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A swot analysis of Glaxcosmithkline

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					SWOT Analysis of GlaxoSmithKline

STRENGTH         Cost reductions Global presence Improved R&D Economies of scale Strong finance Increased market share Various Synergies Advantages of clinical trial

WEAKNESS       Poor social responsibility image High employee turnover Culture conflict Clashing Management styles Poor drug pipeline Drug portfolio overlap

OPPORTUNITIES        Licensing Joint Venture Further merger Direct marketing Organic growth New drug development Conversion to generics

THREATS      Competition Regulators Rising drug cost Growth in generics Drug side effect

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(i) Economic/Shareholder Perspective for the Merger

Emerging Technologies:

The new company GlaxoSmithKline will have a valuable range of experience in emerging technologies. GlaxcoWellcome is an industry leader in combinative chemistry and human genetics; Smithkline Beecham is at the fore front of using genomics to discover a wide variety of diseases with unique targets for discovery. Both are also leaders in the area of bioinformatics. However, if it is to compete in the world market for new genetic –based treatments enormous amounts of money is required.

Economies of Scale:

Economies of scale give large companies access to a larger market by allowing them to operate with greater geographical reach. As they both have complimentary portfolios the merger between GW and SB will combine research budget of both companies, thereby keeping up with critical mass in research and development, bigger sales and marketing force.

A merger of this scale would exploit cost savings and employment, making the new company more efficient. Thereby benefit from economies of scale and scope in Research and Development. Research and Drug development in the pharmaceutical industry is expensive and time consuming. Many pharmaceutical companies have significant gaps in their development pipelines. GSK is expected to start of with an annual research budget of 2.4 billion. It was estimated that annual pre-tax cost savings of £1billion are achievable from the third anniversary of the completion of the merger, of which £250million is expected to be reinvested in R&D.

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Finance managers in both pharmaceutical companies would spend a lot of time analyzing the corporation‟s product portfolio and have to make tough decision to make sure that the company has the right balance of risk and return, and early and late stage opportunities.

Companies need to invest carefully given the fact that development programs are so expensive and time consuming. It also takes time to recruit and train scientists and it is extremely inefficient if you have to keep hiring and firing because you do not have a balanced pipeline and workload. Although there are economies of scale associated with R&D activity (primarily associated with the development side in terms of trial capabilities and the use of contract research organizations) executives are constantly trying to manage the use of size while at the same time providing an entrepreneurial environment that will encourage drug discovery. Scale is also increasingly important now that direct to consumer advertising has been made more accessible. Pharmaceutical companies are now able to use television advertising to market their products directly to consumers. Many have argued that this is a bad idea, however, pharmaceutical companies counter by arguing that increasing consumer awareness is a good thing because more patients than ever are now recognizing symptoms and actively pursuing treatments with their doctors. Another associated reason for size relates to the intense selling infrastructures that many large pharmaceutical companies like Pfizer now have. Firms have to grow in order to compete against these marketing powerhouses, which are increasingly locking up distribution channels.

Patent Expiration:
GlaxcoWellcome has an impressive range of drugs including Ventolin and Serevent for Asthma but The patents on its major “blockbuster” drugs Zantac a heartburn treatment and Zovirax for herpes expired in 1997. Zantac which was launched in 1980s contributed to GlaxcoWellcome‟s revenues, resulting in a large part of its growth based on its success. One of the biggest threats to pharmaceutical companies over the years will come from generic competitors. However, the anticipation that competitors will begin to sell generic versions of these “block buster” drugs which would affect their sales growth was also a reason behind the merger.

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While SB had in its pipeline drugs reaching the final stages of development was a very attractive prospect to GlaxcoWellcome who was seeking potential „block buster‟ drugs. SG Cowen predicted that between 2001 and 2005 patents will expire on products of annual sales of $.6billion. In 2001,drugs like Prozac, which generates annual sales of $2.5 million for Eli Lilly ,will come off patent, as will AstraZeneca‟s Prilosec with sales of $6 billion. (Business Week, 2001).

Intense Competition:
Apart from the threat of generic competitors, GSK faces serious competition from other mega mergers most especially Pfizer, whose take-over of Warner-Lambert in early 2000 was deemed successful due to an increase in its market shares in the USA and Europe thereby making them market leaders. Share holders of both GS ad SW wanted to emulate this success as their positions in the European market dwindled respectively.

Pressure from shareholders for action and a desire to dominate the European market and compete more effectively in the crucial US pharmaceutical market helped prompt the move.

Synergy:
Most mergers take place in order to increase the value of the combined enterprise. For instance, if Companies X and Y merge to form Company Z, and if Z‟s value exceeds that of X and Y taken separately, then synergy is said to exist and such a merger should be beneficial to both X and Y‟s shareholders. GlaxcoWellcome commercial and control driven culture, coupled with their rate of market capitalisation, products and R&D expenditure synergises with SmithKline Beechams non aggressive, reward and celebrate, team approach corporate culture. The seemly more efficient management of GW will enable the weaker SB firm‟s assets will be more productive after the merger. The infusion of stronger management and better technology as a result of a merger may enhance utilization of existing assets in a cost effective manner. In a synergistic merger, the post-merger value exceeds the sum of the separate companies‟ pre-merger values. However, the issue of the distribution of the synergistic gains between

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GW and SB shareholders is determined by negotiation between the merging parties. The Synergistic gains for the merge can arise through sales and marketing. GlaxoSmithKline will have an industry leading global sales and marketing force .In the managed care segments of the US market, GSK will provide many key accounts, through contract with several

pharmaceutical companies to obtain the medicine they need, with the convenience of one stop shopping as a result of the breath of its product line.

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Government regulation and growing concern over drug prices:
Shareholders of both companies spotted an opportunity to increase the market power based on consolidation, consequently dominating certain areas of the drugs market both in Europe and the US. At the time of the proposed merger SB has the leading over the counter drugs (Nicorette and Nicoderm) in the US smoking - cessation market while Glaxco Wellcome the only approved prescription (Zyban) to help smokers‟ quit. A marriage of both companies, will give them 90 percent control of that market. This move attracted the attention of the Federal Trade Commission (FTC) the US competition regulator, who voiced their concerns on this perceived domination by delaying the merger. As it‟s often viewed that mergers are used by companies as a means to reduce competition. The

apprehension of government regulations also resulted in this merger. Governments around the world are looking to reduce the cost of the pharmaceuticals they purchase. They are putting pressure on companies to cut prices, which in turn has helped fuel mergers, which will increase market power, to mitigate aggressive purchasing by national health systems and insurance companies. Many European countries have government healthcare systems, hence the strict pricing controls. However, in the US, the insurance companies rule and can have a big impact by deciding what and how much gets covered. Furthermore, through out much of 2000, the pharmaceutical sector was filled with concern. During the election there was a great deal of discussion about rising drug prices. Many thought the federal government would pass new laws aimed at slashing prices. However, the arrival of a Republican White House and an evenly split congress put an end to many of these fears. IMS Health (a firm which tracks pharmaceutical sales and usage) now expects global sales to grow 8.8% to $385 billion in 2001. (Business Week, Jan 8, 2001).

Despite foreign price controls, many pharmaceutical companies do sell their products abroad at a discount but the margins are low. This is a problem, for although they cover manufacturing and promotional costs, they do not generate enough profit from abroad to adequately fund research and development. If the US follows the lead set by certain European countries that regulate prices it could significantly hinder and most certainly slow the development of new life-saving treatments.

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Shareholders and Management Personal Incentives:
One would like to think that business decisions are based only on economic considerations, especially maximization of a firm‟s value. However, some business decisions are based more on managers‟ personal motivations than on economic analyses. Many people, including business leaders, like power, and there is certainly more power attached to running a larger company than a smaller one. Though no executive would be willing to admit that his or her ego was the primary reason behind a merger, it appears that egos play a prominent role in many mergers. Besides, executive salaries in general are highly correlated to company size. This means that the bigger the company, the higher the salaries of its top executives. This fact could therefore influence merger activity. This is clearly evident in the disagreement over who should be the CEO of GSK and dispute over remuneration awarded to John-Pierre Garniers‟ and other managers.

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Financial Accounting Standard Board:
Additionally, in 2000 there was the move by the Financial Accounting Standards Board (FASB) to eliminate the pooling method of accounting for merger transactions. Companies were concerned that they would have to account for all transactions using the purchase method which requires any premium over and above fair market value (known as Goodwill) to be reimbursed over 30 years. FASB issued a limited exposure draft stating that although the pooling method would still be eliminated, goodwill would not have to be repayed and would simply remain on the balance sheet. The only time firms would have to expense any costs to the income statement would be if the asset became impaired in any way. Although this recent move appears to have eliminated many of the concerns regarding future mergers, concerns over possible FASB rulings undoubtedly contributed to some of the increased merger activity in the pharmaceutical industry. In some ways it would appear to make sense for pharmaceutical companies to merge. Investors have come to expect that pharmaceutical companies will always deliver doubledigit growth, but as patents begin to expire and generic competition increases this is becoming harder to achieve. Recent combinations of giant firms like Pfizer and WarnerLambert and Glaxo Wellcome and SmithKline Beecham puts pressure on those remaining to do the same in order to stay competitive. Pharmaceutical companies are merging for size in order to maintain growth. GSK management will further analyse the socio-political environment in which it will operate and take into consideration the situational factors in planning the merger, so as to capitalise on GSK strength, minimises any weakness, exploit market opportunities and avoid any weaknesses.

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(ii) The objective to be the biggest in size and outperforming the industry in terms of market

share was achieved at first, share price increased by five percent when the merger was announced .After the merger, from December 2000 and 15th March 2001 the share price decreased
by two per cent to £18.00.

Subsequently, GSK was later surpassed by Pfizer who purchased Warner Lambert for $70 billion in June 2000. Pfizer with Warner‟s pipeline are proving to be a tough competitor to beat. Pfizer's revenues increased 10% to $32.3 billion in 2001, compared to GSK‟s only 3% under $30billion. Net income more than doubled to $7.8 billion, and financial results through the second quarter of 2002 were equally rosy. The company markets eight of the world's 30 best-selling drugs, which include Lipitor, Norvasc, Celebrex, Neurontin, Viagra, among others. Combined, these medicines pulled in revenues of $10.3 billion through the first half of 2002, up 15% over the same period in the previous year. (Drickhamer, 2002). Whether, the merger increased or decreased share holders value is quite debatable.In a PMI survey which compared total shareholder return prior to a deal, with total return two year after a deal revel that 58% 0f the sample transaction (which as includes the GSK deal)reduced share holder value.It however implies that profit tends to fall relative to pre merger earnings one year after a merger,but rebound significantly in the next year,rising 9% above pre merger Earnings Before Interest and Tax (EBIT). (Kearney 1999,p.1,17). GSK had started to record losses before the merger full took off, though the combined the divestiture of

corporation won approval from the FTC in December, the FTC forced

medicines which brought an annual sale of $400m. This was a loss in revenue. During its first year of operation, GSK saw pharmaceutical sales increase by 12 percent. It secured savings of over $1.08 billion as a result of the merger, as well as gains from disposal of assets, and anticipated saving $2.59 billion by 2003 in manufacturing costs. Key products includes: Paxil, Wellbutrin, Augmentin, and Seroxat/Paxil. Avandia, a diabetes drug, recorded $702 million, and Seretide, an asthma drug, posted $316 million. Consumer healthcare division only grew 3% and will more than likely be divested in order to create a more pure-play pharmaceutical company. (GSK press release Feb 22, 2001).

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Despite merging both companies R&D budget, to increase spending there was no major return on R&D investment between 2000-2003. It failed to launch new products that could generate large revenues. Instead, they went on to buy licences to market 40 Drugs from other companies. The management clearly did not understand the purpose behind merging two R&D budgets together.

On the whole, the aim of geographic expansion by acquisition has been met effectively, as has the acquisition of products and sometimes technology (although this can lead to restrictions on the exploitation of the technology as the acquiring company becomes its only customer, as happened with Ciba Geigy and Alza). In general, the evidence as to whether the merger adds value or not has been, at best, mixed. Merger premiums are typically in excess of 40% according to data from the Merrill Lynch Mergerstat Review, and it takes a lot of strategic benefit to recoup these premiums. (Clark, 1996). Nevertheless, the value of size or scale can be disputed. The pharmaceutical industry is

plagued by the fear of losing revenues from one or two key products and not being able to replace them with revenues from new products, because they can never be sure what their R&D will produce and when. The reaction has been to use Merger and Acquisition to create larger companies, spending more on R&D - and therefore producing more products in a more regular pattern. The question this raises is whether this is just a dog chasing its tail - the faster you run, the faster you have to run, still without reaching your goal. GSK management while setting their objectives did not envision that being the biggest, come with its own problems which includes complex and strict regulatory conditions which can hamper development and slow down research.

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Moreover, the prospects for GSK merger are not fully clear. It seems likely to add some value to shareholders but mostly through cost cutting as well as some pipeline synergies. However, the strategic focus is even less clear. There was no stated procedure to guide executive in realizing the objectives. The merged assets of SB did not fit into the broad strategy of GW. The intention to move SB beyond its traditional area of competence but GSK was simply unable to effectively integrate the assets in this new area of endeavour. In general many drug mergers have not had a successful history. There is no better example than Pharmacia of Sweden and Upjohn of the US whose own union got off to a terrible start, where the combined management had a major culture clash. (Stahl and Mendenhall, 2005). GSK leadership problems and cultural difference, also aided to hinder meeting its

objectives. There was no early planning for human and physical assets which could improve the chances for success. The managers of both companies were not cognizant of cultural

differences between both organizations and avoid conflicts, in part, by frequent, tailored communication with employees, customers and stakeholders. There was also dispute on who would be the integration leader ,and the issue of remuneration and appropriate incentives. SB's Jan Leschly was happy to be chief executive, with Glaxo's Sir Richard Sykes as executive chairman; but then Sykes fatally preferred to give Leschly's role to a Glaxo man. Three years after the merge, it been reported that employees of both companies were still not fully integrated, which was getting in the way of proposed change. The employees were not thinking and behaving like GSK people but rather like Glaxco people and Smithkline people. Total co-operation and collaboration under clear, accepted leadership are essential. Warring partners will ruin the sweetest of strategic dreams although, of course, the dreams may be ill-founded. GSK might have met their objectives of being world leaders in the use of genomics and biotechnology, after its formation, it had filed for over 500 patents for genomic based drugs.

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One of the most exciting projects in late-stage testing, is a novel cardiovascular drug that targets an enzyme known as Lp-PLA2, high levels of which some studies have indicated as a risk factor for heart attacks and stroke. If the drug works, GSK could snare a slice of a cardiovascular drug market now worth more than $27 billion a year. (Capell, K. 2004). Though GSK set out to be a global pharmaceutical giant, the size of the organization was inhibiting its scientific creativity. Employees were reassured that the deal was about vision not cost cutting, but two years on the union beg to differ.

GSK, has shed more than 15,000 jobs; Managers were unable to retain the talent that resides on the firms. Instead of creating a "powerhouse", research was split into smaller, autonomous units. (Abrahams, 1992 p.22) In October 2002, James Palmer, the pharmaceuticals group's head of development, and one of its leading scientist announced he was leaving. His departure renewed concerns about the

implementation of GSK's radical new research department. The new structure was a response to a series of failures in research at the two merger partners. (Dyer, G., 2002 p.3). Moreover, neither has the company lived up to its expectations for investors - a series of drugs fell through including Lotronex, a pioneering treatment for irritable bowel disease. Yet he firm faces increasing criticism for its handling of the antidepressant Paxil. (Clark, A. 2001). GSK had particular, suffered the intense media attention surrounding Seroxat, a drug that was approved by the US Federal Drug Administration for the treatment of depression. In 2001, just a year after the US $195billion merger of GlaxcoWellcome and SmithKline Beecham. The BBC, reported on alleged dependency, and side-effects sometimes associated with Seroxat use, and suggested an apparent link to suicidal tendencies in adults. Further, stating that GSK had not provided clear guidance on the potential side effects of Seroxat. Since

then lawsuits have been filed against GSK over the drug. These cases are expected to weaken shareholder confidence in the short-term, with huge implications for GSK financially, as it could result in spiraling legal costs.

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Many scholars have argued that the role of mergers and Acquisitions as a means of entry into new markets and the formulation of corporate strategy is frequently overstated. (Kay, J. 1995, Koch, 2000 & Pearce, 2009 ) Mergers can and do add value. They achieve this when they enable distinctive capabilities to be exploited more widely and more effectively. The initial synergies are often mouth-watering. By cutting out overlaps (and people) the architects of Glaxo-SB planned to save billions of dollars. Glaxo's earlier buy of Wellcome produced major savings, as has the Ciba-Geigy union (renamed Novartis). But one-off savings are not the major objective of strategic combinations. The GSK, claim that union will strengthen their ability to create, and market billion-dollar drugs. For that claim, the evidence is scant. Both Glaxo and SB created enormous riches from antiulcer drugs developed long before Glaxo bought Wellcome and SmithKline united with Beecham. The much smaller Swedish firm, Astra, with its anti-ulcer drug, Losec, outdid both giants. Its head, Hakan Mogren, even professed incomprehension over why some of these mergers have been done

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(iii)

Although size may be a good up to a certain point, some of these merger are going too far. The benefits of are in most cases only temporary especially taking into consideration of today‟s dynamic market environment. Some of the disadvantages of associated with being too big are diseconomies of scale and control issues, the potential for disconnect s between R&D and commercial (leading to investment in sub-optimal projects from a commercial perspective, and loss of an entrepreneurial environment that encourages and reward discovery. (Koch, 2000). Below are a few suggestions on other alternatives other than growth through amalgamation for GSK.

Organic Growth: GSK should focus on growing its pharmaceutical business through concentrate on organic growth of its key assets in priority ranges including Agumentin and Vaccines, by increasing output and enhancing sales. This has worked for pharmaceutical companies like Merck & Co. and Lilly both believe that organic growth is ultimately more sustainable, and the increased research and development spending-- cited as one of the main drivers of mergers and acquisitions M&A has so far not resulted in replenished pipelines. Indeed, the upheaval and uncertainty caused by M&A may lead to severe disruption of research projects.

Licensing deals: Growth by building up expensive and under-used sales forces in markets outside its regional Heartland, or do a licensing or distribution deals with the other big companies can be explored. Its higher earning drugs levitra and Seroxat can be licensed to other companies to generate revenue. GSK also it owns the patent for a key drugs in the treatment of HIV/AIDS it can generate revenue by licensing to mega pharmaceuticals.

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Joint ventures, strategic alliances and minority share holdings: This could be explored as an alternative to a merger, especially in entering new geographical markets. GSK can look outside Europe and the USA to form alliances with markets in Asia, Africa and Latin America. The can offer their experience, technological knowhow, and expertise at a price to lift short term growth.

Acquisition, not Merger: The most successful pharmaceutical M&A deals have all been outright acquisitions. Whatever the paper agreement, one dominant company has acquired the assets and raided

the product portfolio and pipeline of another to reap the greatest benefits for its shareholders. Some examples stand out the annexing of Fisons‟ research capabilities by Rorer, Cynamid‟s bitter resistance to the American Home Products‟ hostile raiding mission, and Roche‟s strategic conquest of Syntex for its product portfolio. Glaxo achieved some of the most aggressive cost savings in the history of pharmaceutical mergers and acquisitions with its unconditional takeover of Wellcome savings that were ultimately delivered as shareholder value with a 40% increase in market capitalization in the four years following the merger.

Small and Stealthy Deals :
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When we consider the merger activity of the last fifteen years, we immediately think of Glaxo-Wellcome -SmithKline-Beecham, Astra-Zeneca, Pfizer-Warner-Lambert, and the creation of the Life Sciences behemoths of Aventis and Novartis the landmark deals which reshaped the Life Sciences landscape. We probably do not think of Merck, which has one of the most prolific acquisition strategies in the industry. Its 1993 $6.6 billion purchase of Medco may come to mind, but not the forty two other acquisitions it has made since 1990. Also the meteoric rise of Sanofi- Synthélabo, from small regional players to sixteenth place in the world ranking tables the result of Synthélabo‟s persistent pursuit of strategic partners throughout the 1990s.

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Ultimately, a series of standardized, serial acquisitions rather than one big standard-alone deal supported by a highly coordinated integration process and a proactive plan for cultural assimilation makes a healthier and more sustainable new entity a longer term approach rather than a short term cure.

Investing heavily in Biotechnology and genomics: GSK, should focus part of its R&D efforts and budget into Biotech and Genomics. The developments in biotechnology and genetics are likely to impact the pharmaceutical industry, of the future. If the ongoing genomics research reaches its ultimate conclusion, more drugs will be "personalized"--specific to a small, genetically defined group, or even to an individual-implying that large sales forces will be redundant. As well as increasing the number of drug targets and producing more focused treatments, genomics should also lead to faster drug development times as a result of the ability to carry out smaller, more targeted trials in the genetically appropriate patient groups. The cost of developing individual products should therefore fall, while profitability increases, and governments/insurers may be more prepared to pay extra for such premium products because of gains in efficacy and safety. Instead of having two or three "megabrands" in their portfolios, pharmaceutical companies may thus end up with 12 to 15 smaller, but still highly lucrative drugs, with the risk of high-profile safety problems much reduced.

GSK should focus its R&D on developing over the counter drugs which are less expensive and easily accessible to customer thereby boosting sales revenue. They need to move

quickly to define areas where success can be achieved and dominate it.

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Conclusion
In spite of varying evidence, pharmaceutical firms continue to merge in the hope that size will help them to deal with uncertainty and ever increasing industry pressure. Size and growth are being used to defend against increasing industry pressures including reimbursement issues, political pressure, patent expirations, growth issues, R&D pipeline gaps, and advertising economies of scale. It is not clear that merging is the answer. With regards to the mergers analyzed in this paper, GlaxoSmithKline looks likely to achieve some success through pipeline synergies and cost savings, but the strategic benefits are less certain and the announcement was not well received by the market. In general, evidence to date suggests only minimal success and given the current rate of consolidation any benefits gained through increased size are only likely to be temporary. Operating economies, including the elimination of overlap in R&D, production and marketing, can produce meaningful cost savings, however a number studies have shown that merged firms have not performed better over the long-term than drug makers opting to go it alone such as Merck. Consulting literature stresses several factors that are thought to improve the chances that the deal implementation will be effective. These factors include: early planning for integration process, setting and communicating clear goals, identifying the responsibility of managers and providing appropriate incentives. Keep employees and customers

informed, retain key employees and sales for activism to avoid the loss of customers to rivals. Finally, and perhaps most importantly, these mergers may not deal with some of the most important emerging areas in pharmaceutical development, namely biotechnology and genomics. These areas are improving target identification and will ultimately help to reduce costs. They have the potential to revolutionize the drug discovery process; if drug companies can match their databases of compounds with the genomic database of disease targets we should see some dramatic improvements in the speed and efficiency of drug development.

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