lipitor at the heart

Decem ber 1999 This case was prepared by Matthew Leafstedt, Amy Marta, Jitendra Marwaha, Philip Schallwig and Reka Shinkle for class discussion in Professor Allan Afuah’s Corporate Strategy Lecture on Strategy, Technology and Innovation. Lipitor: At the Heart of Warner-Lambert Introduction November 19 99 w as a tense month i n the M or ri s Pl ains, New J ersey headq uarters of Wa rner- Lambe rt Company. On Novembe r 3, Wa rner-Lam bert a nd Ame rican Ho me Products (AHP ) announ ced a n am bi ti o us m erg er that w oul d crea te the w orld’s l arg est pharma ceutical compa ny, w ith o ver $ 26 bil li on in combined a nnua l reven ue s. The f ol low ing d a y, Pf izer, Inc. announce d a n unsoli cited $ 80 bil li on sto ck of f er f or War ner- Lambe rt, the larg est hostile take ov er attem pt i n the hist ory of the pharm ac eutical business. Late on No vembe r 29 , Warne r- Lambe rt President a nd CEO Lodew ij k J. R. de Vi nk se ttl ed in to rea d Pf iz er’s res ponse to his l ate st move, a lega l sui t seeking to t erm inate the co- ma rketing ag ree me nt betwe en Wa rner- Lambe rt and Pf iz er for the w il dly succes sf ul cho lesterol - lowe ring drug , Li pit or. Pfiz er’s short new s relea se c alled Wa rner-Lam bert’s law suit the l a test in “a series of despe rate de f ensive measure s designe d to deny its shareholders the o pportuni ty to consi der a superior offer from Pfizer.” 1 As de Vink reread the Pf iz er s tatem ent a nd contemplate d his next move, he reca ll ed the chain of decisions that made Lipi to r the eng ine o f Wa rner- Lam bert's rece nt success a nd the key prize in t he ongoi ng m erg er ba ttle. Pharmaceutical Industry Overview The pha rma ceu tica l i ndustry is a criti ca l eleme nt of hea lt h ca re delivery ar ound the w orl d. I n 199 8, sales of ethical pharm ac euticals rea ched $ 103.5 bi ll ion i n the U. S. alone. 2 The U.S . is the single largest purchaser of presc ript ion drugs, repre senting appr ox imate ly 36% of the worldwide ma rket. 3 As i llus t r a t ed b y the fa c t t h a t i n 1998 t he l a r gest ph a rmaceut i c a l c ompan y c a p t u red o n l y 6.5% of U.S. pharm ac eutical sales, the industry i s f rag me nted (Exhi bit 1). 4 The e cono mics of the pha rmaceu ti ca l i ndustry a re dif f ere nt than in many oth er industries. Fi gure 1 brea ks down the ma j or exp endit ures of a drug company asa percentag e of sales. Ma rketi ng and sa les dema nds transl ate into the si ngle large st expense incurred by the i ndustry. Sa les f orces have nea rly do ubled in t he pa st fiv e ye ar s to more tha n 62,00 0 f ield repre senta ti ves. 5 During the sa me period, f ede ra l reg ulatio ns we re ea sed, ena bli ng dru g compa nies to promot e their pro ducts more li ke consum er g oo ds. This ha s spu rre d the indu stry’s onslau g ht of direc t to consum er (DTC) televisi on and print advertiseme nts. I n total, DTC spe nding w as a n e sti ma ted $ 1.2 bill ion in 19 98 6 . Drug ma nuf ac turing costs are relativel y low a t only 17% of sa les, but resea rch and de velopme nt investm ents a re a higher pe rcenta g e of sa les than in virt ua ll y any other industry, i ncludin g the electroni cs, aer ospace , and au to mobil e industries. 7

lipitor at the heart

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