big pharma m&a

Big Pharma M&A- Growth Drivers or Resistors ?

Amit RangnekarNMIMS-PhD-2004

Big Pharma M&A- Growth drivers or resistors ? 1

Amit Rangnekar NMIMS-PhD-2004

The urge to merge sees a surge “It is clear that you cannot stay in the top league if you only grow internally. You cannot catch up just by internal

growth. If you want to stay in the top league, you must combine.”—Daniel Vasella, Chairman & CEO, Novartis,

July 2002

Big Pharma (major pharma players) has blazed a trail of M&A activity since the 1980s, crossing 50 deals

totaling more than $ 500 Billion, making it the second most active industry in M&A after the Banking-

Finance sector1. Many of the huge behemoths created by intricate deals are known today by unfamiliar

names, difficult to recollect for people not watching the industry on a daily basis.

Well known names like Hoechst, Glaxo, Ciba, Sandoz, Beecham, Warner-Lambert and AHP, have

suddenly vanished and Aventis, Novartis, GSK, Sanofi have emerged. However names like Pfizer, Merck,

Johnson & Johnson and Roche continue.

Mega-mergers are driven by the need to consolidate, ensure better reach, and therapeutic coverage. On

the other hand, significant strategic mergers have ensued to lower the cost of drug discovery, and partner

promising drug innovators. The M&A activity till the turn of the century was aimed at building market share

and reducing costs, but today consolidations are more pipeline and geographical reach driven.

Exhibit 1 ; 1998-2004 Big Pharma- M&A Deals

0

20

40

60

80

100

120

00.511.522.533.5

Deal Value ($ Bn) 68 114 76 0 60 0 65

No of Deals 3 2 1 0 1 0 1

1998 1999 2000 2001 2002 2003 2004

Pharma M&A deals have increased in size, but reduced in frequency. 1998 saw 3 major deals

(AstraZeneca, Aventis and Sanofi-Synthelabo) but total value was $ 68 Billion, while 1999 saw 2 mega

deals (Pfizer-WarnerLambert and Monsanto-PharmaciaUpjohn) yielding $ 114 Billion, the highest ever.

But since 2000, there has been only 1 significant deal every alternate year- GSK in 2000, Pfizer-

Pharmacia in 2002 and Sanofi-Aventis in 2004. This period has also seen a number of convergence

deals or strategic acquisitions to increase therapeutic coverage, market reach and reduce drug discovery

costs. This trend is likely to continue as companies look at alliances in every sphere of the value chain.



Pharma M&A strategies

Consolidation

Exhibit 2; M&A leads to consolidation in market share and R&D spend

Merger Impact on Top 10 Company Market Share (%)

28 30 32 40 46 47

Major Merger HMR, GW Novartis AstraZeneca,PfizerWarner,GSK, Aventis

PfizerPharmacia

Sanofi Aventis

1990 1995 1996 1999 2002 2003

The Top 10-R&D Spend ( %)

36

47

54

1994

1999

2004

(Data Source-IMS Annual Review)

The last few years of M&A activity in the global pharmaceutical industry has further consolidated the grip

of Big Pharma. The Top 10 companies now account for 47% of the world pharma market, up from 28% in

1990 to 30% in 1995 to 47% in 2004.

This market share consolidation is also reflected in R&D, where the contribution of R&D spend of the Top

10 companies has significantly increased from 36% in 1994 to 47% in 1999 to 54% in 2004. Whether this

consolidation leads to R&D synergies or enhanced pipelines remains to be seen.

Remarkably, the Top 5 companies market share in 2004 is 28 %, while its R&D spend is 36%. It looks

certain that the Top 5 would form their own premier league, wielding more influence than traditional Big

Pharma in years to come. This race for the premier league would fuel future pharma M&A activity.

Interestingly, since 1983 there have been as many as 5 companies who have enjoyed the top spot albeit

for a short time, with Pfizer holding onto it since 2000. Other numero unos have been Hoechst throughout

the 1980s, Merck in the early 1990s, Novartis in 1996 and GSK in 1999. Except Merck, all the companies

have taken the M&A route.

Surprisingly, 90% of the M&A deals are in the same country or continent. US companies have traditionally

acquired only US companies (Pfizer-WarnerLambert-Pharmacia, BMS,Wyeth) while the Europeans have

either acquired companies from the same country (Sanofi-Aventis, GSK, Ciba-Sandoz) or from another

European country (Astra-Zeneca or HMR-RPR). The only Trans-Atlantic M&A exceptions in the last 15

years have been Hoechst-MMD, Pharmacia-Upjohn and SmithKlineBeckman-Beecham.



Exhibit 3; The No 1 rank from 1983-2003, musical chairs Year and Rank Big Pharma Origin

2003 2002 2000 1999 1996 1993 1990 1987 1983 Growth Model

Pfizer US 1 1 1 2 8 7 10 6 M&A GSK UK 2 2 2 1 2 2 2 M&A SanofiAventis Fra 3 5 8 8 4 4 7 1 1 M&A Merck US 4 3 3 3 3 1 1 2 2 Organic J&J US 5 6 7 7 6 8 Organic AstraZeneca UK 6 4 4 4 10 M&A Novartis Swi 7 7 6 6 1 8 5 3 3 M&A BMS US 8 8 5 5 5 3 3 8 M&A Wyeth US 9 10 10 10 7 6 M&A EliLilly US 10 9 9 7 Organic (Note-Highest ranked company of the merged entity considered for the year, Shaded box indicates company was not in the Top 10

in that year, SanofiAventis’ rank from 1983 to 2002 is the rank of Hoechst from 1983-1993, HMR till 1996 and Aventis till 2002. Data

sourced from IMS and Scrip annual reviews. )

However, large mergers are subjected to tighter regulatory scrutiny, hence taking longer to complete. In

future, big mergers may also attract global monopoly provisions and anti-trust laws.

Convergence

“The real question, therefore, is not whether you should merge and acquire, but with whom, when, for

how much, and how to realize strategic value.” Barbara Ryan, MD, Deutsche Bank

Convergence looks at periodic, smaller, smarter, strategic acquisitions and alliances. Convergence would

emerge strong in areas of drug discovery, biotech, drug design and drug delivery. Convergence would

require a focus, long term strategic planning and capabilities to speedily integrate and internalize

opportunities. Illustrations of some convergence strategies pursued are:

Johnson & Johnson (J&J), is an excellent example of a company with a superb business spread, but

within healthcare. It is almost as big as Pfizer in terms of group turnover. J&J has a major presence in

prescriptions, sanitary care, OTC, surgical care, diagnostics and biotech, important segments within

healthcare. J&J has recorded 72 consecutive years of growth and significantly, the company is no longer

regarded as only ‘pharma’. J&J is the undisputed leader in stents, a new focus area and one with lot of

potential.

The only major takeover it undertook was Alza, leaders in technology platforms for transdermals and

biotech. This was strategically significant as it gave J&J an impetus in biotech and novel drug delivery

systems (NDDS). J&J has a host of strategic alliances with smaller players in allied areas of the drug

discovery process. The J&J model confirms that only an outright acquisition may not generate a sufficient



payback unless it is part of a specific strategy, and that a portfolio of alliances would probably be more

beneficial.

A key strategy used is to form strategic alliances in every sphere of operation including drug discovery,

drug delivery and co-marketing or leverage in/out your strengths with willing partners. Sanofi-Synthelabo

emerged as a major pharma player purely through strategic alliances and in 2004 gobbled up Aventis, a

pharma major more than twice its size, to emerge as the 3rd largest pharma player in the world.

Boehringer Ingelheim, has leveraged its drug discovery strengths with Big Pharma, resulting in its brands

becoming blockbusters on the world stage.

Many companies have acquired their former alliance partners after brief courtships, akin to “dating before

marriage”. This gave both partners more time to understand each other, before taking the plunge. The

Japanese market, the second biggest in the world has seen most JVs between MNCs and the local JV

partner culminating into acquisitions.

Biotech- Eligible Bachelors

The biotech companies are the most sought after, due to the sheer industry potential in areas of unmet

medical needs. No Big Pharma can afford to ignore biotech as it has consistently reduced the drug

discovery time for molecules, an area of great concern for Big Pharma. Biotech emerged as a force to be

reckoned with, as the Amgen/Immunex merger showed in 2002. The market cap of Amgen in 2002

zoomed to $60 billion—more than Aventis and Pharmacia2. Amgen is today a clear leader in the biotech

sector and a major pharma player with an enviable pipeline and a speciality portfolio. Biotech is an area

where Big Pharma like J&J, Roche and Wyeth have achieved spectacular success in convergence deals

with smaller biotech companies in areas like Cancer, Psoriasis and Arthritis.



Key pharma M&A drivers Exhibit 4; Rationale for major pharma M&A Year Company Company Merged

Entity Rationale

Hoechst (Ger) Marrion(US) HMR US Reach 1995 Glaxo (UK) BurroughsWellcome(UK) GW Dilute Zantac expiry impact, size

1996 Ciba (Swi) Sandoz (Swi) Novartis R&D synergy, size, US reach, World No 1

1998 HMR (Fra) RhonePoulencRorer(Fra) Aventis Size, European consolidation Astra (Swe) Zeneca (UK) Astra

Zeneca World No 4, reach, therapeutic leadership

1999

BMS (US) DuPont (US) BMS AIDS market access, synergy Pfizer (US) WarnerLambert (US) Pfizer World No 1, Lipitor future potential 2000 GW (UK) SmithklineBeecham (UK) GSK World No 1, US reach

2002 Pfizer Pharmacia Pfizer World No 1 rank consolidation, R&D synergy, Therapeutic spread

2004 Sanofi Aventis Sanofi Aventis

World No 3, European No 1, R&D synergy, Therapeutic spread

R&D productivity

"With a bloated R&D organization, companies have a harder time forcing difficult changes necessary to improve

R&D productivity. The challenge is to harness their brainpower in a way that produces a return on the massive,

long-term investment in their labs." Dr Traber, Ex-Glaxo Research Head.

The total pharma R&D spend for 2003 crossed $ 60 Billion (13%), on sales of $ 466 Billion3. Pfizer spent

$ 7 billion on R&D, the highest in the industry. The discovery cost of a new molecule in 2004 is almost $1

Billion and out of 5000 molecules researched, only 1 gets to the market. The total time required to get a

USFDA approval to market a new drug takes 12-15 years4. The patent for a drug generally is 20 years

from the patent application, and not from the date of launch. Effective period for which the patented drug

can be marketed (Harvest period), has shrunk to only 4-5 years today considering the 20-year patent

period and 15-year discovery period. Among new drug approvals, only 20% make money.

Originality is an issue, as lesser number of 1st in class drugs are being discovered. Most new drugs

approved are either salts / isomers of an earlier product, or a new formulation, or same in class

molecules. Significant advances or entirely new class of molecules are not forthcoming except for a few.

Also, the number of molecules approved by the USFDA in 2003 has shrunk to 30 molecules, from 48 in

19985. Drug withdrawal/call back rates are also high and there are increased drug safety concerns. A new

drug failure can threaten a company’s existence and make it a potential acquisition target.



However, Big Pharma M&A deals like Pfizer-Pharmacia, AstraZeneca and GSK resulted in major R&D

and therapeutic synergies due to complementary portfolios and pipelines.

Barren pipelines

“GSK needs 5 new drugs each year to grow adequately, they are far from being there” Jan Leschly, CEO, SKB.

Inspite of the exorbitant R&D spend, drug pipelines of companies are quite barren, especially the late

stage pipelines. Many promising early stage molecules fail in the subsequent stages on counts of safety

and efficacy. Hence, companies do not get bigger in their strong therapeutic segments due to paucity of

follow-up drugs to bolster existing blockbusters. Companies tie up with smaller drug innovators to

minimize risks. Conversely, companies with promising late stage pipelines emerge as strong take over

targets.

In 1995, Glaxo’s Zantac, the world’s No 1 drug was nearing patent expiry. Envisaging a severe sales

dent, Glaxo took over Wellcome to bolster its pipeline and created one of the most successful and

profitable takeovers of all time. The Astra-Zeneca merger of 1999 too generated critical mass, synergised

portfolios, and propelled the company to the 4th rank worldwide.

Over dependence on blockbusters

Blockbusters, defined as brands with annual sales in excess of $1 billion, continue to drive growth. The

number of blockbusters are predicted to increase from 67 brands in 2003 to 105 by 20076. Companies

with blockbusters have the muscle and ability to focus and grow, but the exit of a blockbuster due to

patent expiry (generic), or due to safety concerns, can have painful implications for the organisation.

Companies dominant in the blockbuster arena have to be proactive to protect their franchise. Brand

reigns, earlier in decades and years, have now come down to months and days, as even a first-in class

drug cannot expect a window of opportunity. Companies like Pfizer have strong shock absorbers due to a

well spread out portfolio. Neurontin, the world’s biggest epilepsy drug faces patent expiry, but with only a

4 % sales contribution in Pfizer’s portfolio, the effect may not be severe. Secondly, Pfizer is also ready to

launch Lyrica, the follow up drug for Neurontin.

Patent expiries and Generic competition

On losing patent protection, products face severe generic competition that drives down the drug price.

The resultant sales erosion leaves a void that becomes difficult to fill in and may take years to recover or

makes the company a Zombie or a potential takeover target.



Generic sales erosion accelerated to 80% within the first 12 months of patent expiry in the case of

Prozac, EliLilly’s anti-depressant, in 20007. Generic companies are getting smarter in attacking franchises

and swiftly taking a significant percentage of the market.

Geographical footprint

“ To illustrate what our resources can achieve, if necessary Glaxo SmithKline could visit all 250,000 of America's

doctors, within a week” Sir Richard Sykes, Chairman GSK.

The US market accounts for almost half the world pharma market and obviously is the area where the

most sales and profits accrue. Pharma companies outside the US want to bolster their US presence to

increase their world market share, while US companies need to shore up their European and Asian

presence, to be counted.

Surprisingly, except SanofiAventis, Europe’s No1 pharma company, all other European pharma majors

have more sales in US than in Europe. In contrast, US companies have an average of 70% sales only

from the US.

Pharmacia, Swedish pharma major with minimal US presence, merged with Upjohn, medium sized US

company with limited European presence in a rare transatlantic merger. After initial problems, the merger

worked well before their takeover by Pfizer.

Therapeutic potential

Pfizer’s Warner-Lambert acquisition, history’s biggest pharma deal, was purely driven by the need to

acquire ‘Lipitor’, the anti-cholesterol blockbuster. Lipitor, under Pfizer, has gone on to become the first

ever drug to cross $ 10 Billion in sales and has been untouched by drug safety controversies that have

affected other similar drugs. Remarkably, the sales gap between GSK and Pfizer is the sales value of

Lipitor ($ 10 Billion).

Increasing marketing spend

Besides the obvious R&D spend, the marketing spend of companies especially in terms of promotional

costs and sales force costs have spiraled over the years. Employing a sales force of 5000 only in the US

is commonplace. Brands are promoted to doctors, free samples given for trials, gifts showered, drugs

advertised to consumers across all media, and events sponsored. Marketing, sales and admin expenses

add up to twice the R&D spend among the Top 10 companies. Spreading these costs over a bigger

portfolio and reducing the sales force proportionately can lead to substantial cost savings.



Shareholder pressure

Today, any company that doesn’t keep its promises to its shareholders is vulnerable. Besides the

competitive pressure, the internal pressure from the board and shareholders to deliver is also severe. To

deliver value and increase profits, CEOs take the M&A route to create corporate growth. This is one of

major drivers of M&A deals. Shareholder pressure is also severe, soon after a M&A deal.

During the acquisition talks between Sanofi and Aventis, Kuwait Petroleum, the major stake holder in

Aventis accepted the offer. The French government pressurized Sanofi to sweeten their final bid by 15%

in order to match the expectations of Kuwait Petroleum. Aventis had requested Novartis to play white

knight to ward off Sanofi, but the French government ensured Novartis’ withdrawal to facilitate the

creation of a French pharma conglomerate.



M&A insights- Crouching Tiger, Hidden Dragon “Historically, M&A deals do not deliver their full strategic value because 75% of all deals do not pay back their

cost of capital, and stock prices fall.” Suzanne Coles, Head-Strategy, CapsGemini E&Y.

As key issues drive the urge to merge worldwide, the common factor in these issues is cost reduction.

The perception of M&A in the pharma industry is that it strips down costs due to synergy, and reduces

work duplication. Although technically everything seems perfect, very few M&A deals actually succeed in

reducing costs over a long term, and still fewer provide shareholder value.

Companies, once bitten by the acquisition bug, go on to bigger deals. Once on the acquisition trail,

companies like Glaxo, Pfizer and Aventis have gone in for multiple M&A activity. The M&A deals are also

getting bigger and bigger although the frequency is abating. Creating today’s GSK cost Glaxo $ 90 Billion,

while Pfizer has sunk in more than $ 150 Billion in M&A deals to reach, and successfully maintain its No 1

position. What will be the value of the next M&A deal from GSK or Pfizer and will it be worth the spend?

Novartis, a result of the Ciba-Sandoz mega merger has not had a significant M&A thereafter, but has

quietly piled up a significant 33% stake in fellow Swiss pharma major, Roche. Although Novartis and

Roche deny a merger, it should be a matter of time before the marriage is solemnized. A Novartis –Roche

merger can create a Swiss pharma colossus, overtaking Merck, matching Sanofi-Aventis and GSK in

size, and seriously challenging Pfizer in pipeline and therapeutic coverage.

As the sheer size of the deals are getting larger, only fewer deals may be possible. The pharma majors

think that if only 1 major deal may be possible, they should channelise their resources and energy into

making it count in the long run, rather than for short-lived glory.

Pfizer’s mega deals may not have provided the best shareholder value, but they have been immensely

successful in creating therapeutic synergies, shoring up pipelines and consolidating Pfizer’s top ranking in

key markets. In 1990, Pfizer was the 14th largest pharmaceutical company in the world, and Warner-

Lambert was 21st. Neither had a single product in the Top 10 worldwide. But the deal ensured that by

2000, Pfizer had become the largest pharma company in the world with 8 blockbusters, 4 of the Top 10

global brands and leadership in 5 major therapeutic areas including cardiovasculars.

In 2003, Pfizer acquired 9th ranked Pharmacia, with major strengths in Pain and Ophthalmology

segments, a complementary pipeline and major US presence. This move helped consolidate its No1

position worldwide and also emerge No 1 in Japan. Although the Pharmacia name was wiped out from

day 1 and key executives exited, this did not affect Pfizer much due to its integration competence.



Pfizer emerged as a clear pharma industry leader with a distinct $ 10 Billion (33%) size advantage over

second placed GSK. Pfizer has been particularly successful over the past decade with its market share

almost quadrupling since 1993.

Cost Savings –Myth or Reality ?

"In general, M&A is the worst strategy for pharma companies as very few companies approach M&A with the rigor

required to maintain shareholder value. Egos get involved. In every case, there are fewer products coming out of the

pipeline later. Merging companies realize they have similar, parallel projects — and some get killed. Perhaps the

largest fallacy about life science mergers is that size of the scientific staff alone will put more new drugs in the

pipeline, if you had 600 researchers, it doesn't mean you're going to be twice as effective with 1200" Carol Rozwell,

VP, Gartner.

Exhibit 5; Major Pharma / Biotech M&A Deals Rank Year Acquirer Target Value

$ Bn Merged Entity (Country)

1 2000 Pfizer Warner-Lambert 87 Pfizer (US) 2 2000 Glaxo-Wellcome SmithKline Beecham 76 GSK (UK) 3 2004 Sanofi Aventis 65 SanofiAventis (Fra) 4 2003 Pfizer Pharmacia 57 Pfizer (US) 5 1998 Astra Zeneca 37 AstraZeneca (UK) 6 1996 Ciba-Geigy Sandoz 30 Novartis (Swi) 7 1999 Monsanto Pharmacia-Upjohn 26 Pharmacia (US) 8 1998 HMR RhonePoulenc 22 Aventis (Fra) 9 2002 Amgen Immunex 17 Amgen (US) 10 2002 Biogen Idec 15 Biogen (US)

(Compiled from various media sources) The Ciba–Sandoz merger of 1996 created the agro-chemical giant Novartis, resulting in substantial cost

savings from the first year itself, mainly through a layoff of 10,000 employees. Novartis systematically

reduced costs in R&D and the supply chain, but the major cost savings did not last beyond 3 years. The

much hyped follow-on merger of Novartis and Roche, can potentially yield much higher cost savings.

Upjohn and Pharmacia decided to close 40% of their plants in different countries after their merger.

Glaxo achieved some of the most aggressive cost savings in the history of pharma M&A with its friendly

100 day takeover of Wellcome. However, more than 10000 workers were axed. Savings were delivered

as shareholder value with a 400% increase in market cap in the 4 years following the merger8.

The Pharmacia-Pfizer merger resulted in synergies, size and spread but R&D budget burgeoned to $7

Billion, twice that of GSK. Incidentally the GNP of Jamaica during the period was $8 Billion.



A study conducted by Caps Gemini E&Y in 2003 on the ‘Cost savings of major mergers in the pharma

industry for the period, 1994-2002’ concluded that:

• Average deal time for pharma M&A was around 6 months.

• The Glaxo-Wellcome deal (100 days) and PfizerPharmacia 14 months, were the extremes.

• Average cost-savings were 7%.

• Average reduction in expenses was 9%.

• The Glaxo-Wellcome deal and the GlaxoWellcome- SmithKlineBeecham deal have been the

most successful with 11% cost savings each and 17% reduction each in expenses.

• The life sciences industry indicates a poor M&A performance with some conspicuous successes,

but 50-75% deals fail to yield significant or sustainable shareholder value, while 77% of all

industry mergers between 1990 and 2000 did not earn their cost of capital.

• Cost savings should be evident within the first 2 years as successful transactions achieve atleast

50% savings within the first 2 years, and reach full cost-savings target within 3 years.”

Considering that only 2 among all M&A transactions yielded true value, it clearly conveys that even if the

deal makes sound strategic sense and all parties are amenable, the payoff from a mega-merger is by no

means a certainty.

M&A pitfalls

“Mega mergers are counterproductive to creating innovation, destroys teams, scientific relationships and projects”-

Roche CEO Franz Humer, 2002, Financial Times

Acquisitions are more successful in the long term than mergers due to clarity and speed in decision

making, while decisions in mergers need approvals from both sides, which may take longer. The acquirer

exploits the products, pipelines and markets of the acquired to reap optimal shareholder benefits.

Major reasons for M&A failures are the high deal premium and the inability to effectively integrate. As

shareholder expectations pile up, the pressure to deliver value starts and leads to further complications.

Ironically, the biggest initial casualty is the R&D department where there is supposed to be synergy and

cost savings, but in reality there is a setback.

The high investment in the deal puts pressure to start generating returns. If cost reductions are not

evident, returns take longer and shareholder pressure piles up. The cost of integration, although not

monetarily significant, is a painful process leading to organizational upheavals, having a huge bearing on

the culture and future performance of the company. Layoffs further increase the uncertainty and the

spectre of redundancy permeates major departments like sales, R&D and manufacturing. This ultimately

becomes a vicious circle, especially if the synergies are not evident and the integration is incomplete.



After the initial rationalisation phase and the integration phase, it is time for the transformation or action

phase. Effective management of these 3 phases within a critical time frame is the key to M&A success.

Impact of growth strategies on pharma performance

A study of the Top 5 pharma companies of 1987, and the impact of organic and inorganic growth

strategies on their 2004 rankings, throws light on the importance of pharma M&A.

Companies following the organic growth model

• Merck, ranked 2nd in 1987 ranks 4th in 2004 but faces a plethora of problems, most serious, being

a potential takeover target itself.

• Bayer lost focus on pharma, faced product recalls, now on the verge of moving out of the Top 20.

• Takeda ranked 5th in the world in 1987, stands 16th today, even lost No 1 rank in Japan. .

None of these companies merged or acquired, opening a window of opportunity for competitive firms to

capture their market share. Conversely, the global market in the 1980s and 1990s was conducive for a

move by these major players to consolidate due to their size and resources.

Exhibit 6; Status of the world’s Top 5 pharma companies of 1987, in 2004 Rank 1987

(2004)

Company (Current Name)

Sales $ Bn 1987

(2004)

M&A status Status 2004

1 (3)

Hoechst (Sanofi Aventis)

3.4 (28.01)

• Acquired MMD to form HMR

• Acquired RPR to form Aventis

• Acquired by Sanofi to form SanofiAventis

• No 1 in Europe • 7th in US • Strong pipeline

2 (4)

Merck 3.2 (22.48)

• Organic growth model under fire, patent expiries, drug recalls

• No 3 in US • Japan Top 10 • Can be a takeover target

3 (7)

Ciba (Novartis)

3.1 (16.02)

• Merged with Sandoz to form Novartis, Acquired 33% in Roche

• Top 10 in US, Europe, Japan

• Strong pipeline

4 (19)

Bayer 3.1 (5.37)

• Organic model, Drug recall setbacks

• Not in any Top 10 list, Pharma future uncertain

5 (16)

Takeda 2.8 (7.37)

• Organic growth model, needs to look at M&A

• Ousted as Japan’s No1 • Not in any major Top 10 • Weak pipeline

(Note- Figures sourced from IMS and Scrip)



Companies following the M&A model

• Hoechst metamorphosed into HMR and Aventis, but was acquired by Sanofi to form

SanofiAventis, propelling them to No 3 in the world.

• Ciba-Sandoz merger formed Novartis, steady growth since; increased Roche stake to 33%.

• Pfizer, out of the Top 10 in the early 1990s, acquired Warner-Lambert, Parke-Davis and

Pharmacia to emerge No 1 in the World, US and Japan. Still on a strong wicket in 2004.

Does Pharma focus help?

Exhibit 7; Pharma Focus Scrip Rank

Pharma sales contribution to total sales (%)

2003

Current Company Name including earlier significant constituents 1983 1993 1998 2003

Comment

1 Pfizer • Pfizer • Warner Lambert • Pharmacia

50 69 90 88 Pharma focused. Divesting own OTC non-core business plus those acquired, courtesy merger with Warner Lambert .

2 GSK • Glaxo • GW • SKB

91 100 100 85 Totally pharma focused. Acquired non-core businesses courtesy merger with SKB (Consumer Health)

3 Sanofi Aventis • SanofiSynthelabo • Aventis • HMR • Hoechst

18 22 34 90 Hoechst, major chemicals player. Focus on pharma evident now.

4 Merck 75 84 51 100 Organic growth model, divested Medco to focus on pharma.

5 J&J 43 47 Organic model but brilliantly diversified within healthcare.

6 AstraZeneca 73 97 Pharma focused. 7 Novartis

• Ciba-Geigy • Sandoz

30 33 55 64 Ciba- major chemicals player, Sandoz- major consumer health player. Increasing pharma focus.

8 Roche 42 55 58 69 Nutrition and Medical diagnostics. Increasing pharma focus.

9 BMS 38 57 69 72 Increasing focus. Medical imaging, OTC, Nutritionals.

10 Eli Lilly 54 93 96 Pharma focused. 19 Bayer 17 19 19 17 Chemicals, Medical diagnostics,

Crop science. (Data sourced fro Scrip, Issue No 3000, 29 Oct 2004, p15-16)



The world pharma market share of Europe and the US was similar till the late 1980s, but in 2003, the US

market is twice the size of the European market. US pharma companies have historically operated as

pure healthcare groups (Pfizer, Wyeth, BMS, Merck), while their European rivals have often been part of

larger chemical and consumer conglomerates (Bayer, Ciba, Hoechst, Sandoz).

This healthcare focus of the US majors has helped to drive market share growth which European

companies have not been able to match. In 2004, there are only 3 European companies in the Top10 as

compared to 7 US companies.

Companies like Pfizer and GSK are 100% pharma focused, but recent acquisitions have brought in

consumer health and OTC subsidiaries, due to which the focus is not correctly reflected. Merck is back to

100% focus after divesting Medco, its medical insurance company. Roche and J&J are also increasing

their pharma focus, but at the same time spreading out into other areas of healthcare like medical

diagnostics, stents and biotech.

Bayer, the erstwhile pharma giant but today’s world leader in crop sciences, lost its pharma focus in the

1990s and is on its way out of Big Pharma. All the Euro pharma giants are steadily increasing their focus

on pharma.

Is M&A a short term drug for long term ailments?

A study of the change in market shares of the Top 10 companies for the period 1990-2000 exploded a

few myths about M&A increasing market shares. 2004 market shares are mentioned as a reference and

the inferences do not include the Pfizer-Pharmacia and SanofiAventis mergers.

Exhibit 8; Change in company market share, 1993-2004

Market Share % Company 2004 2000 1997 1993

Growth model

Impact on market share from 1993-2000

Pfizer 8.53 6.93 3.51 2.47 M&A Almost trebled market share GSK 6.41 7.02 4.33 6.59 M&A Lesser than sum of constituents SanofiAventis 6.02 3.85 4.15 3.01* M&A No major impact Merck 4.82 4.41 4.45 4.22 Organic Steadily maintained J&J 4.18 3.84 3.71 2.11 Organic Almost doubled AstraZeneca 4.05 4.35 4.01 1.89* M&A Major increase Novartis 3.44 3.95 4.21 4.84* M&A Decreased BMS 3.20 4.01 3.88 3.14 M&A Increased Wyeth 2.71 3.10 3.25 2.88 M&A Maintained EliLilly 2.66 2.81 2.76 2.11 Organic Increased (Note- * indicates combined figures for companies that subsequently merged, Data sourced from Scrip, IMS annual reports)



• Pfizer almost trebled its market share from 1993-2000 thro M&A to emerge a clear market leader.

• AstraZeneca achieved an increase in market share till 2000, largely due to the success of

Prilosec (Omeprazole) in the US and after its expiry, the successful launch of Nexium

(Esomeprazole).

• GSK, the closest challenger to Pfizer for the top position, holds a smaller share of the global

market than did its main constituents (Glaxo, Wellcome and SmithKline Beecham) in 1993.

• Novartis also holds a smaller share of the global pharmaceutical market than their antecedent

companies did in 1993 separately.

• The M&A activity seen in 1990s was driven by the need for the major European companies to

keep up with their faster growing US rivals.

• The mega acquisition of Aventis by Sanofi in 2004 would change equations as they are within

striking distance of GSK.

• Merck, which grew organically has actually increased market share, but still has been pushed to

No 4 for the 1st time in its rich history.

• J&J with its organic model has doubled market share over the last 10 years.

• Companies that merged in the period 1990-2000 made only short-term gains lasting no more

than 3-5 years.

• Bristol-Myers Squibb (BMS) acquired DuPont pharma for their R&D strengths and their HIV drugs

portfolio. The deal was not very significant in monetary terms, but helped BMS stand tall in the

world rankings consistently as it increased its market share by 33% over 10 years.

• Given the cost implications and lack of sustainable postmerger market share, do mergers justify

the upheavals, the huge expenses and lay offs, or are they merely short-term drugs for a long-

term ailment?



The M&A scene in India The pharma M&A scene in India except for Nicholas Piramal has not seen much action but periodic

reverberations have been felt of global acquisitions of world majors. The GSK merger helped consolidate

their No 1 rank and sales crossed the Rs 10 Billion mark. However, ORG-IMS reports over the years

confirm that GSK’s 2003 market share of 5.9% is much lesser than the total of the pre merger market

share of 6.6% of the 2 companies in 2001.

Local action

• Zydus took over German Remedies to jump to the No 4 rank, but was usurped by Nicholas

Piramal.

• Dr Reddy’s took over SOL, American Remedies and Group Pharma, to give them a better

therapeutic coverage in antibiotics, nutritionals and stomatologicals. Inspite of the convergence,

DrReddy’s has struggled for growth in local sales.

• Sun, rose to the Top 5 through focus on the neuropsychiatry and cardiovascular-diabetology

segments but has grown through a series of acquisitions like MJ Pharma (Manufacturing),

Gujarat Lyka (Manufacturing), TDPL (Therapeutic coverage), Natco Pharma ( Brands) and Milmet

(Ophthalmic range). These acquisitions have given Sun an excellent therapeutic spread.

• Brand acquisitions- SKB bought Crocin from Duphar, Ranbaxy bought 7 leading brands from

Gufic, DrReddy's purchased 6 brands of Dolphin and 2 each from Pfimex and SOL.

• The M&A activity worldwide also resulted in redundancies in the Indian operations of MNCs.

Indian companies in their quest to enhance their overseas presence have undertaken M&A activity in key

areas across major markets. Around 20 M&A deals have resulted in combined M&A spend of around $

250 Million yielding an average deal size of almost $ 12.5 Million. This may be small by world standards,

but extremely significant for India.

Exhibit 9; Major Indian M&A action abroad Year Acquirer Target Country Value

($ Million) Rationale

2004 Ranbaxy RPG Aventis

France 84 Ranbaxy became the 5th largest generic player in France, a major generic market of $ 800 Million

2003 Sun Caraco US 42 Sun hiked stake in Caraco from 36% to 63% to ensure better US focus

2003 Wockhardt CP Pharma

UK 20 Wockhardt rose to No 10 in the UK generic market

(Source- What's the big deal? Pharma M&As, Business World, 28Jun04 )



Case 1- Nicholas Piramal (NPIL)- India’s own crouching Tiger NPIL has fine tuned the art of M&A and galloped to the 4th rank in the Indian market, from 26th in 1994.

NPIL markets 16 of the Top 300 brands in India, with a strong presence in antibiotics, pain, nutritionals,

respiratory, neuropsychiatry and anti-diabetics segments.

NPIL, inspite of showing good results with M&A, have adopted contract manufacturing for Big Pharma as

a future strategy unlike other Indian companies who have pursued generics. NPIL has set up huge

USFDA approved capacities and R&D facilities, acquired R&D facilities of HMR and Aventis, and set up a

JV in India with Allergan, the world leaders in ophthalmics. The basic rationale behind the M&A has been

growth through therapeutic synergy, size and reach. NPIL’s key acquisitions over the years have been:

Exhibit 10; Impact of strategic acquisitions of Nicholas Piramal in India

Year & Rank Nicholas Piramal (NPIL) M&A Rationale 19

94

1995

1997

1998

1999

2000

2001

2002

2003

2004

NPIL- Piramals acquire Nicholas Labs in 1988 from Sara Lee.

26 25 26 11 12 10 4 4 4 4

Roche- Therapeutic synergy 31 Boehringer Mannheim- Diagnostics 45 42 58 Rhone Poulenc- Therapeutic synergy 19 22 27 26 26 27 ICI Cardiac Portfolio enhancement Sumitra Pharma API portfolio enhancement Sarabhai Piramal Leadership in Pain, No 2 in Cardiovasculars

(Data sourced from various ORG and ORG-IMS retail audit reports over the years) In December 2003, NPIL bought over its JV partner’s 50% stake in Sarabhai Piramal (SPPL) for Rs 693

Million. SPPL clocked 2003 sales of Rs 1.8 Billion, net profit of Rs 176 Million, with 12 brands exceeding

sales of Rs 50 Million, out of which sales of 5 brands were above Rs 100 Million.

As a result, NPIL's market share increased from 3.4 to 4.4%, consolidating its 4th rank while significantly

improving its rank in therapeutic segments like pain management (7 to 1), CNS (4 to 2), respiratory (4 to

3) and hormonal (8 to 5). NPIL's sales force increase to 2805, the distinct leader in India in market-reach.

Over the last 5 years NPIL has moved away from mega M&A to strategic convergence, increasing its

therapeutic spread, market coverage and penetration. But in India, whenever a company or a brand is for

sale, the first company approached is generally NPIL, revered as a ‘Crouching Tiger’. Such is their

reputation considering their track record and penchant for deals.



Case 2 - The Astra Zeneca merger, 1999- Conspicuous Success Astra, Sweden and Zeneca, UK completed a $37 billion merger in 1999, to form the UK based

AstraZeneca, considered one of the few successful pharma mergers of equals. Dr Tom McKillop, Chief

Executive AstraZeneca said " I am determined that the energy, thoroughness and cooperation which

has enabled the new company to be created in such good time will now be devoted to ensuring that

AstraZeneca builds further on its platform for growth."

Reasons for the Merger

• Impending patent expiry of Losec, the world’s No 1 drug from Astra in 2001.

• Pooling resources to create a R&D power house, bolster pipelines.

• Create synergy, as no direct drug overlaps, merger of equals.

• To counter the intensive competition by rationalizing marketing and R&D functions.

• Increased market coverage in the significant US market, consolidation in Europe.

Exhibit 11; AstraZeneca- pre and post merger impact

(Note- 1994-1998 figures are total of Astra and Zeneca Sales ) (Data sourced from the www.handels.gu.se/epc/archive/00001348/01/Tkachenko_2001_9_inlaga1.pdf and www.astrazeneca.com) Results

• Emerged as the world’s 4th largest company, true synergy

• Profit margins surged to average 22% post merger, cost savings of $ 1 Billion plus

• Slashed 6000 jobs

• Evident synergy of operations and market coverage

• AstraZeneca controls a whopping 25% share of the Gastrointestinals market, besides major

share in key therapeutic areas like cardiovascular, respiratory, oncology and anaesthesia drugs.

• AstraZeneca brilliantly managed the patent expiry of Losec, and a smooth transition to Nexium.

AstraZeneca- Merged 1999 Year Status Sales

$ Bn Net

Profit $ Bn

Net %

R&D Spend $ Bn

R&D %

World Rank

1995 13.06 1.84 14 1.72 13 1996 15.08 2.45 16 2.03 13 1997 15.62 2.52 16 2.21 14 1998

Pre

Merger

16.29 2.64 16 2.49 15

Not in Top 10

1999 Merger 15.13 2.51 17 2.47 16 7 2000 15.81 2.91 18 2.62 17 4 2001 16.22 4.21 26 2.69 17 4 2002 17.84 4.04 23 3.11 17 4 2003

Post

Merger

18.85 4.08 22 3.45 18 6



Case 3- Sanofi-Synthelabo and Aventis merger, 2004- French Kiss

In 2004, Sanofi-Synthelabo launched a hostile bid for their French competitor and much bigger pharma

major Aventis, after several weeks of speculation. The acquisition, blessed by the French government

and a nod from Kuwait Petroleum, Aventis’ major shareholders, created a French pharma conglomerate

for $ 65 Billion. One of the key issues in the acquisition would be the cultural integration between the 2

companies.

Global Pharma Market Share

SanofiAventis generated sales of $27.9 Billion in 2003 and a market share of 6.6%, catapulting them to

3rd position behind Pfizer and GSK in sales. SanofiAventis is estimated to overtake GSK as the 2nd

ranked company by 2007 on sales of $34.2 Billion9.

Blockbusters

SanofiAventis’ portfolio currently comprises 6 blockbusters- the cardiovasculars Plavix, Lovenox and

Tritace, the insomnia treatment Ambien, the taxane oncology treatment Taxotere and the respiratory

treatment Allegra. The portfolio is supported by fast-growing products such as the platinum anticancer

Eloxatin and the anti-hypertension treatment Aprovel. By 2007, the SanofiAventis portfolio will comprise 7

blockbuster products generating total revenues of $14 Billion.

Overlap – There is little overlap between Aventis and Sanofi- Synthelabo’s portfolios. Potentially the only

significant product requiring divested would be the anti-thrombotic Fraxiparine, a competitor to Aventis’

dominant Lovenox brand. Sanofi’s anti-thrombotic Arixtra would benefit from the expertise that Aventis

has built up in this area and act as a follow-up post Lovenox’ patent expiry (anticipated in Dec 04).

Patent Expiry – The SanofiAventis merger would help to minimise the forthcoming impact of patent

expiry for Aventis’ anti-histamine Allegra. Although patent protected to 2011, the market exclusivity of

Sanofi’s major product Plavix is under threat in the key US market from a lawsuit anticipated in Dec 2004.

The insomnia treatment Ambien’s patent expires in 2006, but a once daily form is in development to

minimise the impact of generic competition.

Therapeutic Coverage

SanofiAventis’ presence would be enhanced in 3 core therapeutic areas – cardiovascular, CNS and

oncology. SanofiAventis would be ranked third in the CV market behind Pfizer and Merck with revenues

of $7.3 Billion in 2003, and a market share of 11%. The company’s presence would also be enhanced in

the CNS market where SanofiAventis would be ranked 5th with sales of $ 4 Billion. In oncology

SanofiAventis is ranked 2nd behind Roche with sales of 3.1 Billion.



Geographic Coverage

SanofiAventis would become the top ranked pharma company in Europe with estimated market share of

8.8%. However, inspite of a US market share of 4%, SanofiAventis would rank fifth behind US and

European majors-Pfizer, GSK, Merck, J&J and AstraZeneca. In Japan, SanofiAventis with a market share

of 2.7% would trail behind Pfizer, Merck, Novartis and several Japanese companies.

R&D

SanofiAventis had a combined R&D budget of $4.7 Billion in 2003 second only to Pfizer’s $7.1 Billion

R&D spend. Key products approaching the market from the SanofiAventis portfolio include the respiratory

steroid Alvesco and the anticancer agent Genasense. A wonder drug slated for a 2008 launch is

Accomplia, used is smoking cessation, diabetes, cardiovascular disorders and alcohol addiction.

Conclusion

The merger of Sanofi-Synthelabo and Aventis would create a company of sufficient critical mass to

compete on a global basis against current leading US and European companies.

The portfolio would include a number of blockbuster brands while synergies are particularly compelling in

the cardiovascular and oncology sectors. SanofiAventis would lead the European market; however the

main issue facing the merged company would be to improve its position in the key US market.

(Data and estimates, culled from Clark I., French connection, Pharmaceutical Field, Issue 2, 2004 p 38)



List of Exhibits Exhibit Subject

1 1998-2004 Big Pharma- M&A Deals 2 M&A leads to consolidation in market share and R&D spend 3 The No 1 rank from 1983-2003, musical chairs 4 Rationale for major pharma M&A 5 Major Pharma / Biotech M&A Deals 6 Status of the world’s Top 5 pharma companies of 1987, in 2004 7 Pharma Focus 8 Change in company market share, 1993-2004 9 Major Indian M&A action abroad 10 Impact of strategic acquisitions of Nicholas Piramal in India 11 AstraZeneca- Pre and post merger impact-sales, net profit, R&D spend and world rank

Bibliography

• IMS Annual Review-1996 to 2003

• Scrip Annual Issue-1994 to 2001

• The Mckinsey Quarterly

• Business World

• The Economic Times

• ORG-IMS

• IDMA Bulletin

• PhRMA

• Analyst Reports- HSBC, CLSA, Enam

• Forbes

• The Economist

References 1 Mergerstat, February 2003 and Cap Gemini Ernst & Young analyst report, Perspectives on lifescience 2 Palmer M., Caps gemini ernst and young, Perspectives on lifescience, p 22 3 World pharma market 2003 Overview, Woody Mac, PharmExec, May 2004, p 63-82 4 Annual Report PhrMA 2003, Therapeutic Window Factors Altering Response to Drug Therapy, Damaj I 5 Lipitor leads the way in 2003, IMS Global (18 March 2004), Retrieved on 19 March 2004

from http://www.ims-global.com/insight/news_story/0403/news_story_040316.htm 6 Blockbusters blast a highway through pharma sales, Retrieved on 4 December 2004 from

http://www.ims-global.com//insight/news_story/0203/news_story_020317.htm 7 CLSA, US Generics-A primer, Sep 2003 8 Coles S., Caps gemini ernst and young, Perspectives on lifescience, p 8 9 Clark I., French connection, Pharmaceutical Field, Issue 2, 2004 p 38

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