Proposed Combination Of Pfizer Pharmacia Company example essay topic

An avenue that Bristol Myers Squibb can and may be forced to consider as a remedy for its pipeline problems is a Merger & Acquisition strategy. With the economic downturn in full force the pharmaceutical industry stands out as an exception to the wait-and see mood of the markets. Mergers and Acquisitions in pharmaceuticals and biotechnology sector have actually sped up as companies try to survive in a market that demands high returns to offset skyrocketing R&D expenses and lost revenues as high revenue drugs come off of patent. In addition to soaring R&D costs, pharmaceuticals are facing unprecedented competition, and the need to come up with new products to fuel their pipelines in greater than ever. Pharmaceuticals are also coming to the realization that the products they launch tomorrow will not come from internal research any longer, but more likely will come from the biotechnology sector. Consequently, M&A activity is increasing as Big Pharma attempts to secure intellectual capital with the excess cash holdings from their balance sheets.

Mergers between biotech and pharmaceuticals has intensified as a result of the scarcity of venture capital during these recessionary times, as biotech's are being forced to turn to Pharmaceuticals to sustain the cash flow needed to continue their R&D projects. At the same time a new wave of Pharmaceutical-Pharmaceutical M&A appears to be upon the sector as firms look for a quicker way to secure products and the revenue streams they generate. Globally, there were 374 M&A deals announced in the health care sector in 2002, more than 80% in the biotech and pharmaceutical sub-sector, which represented 12% uplift on the number of deals announced in the previous year. Included amongst these deals was Pfizer's proposed $60 billion combination with Pharmacia, perhaps signifying the return of the mega merger trend which dominated the industry in the late 90's. The key drivers behind M&A in the pharmaceutical sector were as strong as ever in 2002; big pharma companies need to fill their R&D pipelines and replace drugs coming off-patent, and biotech companies need access to cash to develop their products and bring them to market. Pfizer's combination with Pharmacia represents the first mega-deal in the sector since Glaxo Wellcome's merger with SmithKline Beecham in 2000, and is the sectors third largest ever deal.

As with many of the smaller deals in 2002, access to new products is a major factor behind the deal. In the bull market many companies made acquisitions designed to give them access to the wide array of technology platforms being developed by biotech companies. In these more difficult times the product is once again king, and this is reflected in the top ten deals. Of the eight acquisitions made by corporate rather than private equity-backed acquirers, no less than seven had a product-based rationale. M&A can be driven not only by ambition, but also by necessity, and strategically the drivers for M&A in the pharmaceutical and biotechnology sectors remain as compelling as ever.

Furthermore, with the mega merger of Pfizer and Pharmacia the landscape of the Pharmaceutical industry is once again changing. Bristol Myers last venture into the M&A world yielded them Dupont Pharmaceuticals in a $7.8 Bln deal in 2001. In line with the companies desire to solidify its product pipeline it was attracted to Dupont's strength in virology and cardiovascular businesses. Unfortunately not much has gone right for BMS since this acquisition.

It was nearly a year ago that Bristol-Myers Squibb was forced to reveal that wholesale inventories of its medicines were too high in the U.S. and that reducing them would hurt 2002 earnings. BMS's shares dropped 15% on the announcement, but that came on the heels of a 15% drop 10 days earlier when management announced poor results for a new drug that was expected to be a blockbuster, and that after the Im Clone Systems debacle. So in coming off of a particularly difficult year where its stock price has fallen from $54.20 to $24.70 and its market cap has fallen to an all time low of $46 Bln BMS should strongly consider a major move to try and right the ship. These solutions include, selling outright, merging with an equal partner or acquiring a promising smaller company. Given its sagging stock price and weak balance sheet the most viable option for BMS and its shareholders may be to sell route.

The competitive pressures in the industry have been heightened as a result of the Pfizer-Pharmacia merger and if firms wish to remain competitive with this giant of the industry another round of Pharmaceutical consolidation is probably on the horizon. BMS is far more likely to be an aquire e rather than an aqui ror. It is important to stress the reasons behind a sell strategy: - In light of the Pfizer Pharmacia deal competitive pressures in the industry will force all players to take a fresh look at themselves and realize that it will even more difficult to compete on equal footing with this new giant. - A poor financial showing in 2002 has reduced BMS market capitalization to an all time low of $46 Bln, with a number of scandals fresh in everyone's mind, inventory and pipeline issues still unresolved being acquired may be the only way for the shareholders to realize a truer value of the firm.

- From an economic perspective an M&A deal will allow BMS to realize economies of scale and synergies. Pooling R&D potential, streamlining sales forces and marketing campaigns and slashing top management will all lead to cost savings. In the case of the Pfizer-Pharmacia deal cost savings are estimated at $1.4 billion in 2003, $2.2 billion in 2004 and $2.5 billion by 2005. - BMS's current financial reality makes other M&A strategies very difficult to execute.

The predatory nature of this industry would most likely see competitors outbid BMS in any takeover attempt they initiate. For all of these reasons BMS's best option for solving its current woes is to allow itself to be acquired by a major competitor. As for possible partners for BMS, the most likely appear to be Glaxo Smith Kline (GSK) or Wyeth (formerly American Home Products). GSK faces the same problems as the rest of the industry, competition from generics and the need to shore up its pipeline and existing drug portfolio.

A merger or acquisition of BMS would be appealing given that there is little conflict between the two company's product portfolios. The combined firm would be more competitive in a wider range of fields. While GSK is strong in the areas of HIV and gastro-intestinal medicine, BMS's portfolio of cancer and anti-depressants drugs would make it a nice addition. Another potential partner would be Wyeth for many of the same reasons, little overlap in product portfolio and strong presence in both the prescription and over the counter market. A third benefit of the combination would result from the firms nutritional products divisions. Wyeth is strong in most overseas markets and BMS is strong in the United States.

A combination would produce a company that would become a dominant force in the global nutritional market. One hurdle to a Wyeth-BMS combination is the relative small market capitalization of Wyeth. If a larger company decides to enter the bidding for BMS, they will easily be able to outbid Wyeth as was the case when Pfizer outbid what was then American Home Products which had agreed in principle to a merger with Warner-Lambert. The proposed combination of Pfizer - Pharmacia company will create the world's largest Pharmaceutical company more than twice the size of the next competitor. The proposed merger has set a new level for big pharma to aspire to, with combined pro-forma ethical sales expected to top $40 billion. What is certain is that Pfizer's move will spark a round of consolidation within the pharmaceutical industry as firms strive to remain competitive.

As the industry prepares for a new round of mergers and acquisitions, patent expiry of blockbuster drugs should become a factor. The potential for generic competition to decimate revenues is perhaps the key factor influencing Pfizer's decision to merge with Pharmacia. Companies with a high dependence on drugs that have lost patent protection are forced to devote resources to safeguarding these revenue streams; this is clearly the spot that Bristol Myers finds itself in. For financially strong firms, one solution to the short- to mid-term revenue gaps is to acquire another company, maximize the opportunities presented by the marketed portfolio and hopefully strip out some costs to keep the bottom line growing healthily. For firms such as Bristol Myers, facing more dire realities being on the receiving end of a acquisition is a best case scenario and possibly there only hope for remaining competitive and generating any sort of return to their shareholders. Finally, and perhaps most pertinent in the current market, the need to maintain a competitive edge is a key driver for M&A. This may involve acquiring new technologies to promote innovation or acquiring sales and marketing expertise to boost share of voice.

It may facilitate geographic expansion and aid new market penetration, as would be the case with a combination of BMS with Wyeth. The announcement of the planned merger of Pfizer and Pharmacia has changed the competitive landscape, and has forced a number of other companies to re-evaluate their potential future as independent entities. Bristol Myers Squibb would be wise to lead this bid at rebalancing the industry and should strongly consider merging and consolidation options with other large Pharmaceuticals. The firm cannot survive on its own and an acquisition of a smaller firm will not be sufficient for them to remain competitive. While being acquired may be the best the best strategy for BMS and its shareholders, the firm must be weary of the downside of this option. Namely, loss of independence, the probable loss of numerous top management positions, potential drug divestment requests by the FDA which can force firms to sell off drug lines upon firm combination and foregoing the chance that they may be able to stabilize on its own.

The downside from a shareholders perspective is far more limited and this group would probably be most in favor of this suggested strategy.