxo Wellcome resulted from the merger of two leading UK pharmaceuticals in 1995. In the mid-1970s, Glaxo was a small British firm with its origins in the dried milk business and had most of its sales in antibiotics, respiratory drugs and nutritional supplements. During the 1980s Glaxo grew organically and rapidly thanks to the commercial success of its R&D efforts. By 1994 sales totalled £5,656 million or 3.6 per cent of the world market with earnings emerging from a strong presence in Europe and the US. The top industry position was secured in 1995 when the industry as a whole faced increased drug discovery costs yet again. Glaxo managers effectively engineered a takeover of Wellcome, as the Wellcome Foundation (the largest non-profit medical institution in the UK) owned a 40 per cent stake in Glaxo's Zantac and 39 per cent of Wellcome's share capital. It was a giant by itself in the pharmaceutical industry. Its claim to fame was with the success of its anti-ulcerant, Zantac. Zantac gave stiff competition to SmithKline’s Tagamet. Zantac’s marketing was brilliant and it became the best selling medicines of all times. SmithKline Beecham was a transcontinental pharmaceutical and healthcare firm, which sparked a wave of mergers of pharmaceutical companies that spanned the following decade. Beecham and SmithKline Beckman (SKB) were two average companies, both running out of internal options: SKB had failed in its efforts to replace the income stream of its main blockbuster drug (Tagamet) but had an aggressive sales force in the US. Beecham was essentially a consumer goods company that had been successful in early research on antibiotics. Culture at Beecham was very British, actually the old British.: for example, the buildings had separate dining rooms for different grades of staff and managers and there was even a 'members only' bar at Beecham House (i.e. head office). Beecham never had the mass or the competencies to become a serious pharmaceutical player but it and SKB felt threatened as potential takeover targets. The amalgamation of Beecham and SKB was lengthy and relied on a combination of benchmarking like continuous improvement efforts and process re-engineering. Initially the integration process resulted in a great deal of uncertainty for the workforce as stringent demands were made on individual managers, who were not given their new responsibilities until after the integration plans and new organization structures were approved. On looking back, however, the prolonged integration process was actually a success. Top management invested substantial time and effort to create a new culture, also called the simply better way' or the SB way. This initiative introduced new methods to measure and reward individual performance. At the same time, managers worked together saving the best of each group. For example, the more street-wise and marketing orientated Consumer Healthcare workforce which was largely from Beecham was encouraged to cross-connect with their pharma colleagues. The 'Leadership and Development Review' was set up to facilitate that this sort of cross-interaction went along nicely with the career development plans of staff. The company thus tried to live its values of innovation, performance, integrity, people, customer: something quite new then. Continuous improvement was a big thing - 'plan, do, check, act' for doing anything and 'situation, target, proposal' for all reports. The more laid-back British approach of the Beecham group was replaced by a process orientated way of working. Even the old dining habits were caught in the process of change: Beecham House now had a single canteen for all employees and another set up down the road at New Horizons Court, where the corporate headquarters was. In short, there was a 'reward and celebrate' culture and SB people in general were genuinely proud to work for their company. By 1994 there was an atmosphere of success about SB. Processes, procedures and corporate culture had come together in harmony. The company had grown and developed critical mass in new geographical markets, especially Central and Eastern Europe. The amalgamation really felt like a merger of equals and the company went at great lengths to show this to the outside world. The share price just rocketed. This also benefited employees that had taken advantage of the very generous 'buy one get one free' share plan. Indeed, the canteen at headquarters even had a screen with the share price and people talked about it obsessively. Through amalgamation both Beecham and SmithKline Beckman tried to keep up with critical mass in R&D, as the combined research budget doubled, but total R&D expenditure still lagged behind the likes of top firms such as Glaxo, which was outspending them two to one. At the same time, some managersfelt the SB Way initiative was running out of steam. With such background, its merger with its arch-rival became the hottest news in the entire business world. At that time Glaxo Wellcome was on the verge of becoming the world’s largest pharmaceutical company. There were feelers sent across the industry when it started withdrawing its drugs from the market. The company had recalled three of its products – Raxar that was an antibiotic, Romozin, that was a drug for diabetes and lastly Lotronex that was a drug for irritable bowel syndrome. Even the latest launch Relenza, that was a drug for Flu but was not performing as per the expectations. The withdrawal of Lotronex was the most surprising because it was a potential billion dollar drug and it was withdrawn on safety grounds. According to K.A. Ananthram,(domain-b.com/companies)this looked like the final straw. He says that Glaxo’s core competency was commercial and marketing brilliance as it shifted its focus to innovation. Although it proceeded in the direction of innovation, but neglect of marketing proved detrimental. He feels that two major events took place together that pushed the company towards merger:- The chairman of the company changed and the patent of Zantac ran out. Sir Richard Sykes who was appointed as chairman, was into research and development before. He had the idea of making Glaxo into an innovating giant. As the patent of Zantac was running out, Glaxo pushed Lotronex to treat the condition of irritable bowel syndrome. But the aggressive marketing was caught in rough weather due to tough US regulatory environment. It had serious side effects and even had three fatalities. Glaxo had spent millions to develop this drug but it had to be withdrawn. Relenza, the drug for fighting flu also had side effects, but not so severe as Lotronex. Ananthram feels that aiming for innovation should be appreciated but such scientific achievements require flawless handling of the entire process to convert it into commercial success. A company cannot claim to be a pioneer in innovating new medicines and new molecules unless it has tested all its safety and efficacy aspects at the clinical trial levels. It is not that Glaxo overlooked the clinical trials but all clinical trials have a limited number of case studies. Unless the product goes out in the market, the rare effects cannot be noticed. Unfortunately Glaxo faced adverse side effect reports for all the four drugs in a row- Lotronex, Romozin, Relenza and Raxar. Prior to this Glaxo had a two-pronged strategy. It reformulated old drugs and introduced new ones. Major efforts were taken to reformulate the well established drugs into other variants and focus on marketing them. Imigran, a drug for migraine and Zofran, a drug for chemotherapy related nausea were two such products that kept the cash registers ringing. Although Ananthram finds its shift to innovation the major cause of its decline leading to its merger, he appreciates its innovative efforts and feels that if it was backed by very extensive clinical trials and very brilliant marketing then it would not have faced merger. The announcement made at the time of merger by Sir Richard Sykes also sounded similar because he felt that the merger will allow them to have enough funds to be invested in research which according to him was essential to outperform the industry (.Pharmaceutical Executive, May 1999, p. 37) . The escalation in the cost of research had become a stumbling block for the entire pharmaceutical industry. According to the British Pharmaceutical Industry, the cost of innovating a new drug was 350 million GBP approximately in the year 2000 which was also the year of the merger. In three years time this cost had escalated to 500 million GBP. As a result the yea 2001 saw the launch of only 24 new drugs. In year 2002 it dropped to just 17. The returns on investment on R & D became very poor. According to Goldman Sachs, the US investment Bank, the R& D investment had become as high as 35 billion in the year 2001, which is double the amount in the year 1997 and triple of 1992. These figures spell out the need of a solution to maintain the cost and still stay ahead in the race. This has been a problem for both the US based companies and UK or European companies. Glaxo and SmithKline was not the only merger in its time. Pfizer also took over a $ 60 Billion US based Pharmacia. It helped Pfizer to increase its world market share to 10% from the previous 6.7%. It is important to note that GlaxoSmithKline captured only 6.9% of world market share. When this deal finally took place in 2003, Pfizer became the number 1 in US, jumped from previous number 4 to number 1 in Europe, jumped from the previous number 3 to number 1 in Japan and also in Latin America. The reason behind GlaxoSmithKline not being able to touch the heights of Pfizer was not the lack of research or the failure of the same but the timing was such that they had to shift their focus renewing of the licensing agreements as mast of the patents were running out. At that time it had 125 drugs in the pipeline but that was not the prime focus. As a result, it bought licenses for marketing 40 drugs from other companies. This number was not only double the number it had acquired between 1988 and 1997 but it was also higher than the average acquisitions by top 20 companies of the industry, that was 31. The main reason behind the merger was improvement in R& D by both the companies. They had anticipated a saving of 1 billion GBP, in three years time. After two and a half year, they did bring the cost saving to 1.8 billion GBP. Now it had achieved what it had aimed for. The profit margins also grew to 35 %. With the success so far, a second stage of cost cutting was also announced by the head, Jean-Pierre Garnier. The next point of the merger was to reinvest this saving into R& D. it planned to reinvest 250 million GBP into R & D and have a budget of 2.4 billion GBP, next to only Pfizer. Since both the companies were strong in research prior to their merger, the possibilities looked great. Glaxo’s strength was automated technology and SB’s strength was in genomics. The four drugs that were in the pipeline of SB were prime attraction to Glaxo. The new head, Jean Pierre Garnier was very clear that old methods had to be changed and new methods must be tried. His plan was to reorganize the R& D to have 15,000 scientists across several time zones. It had a combination of centralization and decentralization. Discovery efforts were put into six small sub-units to escapes the bureaucracy routes. Drug development and clinical trials were kept in central co-ordination. Discovering new chemical entities requires scarce skills and expensive equipment. For this two administrative divisions were created, one for the Genetic research and the other for traditional Drug Discovery research. Genomics was an area in which they had an advantage. With the merger they acquired 500 patent filing for genomic based drugs. Just after the merger, SB had put two genomic based drugs for clinical testing- one for treating obesity and other for treating Hypertension. In 2000 six sub units were created – one in Italy, 2 in UK and 3 in US. In 2003, a seventh one was created which was Centre of Excellence for Drug Discovery. It was designed to concentrate on biopharmaceuticals. This unit called CEDD, co-ordinated 24 R&D sites that existed prior to the merger across the world. CEDD was created to help these units work semi autonomously without facing the bureaucratic hurdles. Based on the lines of biotechnological firms, big share options were introduced that offered royalties to the scientists on the sale of medicines invented by them. After merger GSK also intensified its clinical trials. It was expanded over the continents and all efforts were taken to comply with the strict regulatory conditions. All factors like uniformity, global reach and regulations were adhered to. They even made links with Japanese Pharmaceutical sector to strengthen the links. It was seen as a very big achievement as it meant entry into the Japanese market. Other alliances were also made outside US and Europe that were their home areas. They signed a deal in India with a local company Ranbaxy for development of NCEs although they are competitors in the US market. Despite of all these efforts, there were questions still being raised on the success of the merger. Since the main objective was improvement of R& D, all eyes were focused on the seven biotech units. There were doubts about the autonomy granted to them as to how much autonomy was actually granted. CEDD was also a centre of concern on its potential to improve productivity. At the time of merger both these companies had product lines that were overlapping. Both of them were weak in cancer and cardiovascular disease treatment drugs and both of them were strong in gastrointestinal, antibiotics and nausea prevention drugs. The other factor was that only 7 per cent of Glaxo Wellcome's sales depended on drugs whose US patents expired before 2006 as compared to SB's 33 per cent. GlaxoSmithKline was therefore born with assured income streams given patent protection and the fact that no single drug accounted for more than 12 per cent of sales. Thanks to this, GSK was protected from the sudden-death syndrome that afflicts some companies when their blockbuster looses protection. Assured income streams also gave GSK managers some slack time to test the efficacy of the'radical' new organisational structure. In 2002, however, GSK only had 42 new chemical compounds in early-stage clinical trials. Few of these would actually make it to the market and questions were being raised as to whether the company might or might not maintain its growth rate while eventually successful drugs slowly made their way to market. A few interesting medicines were launched between 2000 and 2003 but most of them were acquisitions from other firms and they did not do too well in the market also. There were too many reorganizational activities in the first three years. There were frequent changes in team structure, change in location, change in plans and the global expansion actually lengthened the time for the product to reach from the laboratory to the market. To discuss promising drug candidates with analysts and investors, a Research Day was organized by the company in 2003. This was the first meeting of its kind after the merger in 2000. Through this meeting, the GSK management team wanted to reassure its investors about the long term growth prospects. They wanted them to know about he potential blockbuster drugs in the pipeline. So far the industry had been waiting to see the results of the cost cutting and reinvestment into the R&D but nothing concrete had surfaced. Despite GSK’s telling the investors about their 147 projects in clinical development including 82 new chemical entities (NCE0, 45 product line extensions (PLE) and 20 vaccines, the investors were not convinced. These numbers were bigger than the 2001 figures. The main reason of disbelief as pointed out by Max Hermann, analyst at ING Barings, was the poor record of the company to take the products from phase III trials to the market. (Financial Times, December 03, 2003.) Even three years after there was very little visible signs of success. GSK was mostly dependent on the licensed products like Levitra- Bayer’s impotence treatment drug, and cost saving to help in short term growth. But Garnier still stood firm by his decisions and made statements like "Miracles don't exist, but you will see that R&D has changed at GlaxoSmithKline. It has taken hard work and painful choices."( Financial Times, May 01, 2003.) The differences of the working culture of the companies also mattered as the employees felt the two distinct cultures still existed. It had failed to give birth to a new work culture and a new identity. The employees felt and behaved much like an ex Glaxo or an ex SB employee. But this was on the internal level. To the outside world they looked like a huge entity. The question is still hanging in the air whether the merger helped them to grow? But at the same time there is another question that looms large is that what would have happened if the merger had not taken place. Possibilities are being explored whether GSK should look for a new amalgamation. But the company head Jean-Pierre Garnier feels that the move has been successful and they have made profitsof £3.7 billion in the first six months of 2003, up 9 per cent on 2002, or 18 per cent if the effects of the depreciating dollar versus sterling were stripped out. Turnover was up 6 per cent in constant currency terms, with disappointment only in the consumer goods business. Moreover, GSK was strengthening its presence in the global market for over-the-counter (OTC) drugs and was due to present its portfolio of new drugs to investors at the end of 2003. Garnier hoped to announce a drug development pipeline positively alive with exciting new products. However, somehow that message had proved hard to sell. According to Dr Peter J Machin of Glaxo SmithKline, all mergers come with uncertainity, insecurity and fear of the future. But at the same time opportunity and choice also come from the chaos and change. He talks about three choices that this merger offered. It offered a complete choice to start on a blank sheet of paper to create something completely new. The second is a situation of No Choice because some things have to be done because of the merger. The question is if it can be done to add value. The third is the best choice that come by combining best practices from the two organizations to create “a whole that is greater than the sum of the parts” to get more value. According to Oliver Morgan ( The Observer, Sunday July 21, 2002) the demise of blockbuster treatments, and pipelines running dry, pharmaceutical companies are increasingly feeling the urge to merge. But recent history shows it is not the solution. The GSK merger promised to increase R& D and bring new products But two years after the merger, it has not launched one financially significant product. On the other hand, it has cut around 1,500 jobs. And now chief executive 'JP' Garnier is talking about a merger with another 'good pipeline' company. He wonders whether the cost cutting was done by job cutting. At the beginning of June, attention fell on Bristol Myers Squibb in the US - and it resulted in reeling down of GSK's share price by 5 per cent as analysts dismissed BMS's 'bad pipeline' 'The outlook is pretty pedestrian,' says Nigel Barnes, analyst at Merrill Lynch. 'They have exceeded their promise on savings, but these are one-off and, going forward, there are problems.' But beyond defensive reasons there is no other logical reason. If companies had really good blockbuster products such as Zantac or Prozac, would they be so desperate to merge? Actually it is the demise of the blockbuster that is widely seen as the driving force for mergers. Some analysts like Barnes point out that treatments such as Lipitor and Celebrex are generating revenues that do give them blockbuster value,even if it is not the status of a Prozac or Viagra. In fact the forces at work are much more subtle. Companies come together to merge R&D and to fill in pipelines. For example, at the time of the GSK merger, Glaxo who was traditionally strong in respiratory treatments, benefited from SB's Augmentin antibiotic and Paxil anti-depressant. But in the absence of life-changing drug franchises, there are mere structural reasons that are driving mergers, and that is why there is no long-term growth. 'The economics of the industry make it difficult to keep the growth that the markets became used to 10 years ago,' says one industry source. As Richard Ley of the Association of the British Pharmaceutical Industry points out: 'The industry is quite fragmented. Even Pfizer has only 7.3 per cent of the market', which, before the merger with Pharmacia was the biggest in the world. At the same time, marketing and distribution networks have become vast as markets for treatments have grown and products have become more specialised. Barnes says: 'At the time of the GSK merger there was great hope in the productivity advancement of research using genomics. But that deal fell down on R&D productivity. It has never been able to get enough commercially significant product to justify the big sales base.' Companies are also finding margins squeezed by more aggressive purchasers, from insurance funds in the US, to national health systems, like the UK NHS through the National Institute for Clinical Excellence. So while worldwide sales growth is still running high, earnings growth for big players has fallen from that level 10 years ago to around 12 per cent now. The gap is being filled by generic medicines - cheaper versions of drugs developed by the majors - providing value. The generics industry has seen enormous growth over the past 10 years, with big companies such as Novartis developing their own offshoots. The nightmare for a big company is to see patent protection offered on a £500m investment blown away by generic challenge. This is what happened to GSK earlier this year, when its Augmentin patent was challenged and generics companies like Novartis's Geneva - offered cheaper alternatives. Thus we can conclude that it is not enough to improve the R& D to improve the turnover. The equivalent marketing efforts also need to be pushed up to translate the new developments into high rate of growth and market share. The possibilities of more mergers can not be ruled out, in fact it has become even more evident in the light of spiraling costs for companies to merge and pool their resources for development. We hope they go for an overall improvement and actually do not use merger just to save themselves from disappearing from the market scene forever. Reference: Oliver Morgan,Sunday July 21, 2002,The Observer The Pharmaceutical Journal Vol 265 No 7106 p123 ,July 22, 2000 Business The Observer, Sunday July 21, 2002 Bbc news Monday, 18 December, 2000, 11:25 http://education.guardian.co.uk/businessofresearch/story/0,9860,759741,00.html Dr Peter J Machin, GSK, Harlow, Essex, Maintaing and growing business through the GSK merger, Financial Times, December 03, 2003.GMT Pharmaceutical Executive, May 1999, p. 37 . Financial Times, May 01, 2003. domain-b.com/companies Read More