Cross-Border Mergers & Acquisitions in the Pharmaceutical Industry

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Introduction

In every part of the world, the business sector is streamlining its operations through diverse types of amalgamation approaches. Amalgamation is done in order to triumph over the many challenges but also harness opportunities created by globalization. The intensity of such operations has been witnessed in different major sectors of the economy in many countries of the world.

In particular, there have been relatively high rates of mergers and acquisitions among the pharmaceutical industries. This phenomenon is attributed to presence of subsidiaries of big multinational companies in many countries the entire world over. This paper investigates into literature written on acquisition and mergers with a special focus on the pharmaceutical industry.

Acquisition and Mergers

The term merger and acquisition are often applied synonymously; however, there is a slight difference in the meaning of the two terms. A merger takes place when two firms harmonize to go onward as a unitary corporation rather than remain disjointedly possessed and managed.

When merging occurs, and in most occurrence between companies of the same size, their stocks are surrendered and the new company stock is issued in their place.

On the other hand acquisition takes place when one firm takes over another and establishes itself as the new owner. In this case the target corporation ceases to exist legally, and the buyer’s stockpile continues to be traded, as noted by Hassan (2007, p.58). In addition, Hassan (2007) notes that almost all mergers tend to be between medium size firms and large sized firms.

Cross-border mergers and acquisitions in the Pharmaceutical Industry

There are numerous reasons that lead to the majority of mergers in pharmaceutical industries. In reference to most mergers and acquisition in pharmaceutical industries in the United States of America, Kang &Johansson (2000, p.29) observes that possession of recognized product in some pharmaceutical markets, well renowned market system and the market allotment are examples of motivations that has led to the boom in merger and acquisitions.

The other Factors that motivate Cross-border mergers and acquisitions in the Pharmaceutical industry can be classified in two distinct categories (Kang &Johansson, 2000). Kang &Johansson (2000) further observe that while some of these factors are exogenous, others are autogenous.

Exogenous factors are those that surface within the company or those factors that the company can be able to handle or even influence (Kang &Johansson, 2000).

On the other hand, autogenous factors are those foregoing external issues, which are beyond the aptitude of the corporation to control or even to influence considerably (Kang &Johansson, 2000). However, while they determine the attainability of a certain merger or acquisition, they do not explain why corporations want to merge.

Antitrust is one of exogenous factors associated with government policies that can promote, retard or prohibit Cross-border mergers & acquisitions in the pharmaceutical industry. In both the US and European Union, the antitrust regulators have largely been reasonably sympathetic to mergers and acquisition (Kang &Johansson, 2000).

They have realized that markets are universal and have acknowledged the divestitures, permits and business restriction to heal some of the problems as observed by (Kang &Johansson, 2000, p.30). In addition, Kang &Johansson (2000) note that the universal direction to private enterprise and privatization of state possessed corporation, has led to a notable rise in the number of cross-border merger and acquisitions.

Moreover, the different governments especially in developed countries such as those in North America and Western Europe have decided to take a back seat and leave the market to decide on the results of hostile bids. These bids appear to have opened the door and led to a significant increase in the number of cross-border mergers and acquisitions of various pharmaceutical firms in their countries (Kang &Johansson, 2000).

Another factor that has motivated the cross boarder merger and acquisition in the pharmaceutical industry is labor. In his own views, Kang (2001, p.71) notes that as long as the job security of workers is guaranteed and there is a vibrant job market, the resistance of employees of to mergers and acquisitions is minimal. Employee cooperation has made the whole process to be simplified and accessible.

Going by autogenous factors, Kang (2001, pp.71-75) perceives that the traditional prime motivation for any merger is to gain and increase the market power. Similarly, the idea behind the many cross-border merger and acquisition is to attain the ability to control a large share of the market, and if it would not have been for the government regulations, most corporations would be seeking to have total monopoly.

Kang (2001) further observes that distributing the profit of an enhanced operating margin throughout diminution of working cost is another very important reason behind cross-border operations within the pharmaceutical corporations.

The acquirer in often cases restructures towards bettering the acquired organization’s operations. Consequently, this leads to improving or increasing value for the shareholders of acquired company. Moreover, intra-industry consolidating acquirement provides opening to reduce costs (Kang &Johansson, 2000).

The need to minimize the cost of developing new technologies is another factor that facilitates most cross-border acquisition.

Following the state-of-the-art technological advancement required in pharmaceutical industries, the cost of coming up with such obligation may be a huge responsibility for a pharmaceutical firm with less operating margin to match. At this point, the need to merge with another firm of same size may emerge, in order to reduce the huge financial budget (Cantwell & Santangelop 2006, p.21).

Cantwell & Santangelop (2006) observe that technological factors have influenced the growing merger and acquisition strategy in the pharmaceutical industries.

Internationalization and integration have taken place in pharmaceutical manufacturing, through the amalgamation and acquisition taken on as a means of attaining cost savings and accelerating innovation in response to the first tempo of scientific changes in this segment (Cantwell & Santangelop, 2006).

Pharmaceutical industries have consequently undertaken mergers and acquisition consecutively to accumulate enough resources to fund researches and development of new drugs (Cantwell & Santangelop, 2006).

Cantwell & Santangelop (2006) point out that in order to overcome challenges of intimidation to their spirited positions; pharmaceutical corporations have pushed to get better research, promotion and allocation of their pharmaceutical products. Now, cross-border unions usually provide the much needed alternative of expanding the commercial property base and preserve of technical strength.

Institutional stakeholders in pharmaceutical industries and other investment campaigners are known to have a considerable achievement in urging or if need be compelling corporations to reorganize their operations or seek a merger (Cassiman & Colombo 2006, p.32). This is more often than not propelled by the desire in shareholders’ of such pharmaceutical firms to make the most of their worth.

The improved aptitude by stakeholder to converse amongst themselves and put pressure on the board of executive has had a monumental impact (Cassiman & Colombo 2006, p.32). In additional cases, shareholder demands has been the momentum for growth through instances such as cross-border acquisitions intended to increase volume or expand product lines

Impact of Cross-Border Mergers and Acquisitions on Performance of Pharmaceutical Industries

Having looked at some factors that motivate Cross-border mergers and acquisitions in the pharmaceutical Industry, the question most likely to arise would be to what degree the consolidation approach assisted them (pharmaceutical industries) to advance their situation. Mergers and acquisition are anticipated to change the performance of the amalgamating companies in a variety of ways.

One of these ways is through an expansion in the level factors, where the merging firms are expected to increase the capacity of their production. In turn, increased production capacity helps reduce the unit cost of production per pharmaceutical product.

In many instances, mergers and acquisitions are meant to give more powers to merging pharmaceutical firms in the market and this eventually present them with powers to increase their accomplishment which lead to high prices and in due course to high profits.

In other cases, however, merging pharmaceutical firms may experience minimal performance, if obtained unprofitable firms and are not able acquire the anticipated synergies (Cantwell & Santangelop, 2006, pp. 21-25)

A close comparison of the merging and non merging firms will bring out a clearer picture of performance between the two diverse categories of consolidation approaches. A merging firm occurs only after making the primary merger or acquisition, and until that it would be a non merging corporation.

Going by measures of affluence such as Gross profit margin and return on funds engaged, these ratios give the impression that merging incorporations are by far more profitable in comparison to the non-merging companies.

Similarly, the research and development intensity of the merging corporations are significantly better compared to their non-merging counterparts. The elevated variability shown by the research and development of the merging industries unlike the non merging ones, indicate that only a few merging firms are capable of investing more on research study and growth (Beena, 2006, p.11).

Other core determinants of supporting market expansion are the selling expenses, mostly the marketing cost relatively to promotion expenses (Beena, 2006). This is attributed to the fact that most pharmaceutical industries usually make advances to the prescribing doctors instead of approaching the patients, which compels them to incur expenses on advertising through sales legislative body.

The author as well argues that the average commercial advertisements strength for merging corporations remained to some extent above the one of non-merging firms, which implies that merging firms could minimize their expenses on marketing costs, upon getting into a merger.

The analysis on merger and acquisition proves that pharmaceutical companies reengaged in them, are able to distribute among themselves the market channel, which to a considerable extent minimizes their cost (Beena 2006, p. 20). These corporations have as well acquired various tactical marketing integrations that assist them to develop marketing synergies (Halibozek & Kovacich 2005, p.49).

In comparing the intensity associated with export and import, between the merging and non-merging conglomerate, Halibozek & Kovacich (2005) observe that the merging companies have a high export and import strength. The high import concentration may be attributed to the pharmaceutical firms’ dependence on the importation in bulk of their pharmaceutical products such as the drugs (Halibozek & Kovacich, 2005, p.52).

Despite the fact that mergers and acquisitions are projected to augment the capacity exploitation of the merging pharmaceutical industries because of the expansionary explanation, capability utilization is inferior to that of the non-merging corporations throughout the post amalgamation period (Mueller, 1980, p. 4).

According to Muller (1980, p.5), most of the pharmaceutical industries seeking mergers and acquisition, usually consider the possibility of cutting short peril and uncertainty. In this perspective, Muller (1980) argues that many firms believe that the more diversified a firm is, the higher the likelihood of obtaining a steady returns, hence a losses in one market may as well be offset by gains in another market.

Many firms as a result of merger and acquisition are able to expand their production portfolio by coming up with new brands of products, which are added to more therapeutic groupings and thereby not only minimize risks but also spread out their market synergies. The synergies effects of cross-border merger and acquisition makes it possible for pharmaceutical corporations to deepen or scope products arrangement.

Conclusion

Liberalization of many pharmaceutical firms by majority of governments has enabled cross-border merger and acquisition, which in turn has provided new market opportunities.

The fast tempo of scientific changes has acted as a major influence to cross-border amalgamation and acquisition through making it possible for pharmaceutical firm to deal with a growing groundbreaking complication and interrelatedness, which has enabled them to carry out widespread research and development on their products.

Similarly, mergers and acquisitions have made it possible for pharmaceutical firms to look for more business and market in order to manage with cost raise. Cross-border merger and acquisitions have in addition influenced though differently on national economies, when considering developing and developed economies.

Within national borders, merger and acquisitions of pharmaceutical industries can be used to enhance domestic development and growth, while in case of developed countries they may allow national governments to pursue improvement of guiding principles

On whether the mergers and acquisitions in the industry are good it is not easy to say. However, if these corporations are in a position to transfer a fraction of benefits gained through their enhanced performance due to consolidation to the customers, then the developments are welcome. The benefits can be passed to the customer in the form of reduced costs and a superior quality of drugs.

Such benefits accruing to the customer would be a welcome development that would in turn lead to bigger market share command by firms. However, if amalgamation only leads to monopolistic tendencies, then it would be worthy of special attention, to safeguard the interest of the common person who cannot afford the hefty price of drugs.

References

Beena, S, 2008, Mergers and Acquisitions in the Indian Pharmaceutical Industry: Nature, Structure and Performance, Emerald Group Publishing, New Delhi.

Cantwell, JA & Santangelop, 2006, Mergers & Acquisitions and the global strategies of Transnational Corporation, University of Reading Press, Reading.

Cassiman, B & Colombo, MG 2006, Mergers & Acquisitions: The Innovation Impact‎, Edwar Elgar Publishing, Massachusetts.

Halibozek, EP & Kovacich, GD 2005, Mergers and Acquisitions Security: Corporate Restructuring and Security, Oxford University Press, London.

Hassan, M 2007, “Do Mergers and Acquisitions Create Shareholder Wealth In The Pharmaceutical Industry?”International Journal of Pharmaceutical and Healthcare Marketing, Vol. 1, pp.58 – 78, Fordham University Press, New York.

Kang, NH 2001, New patterns of industrial globalization: Cross-border Mergers and Acquisition, OECD, London

Kang, NH & Johansson, S 2007, Cross-Border Mergers And Acquisitions: Their Role In Industrial Globalization, 8 (1), pp. 23- 59, OECD 2000 publishers, London

Mueller, D 1980, “The Determinants and Effects of Mergers: An International Comparison”, Cambridge University Press, MA.

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