Pharmaceutical Merger

In the dynamic international market dimension, mergers are becoming an essential element for corporate strategy to respond to intense market pressure. A broad range of economic and financial synergy reasons are provided, from the most obvious like, sheer size, trade liberalization and access to R&D, to the dubious ones like: operational efficiencies to reducing the cost of capital.

The size and number of international and cross-border ones have grown considerably as the firms have experienced lower growth in the local market. With mature capital market and liberalized capital movement, the stock market has become an effective and cheap way of financing merger activities. Managers in the firms are encouraged to undertake mergers with stock swaps or equity financing when the stock price of the firm is high.

The bullish technology sector stocks since the last couple years have positioned these technology intensive industries the largest contributors to single large deals in the late 1990s. Drugs & pharmaceutical, telecommunication and media industries are categorized under the technology intensive industries for their high spending on the R&D and innovation activities. In 2000, the value derived from these three industries was more than 40% of the total deals amount. By looking at the industry characteristic, it explicitly shows that the shareholders put high expectations on the future success from emerging innovation of these industries.

In spite of intensifying deals created through equity financing, skepticism towards the post-merger performance is appearing. The shareholders, particularly of the acquiring firms, are now suffering from the high priced premiums of the previous years, when the stock market reflected negative returns compared to the period before the merger. The glamour of technology sector stocks are no longer delivering the returns as expected. Consequently, the closed merger deals for the 1st quarter of 2004 declined drastically. Investors can not expect the same yield of the harvest merger experienced during the previous years. Learning from past experience, shareholders are more cautious to select their portfolio and managers become more careful in choosing the strategy of investment decision.

Many post-merger cases have portrayed conflict of management interest, communication barriers (in the case of cross-border ones) and lofty expenses paid as premium are few reasons of fail case in merger. Only few have proven successful result- those relying on comparative advantage, i.e.: core business concentration. If one of the merged firm has a comparative advantage in price/market share/service and bring the expertise to other. They facilitate to the direction of comparative advantage.

Since the early 1990s, the pharmaceutical industry has experienced global mergers. Competition within the industry heats up with no single company dominating the pharmaceutical market and none having more than 7% of global market shares. Though the industry is less elastic to price changing, the pressure on price control and health policy reform in each market contributes to the hurdles of huge investments. Therefore, the reasons contributing to the pharmaceutical industry mergers are the need for cost cutting to fund more researches, the consolidation of research departments to enhance efficiency