CASE STUDY :

The Combined Companies

The August 20 merger announcement described the combined company as follows:

The company, named Pharmacia & Upjohn, Inc., would have had combined 1994 sales of nearly $7 billion, with prescription pharmaceutical sales placing it in the top ten in the worldwide industry. Annual research and development expenditures will exceed $1 billion, also in the top tier of the pharmaceutical industry. The complementary geographical strengths of the two companies will give Pharmacia & Upjohn sales ranking among the top five pharmaceutical companies in Europe, top 15 in North America, and top 20 in Japan (also among the top two or three non-Japanese companies in Japan). Pharmacia & Upjohn will have a broad product portfolio with sales exceeding $500 million in six key therapeutic areas. Sales growth in Pharmacia & Upjohn, led by 28 product introduction and line extensions in the next three years and deeper penetration of existing markets, is expected to exceed industry averages. Projected annual operating cost synergies of over $500 million, more than 85% of which are expected to be in effect by the end of 1996, are anticipated to further contribute to increased earnings and a strong balance sheet as well as provide flexibility to take advantage of further growth opportunities.

According to company management, the combination of Upjohn and Pharmacia would made a company better prepared to compete in the changing environment of the

pharmaceuticals industry. Specifically, a merger with Pharmacia would strengthen Upjohn in terms of market presence, R&D, geographic reach, product portfolio, cost synergies, financial position and growth, and provide the management experience necessary to succeed.

MARKET PRESENCE. Pharmacia & Upjohn would become the world's ninth largest pharmaceutical company. In a world increasingly dominated by large buyers looking to deal with fewer suppliers, the general belief in the industry was "bigger is better."

R&D. The increasing cost of developing new pharmaceutical products was making it more difficult for smaller companies. Some analysts believed that $1 billion in yearly R&D expenditures was becoming a minimum threshold for continued long-term success. Upjohn alone had been spending above the industry average for R&D, but was still significantly short of this threshold. The addition of Pharmacia would enable Upjohn to reach this level. Further, although Pharmacia's pipeline was not in the industry's top tier and did not contain potential blockbusters, it did have several products expected to begin making moderate contributions to sales growth in the 1995 to 1997 period, and had several more potential products further back in the pipeline.

GEOGRAPHIC REACH. Upjohn alone was weak in the world's second and third largest markets, Europe and Japan. While some drugs were tailored to specific markets, most

could be used worldwide, and particularly in the top three markets. Thus, as the cost of developing drugs rose, it became increasingly important to be able to access the world

market. Improving Upjohn's position outside of the U.S. would require market specific drugs, but more important it required a developed sales and marketing organization with

good contacts among the many buyers in these markets. Pharmacia provided both, particularly since Europe, which was Upjohn's weakness, was Pharmacia's strongest market.

PRODUCT PORTFOLIO. One of the key benefits of the merger for Upjohn was the addition of Pharmacia's products. The combined companies would have sales of over $500

million in each of six areas. In five of Upjohn's top selling product areas (central nervous system; reproductive and women's health; critical care, transplant, and cancer; infectious disease; and metabolics) Pharmacia added strong products of their own, potential products to be introduced within a few years, or better access to key markets. Further, the addition of Pharmacia's over-the-counter products, such as Nicorette and Nicotrol for smoking cessation, the laxative Microlax, and various dietary supplements, to Upjohn's Motrin IB pain reliever, Kaopectate for diarrhea, Dramamine for motion sickness, and Unicap vitamins, may give this area a critical mass that it lacked at both companies individually. Also, Pharmacia added additional experience in moving products from being prescription drugs to over-the-counter products. This could prove useful as Upjohn attempted to make this switch with several of their products in various world markets.

COST SYNERGIES. The combined companies had announced $500 million in expected operating cost synergies as a result of the merger with some 85 percent of the reductions in place by the end of 1996. One analyst estimated that one-half of the savings would come from Selling, General, and Administrative expenses and one-quarter each from manufacturing expenses and R&D expenses.14 A part of these savings was to be the reduction of over 4,000 jobs.

FINANCIAL POSITION. The combined company would have a strong balance sheet. Because this was a pooling of interests merger financed by stock, there would be no acquisition-related interest costs or amortization of goodwill. Further, because it was one of the least leveraged companies in the industry, Pharmacia & Upjohn would be able to

pursue future growth opportunities without severe financial constraints.

GROWTH. In addition to growth by acquisition, management expected the addition of Pharmacia would increase the growth of the existing company. Although in mid-1995

Pharmacia was growing faster than Upjohn, both companies were growing at below industry average rates. However, management believed that because Pharmacia's sales organization was strong where Upjohn's was weak, the combined companies would grow faster than either would separatelyeven faster than the industry average.

MANAGEMENT EXPERIENCE. While Upjohn had management skilled in rationalizing operations, Pharmacia management brought critical skills in terms of integrating

merged or acquired companies, having done so several times since the late 1980s. In particular, with the 1993 acquisition of FICE, Pharmacia had to restructure the company

and combine and reduce its manufacturing, sales, and marketing organizations, as would be necessary with the proposed merger. The potential of the new company could not

fully be realized unless it was successful in combining different operations and cultures to create effective and efficient functional units.

QUESTION OF CASE STUDY :

1. Might Upjohn be better off acquiring rather than merging?