MERGERS AND ACQUISITIONS

The Effect on Shareholder Wealth from Mergers and Acquisitions in the Pharmaceutical Industry: The Case of Astrazeneca Plc and Medimmune Inc

Mergers and Acquisitions

The UK pharmaceutical market is a successful, research-driven, high-technology industry. The UK market is dynamic and increasingly competitive and, with a trade surplus of £2.44bn in 1998, it ranks third after Germany and Switzerland in the global pharmaceutical industry rankings in terms of trade balance. According to the Association of the British Pharmaceutical Industry (Abpi), the industry employs around 75,000 people, of whom over 25% are graduates.

Research and development (R&D) is extremely important to the pharmaceutical market. It takes many years and hundreds of millions of pounds to develop and launch a new drug, with the ever-present threat of failure. At the same time, product lifecycles are shortening because of increasing competition within the different therapeutic categories. In 1998, in the UK, pharmaceutical R&D expenditure was £3.54bn, almost a third of total UK expenditure on R&D. The Abpi claims that the UK pharmaceutical industry invests more than 20% of its total turnover in R&D and is responsible for over 70% of pharmaceutical research within the UK. (Coyne , 2005, pp.88-121)

The increasing costs of drug R&D, coupled with increasing cost rationalisations and control in healthcare systems throughout the world, has fuelled the huge amount of acquisition and merger activity within the industry, which has now reached another stage. The agreement to merge in January 2000 of the UK industry leader Glaxo Wellcome with SmithKline Beecham, to form Glaxo SmithKline in a $76bn mega-merger, will have an enormous impact on the UK market, not least on industry employment as the company rationalises operations. Almost all the other major pharmaceutical companies operating in the UK have undergone or are in the process of undergoing mergers and acquisitions, including AstraZeneca, Pfizer and Warner Lambert, Shire and Roberts, and Celltech with Chiroscience and Medeva.

The market is divided into two sectors: prescription-only medicines (POMs) and over-the-counter (OTC) medicines. POMs are obtained only with a prescription from a qualified medical professional and dispensed only by a registered pharmacist in a licensed pharmacy outlet. Promotion of prescribed pharmaceuticals is extremely limited, being confined to advertising in professional journals. The vast majority of prescribed pharmaceuticals in the UK are prescribed through the National Health Service (NHS).

According to the Abpi, UK expenditure per person on prescription medicines, at around £88 per year, is low in comparison to other major European countries - only around half that of France or Germany. However, the proportion of expenditure on drugs in the NHS is rising, in spite attempts to contain costs. It rose from 8.7% of the total NHS budget in 1980 to 12.7% in 1997. The proportion of people exempt from NHS prescription charges has also risen steadily, from 60% of all prescriptions in the 1970s to more than 85% in 1998. (Coyne , 2005, pp.88-121)

In recent years, the NHS has been in an almost constant state of financial crisis, which has led to severe budgeting ...