Pfizer 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, Pfizer moved from 14^thin terms of market share in 1990 to the top spot in 2000. With the acquisition of Pharmacia in 2002, Pfizers 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 millennium. 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 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 worlds leading arthritis medicine and the 7^th largest selling drug globally in terms of annual sales in Celebrex. The companies were continuing the partnership with 2^nd generation drugs such as Bextra launched in the spring of 2002. For Pharmacias 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 are $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 expects to spend $5.3 billion on R&D in 2002. Adding Pharmacias $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 Pharmacias closing stock price of $32.59 on the announcement date. Pfizers shareholders would own 77% of the combined firms and Pharmcias shareholders 23%. The market punished Pfizer, sending its shares down $3.42 or 11% to $28.78 on the announcement date. Meanwhile, Pharmacias shares climbed $6.66 or 20% to $39.25.

Discussion Questions:-

1. In your judgment, what were the primary motivations for Pfizer wanting to acquire Pharmacia?
2. Why do you think Pfizers stock initially fell and Pharmacias increased?
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?