fizer Acquires Pharmacia to Solidify Its Top Position
In 1990, the European and U.S. markets were about the same
size; by 2000, the U.S. market had grown to twice that of the European market.
This rapid growth in the U.S. market propelled American companies to ever
increasing market share positions. In particular, fizer moved from 14th in
terms of market share in 1990 to the top spot in 2000. With the acquisition of
Pharmacia in 2002, Pfizer’s global market share increased by three percentage
points to 11%. The top ten drug firms controlled more than 50 percent of the global
market, up from 22 percent in 1990. Pfizer is betting that size is what matters
in the new millenium. As the market leader, Pfizer was finding it increasingly
difficult to sustain the double-digit earnings growth demanded by investors.
Such growth meant the firm needed to grow revenue by $3–$5 billion annually
while maintaining or improving profit margins. This goal became more difficult
due to the skyrocketing costs of developing and commercializing new drugs.
Expiring patents on a number of so-called blockbuster drugs (i.e., those with
potential annual sales of more than $1 billion) intensified pressure to bring
new drugs to market. Pfizer and Pharmacia knew each other well. They had been
in a partnership since 1998 to market the world’s leading arthritis medicine
and the seventh largest selling drug globally in terms of annual sales in
Celebrex. The companies were continuing the partnership with second generation
drugs such as Bextra launched in the spring of 2002. For Pharmacia’s
management, the potential for combining with Pfizer represented a way for
Pharmacia and its shareholders to participate in the biggest and fastest
growing company in the industry, a firm more capable of bringing more products
to market than any other.
The deal offered substantial cost savings, immediate access
to new products and markets, and access to a number of potentially new
blockbuster drugs. Projected cost savings were $1.4 billion in 2003, $2.2
billion in 2004, and $2.5 billion in 2005 and thereafter. Moreover, Pfizer gained
access to four more drug lines with annual revenue of more than $1 billion
each, whose patents extend through 2010. That gives Pfizer a portfolio,
including its own, of 12 blockbuster drugs. The deal also enabled Pfizer to
enter three new markets, cancer treatment, ophthalmology, and endocrinology.
Pfizer expected to spend $5.3 billion on R&D in 2002. Adding Pharmacia’s
$2.2 billion brings combined company spending to $7.5 billion annually. With an
enlarged research and development budget, Pfizer hopes to discover and develop
more new drugs faster than its competitors. On July 15, 2002, the two firms
jointly announced they had agreed that Pfizer would exchange 1.4 shares of its
stock for each outstanding share of Pharmacia stock or $45 a share based on the
announcement date closing price of Pfizer stock. The total value of the
transaction on the announcement was $60 billion. The offer price represented a
38% premium over Pharmacia’s closing stock price of $32.59 on the announcement
date. Pfizer’s shareholders would own 77% of the combined firms; and
Pharmacia’s shareholders, 23%. The market punished Pfizer, sending its shares
down $3.42, or 11%, to $28.78 on the announcement date. Meanwhile, Pharmacia’s
shares climbed $6.66, or 20%, to $39.25.
Case Study Discussion Questions:
1. In your judgement, what were the primary motivations for
Pfizer wanting to acquire Pharmacia? Categorize them in terms of the primary
motivations for mergers and acquisitions discussed in this chapter.
2. Why do you think Pfizer’s stock initially fell and
3. In your opinion, is this transaction likely to succeed
or fail to meet investor expectations? Explain your answer.
4. Would you anticipate continued consolidation in the
global pharmaceutical industry? Why or why not?