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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 create a company better prepared to compete in the changing environment of the
pharmaceuticals industry. Speci¬cally, a merger with Pharmacia would strengthen Up-
john in terms of market presence, R&D, geographic reach, product portfolio, cost syner-
gies, ¬nancial position and growth, and provide the management experience necessary
to succeed. (See Exhibit 3 for the stock market reaction to the merger announcement.)

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.”

13. Analysts Report, Pharmacia,Auerbach Grayson & Company, July 7, 1995.
Mergers and Acquisitions

15-31 Part 3 Business Analysis and Valuation Applications

R&D. The increasing cost of developing new pharmaceutical products was making it
more dif¬cult 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 sig-
ni¬cantly 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 sev-
eral more potential products further back in the pipeline.
The Uphohn Company

GEOGRAPHIC REACH. Upjohn alone was weak in the world™s second and third larg-
est markets, Europe and Japan. While some drugs were tailored to speci¬c 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 speci¬c
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, par-
ticularly since Europe, which was Upjohn™s weakness, was Pharmacia™s strongest

PRODUCT PORTFOLIO. One of the key bene¬ts of the merger for Upjohn was the ad-
dition of Pharmacia™s products. The combined companies would have sales of over $500
million in each of six areas. In ¬ve of Upjohn™s top selling product areas (central nervous
system; reproductive and women™s health; critical care, transplant, and cancer; infec-
tious 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 Up-
john™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 be-
ing 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 ex-
pected operating cost synergies as a result of the merger with some 85 percent of the re-
ductions 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.

14. Joseph P Riccardo and Scott J. Shevick, Analyst Report, The Merger: Upjohn Co., Pharmacia AB , Bear Stearns &
Co. Inc., September 18, 1995.
628 Mergers and Acquisitions

Mergers and Acquisitions

FINANCIAL POSITION. The combined company would have a strong balance sheet.
Because this was a pooling of interests merger ¬nanced by stock, there would be no ac-
quisition-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 ¬nancial 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 in-

The Uphohn Company
dustry average rates. However, management believed that because Pharmacia™s sales or-
ganization was strong where Upjohn™s was weak, the combined companies would grow
faster than either would separately”even faster than the industry average.

MANAGEMENT EXPERIENCE. While Upjohn had management skilled in rational-
izing operations, Pharmacia management brought critical skills in terms of integrating
merged or acquired companies, having done so several times since the late 1980s. In par-
ticular, 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 ef¬cient functional units.

The Decision
As the date of the shareholders meeting approached, Upjohn™s shareholders were trying
to decide whether to approve the proposed merger with Pharmacia. Many observers saw
the merger as a signi¬cant step toward addressing Upjohn™s strategic problems, and in
the days following the announcement several investment ¬rms raised their recommen-
dations on Upjohn stock from neutral to outperform. However, it was not clear that the
proposed deal was the best one available for the shareholders. Dif¬cult questions re-
mained to be answered.
A merger with Pharmacia appeared to make Upjohn a top tier ¬rm. However, merg-
ing two companies of this size from different countries and with different cultures might
be more complex than management believed. Was $500 million in cost synergies obtain-
able by the merger of two companies that had already achieved signi¬cant improve-
ments in margins through rationalization efforts over the preceding few years? Even
though Pharmacia™s sales force was strong in Europe and Japan, there were questions
about whether that sales force had the right contacts to achieve the sales increase that
Upjohn was expecting. Further, Upjohn™s product development pipeline had no block-
buster products and the addition of Pharmacia did not solve this problem. Were block-
buster drugs necessary for success, or was a relatively large number of lower potential
products suf¬cient? Was Pharmacia the right partner with which to merge? Might
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15-33 Part 3 Business Analysis and Valuation Applications

Upjohn be better off acquiring rather than merging? Or perhaps shareholders would re-
ceive a higher premium by having Upjohn be acquired by some other ¬rm. Finally, as-
suming Pharmacia was a good merger partner, was the stock exchange ratio a fair one
for shareholders?
These questions were complicated by the fact that this might very well be an interim
step for Upjohn if they hoped to remain a top tier player in the industry. The proposed
merger would make Pharmacia & Upjohn a top ten company in 1995, but they might not
be able to hold that position because other top companies were likely to merge and/or
The Uphohn Company

had potential blockbuster drugs in their pipelines.
630 Mergers and Acquisitions

Mergers and Acquisitions

Upjohn Company - 1994 Letter to Shareholders of Financial Review
TO OUR SHAREHOLDERS: worldwide to reduce excess capacity and operating
costs in the years ahead. We also sold Asgrow Seed
Company and our chicken-breeding joint venture,
In 1994, The Upjohn Company sharpened its focus
enabling us to focus on our core human and animal
and directed its resources toward a long-range strat-
health pharmaceutical businesses. Our re-engineer-
egy for growth. We began re-examining everything
ing and cost-containment efforts, including work-
we do to ¬nd ways to do things better. We sold non-

The Uphohn Company
force reductions, contributed $75 million to operat-
core businesses and initiated the re-engineering of
ing earnings in 1994.
our supply (manufacturing), sales and marketing
and research and development operations. We redi- We are accelerating growth of our international
rected our sales and marketing efforts to exploit business, which now contributes 44 percent of our
growth opportunities around the world. We contin- total sales. We received 199 international product
ued to concentrate our research and development registrations in 1994. A joint venture in China, a
on major unmet medical needs. Through these key growing presence in Central and Eastern Europe,
initiatives, we have strengthened our prospects for and a return to Argentina and Brazil positions
increasing the company™s long-term performance Upjohn to take maximum advantage of some of the
and value. world™s fastest-growing markets.
We pursued these initiatives during one of the most
We restructured our U.S. pharmaceutical sales and
challenging years in our company™s history, balanc-
marketing operations to focus on integrated health
ing our efforts to establish long-term programs and
care systems, HMOs, business coalitions, insurance
priorities and the need to achieve a respectable
providers and other emerging large customers in
¬nancial performance today. Our sales for 1994
medical specialty areas. We formed Greenstone
reached $3.3 billion, slightly below 1993 levels. Net
Healthcare Solutions to add the dimension of
earnings were $491 million in 1994, compared to
comprehensive disease management and analysis
$392 million in 1993. Earnings from continuing
services to our traditional role of researcher, manu-
operations (before restructuring and unusual items
facturer and marketer of health care products.
and the cumulative effect of accounting changes)
were $489 million, compared to $575 million in Of course, the key to our company™s long-term per-
1993. These results met our goal and exceeded formance remains research and development. Our
external expectations. 1994 investment in R&D was $607 million, or 18.5
percent of sales, a rate above the industry average.
Four of our largest-selling products”XANAX, HAL-
This investment, along with a relentless discovery
CION, MICRONASE and ANSAID”lost U.S. patent
focus and accelerated development pace, comprises
protection, resulting in a $400 million decline in
our commitment to create new products with high
sales from intense generic competition. We offset
value and line extensions that maximize the value of
substantially all of this loss in revenue with new-
our existing products.
product sales, strong growth in international mar-
kets and a generics effort of our own. Our generics Our current R&D pipeline is one of the strongest in
strategy helped us retain 83 percent of the dis- Upjohn™s history, with 10 compounds in late-stage
pensed new prescriptions for XANAX and alpra- development. We expect to ¬le 10 New Drug Appli-
zolam in the U.S. anti-anxiety market in 1994. While cations in the U.S. between 1994 and 1996. Over
this competition will continue, we have a unique the last ¬ve years, we have reduced by more than
array of products in our pipeline aimed at penetrat- 50 percent the time it takes to move a product
ing new, specialized markets. through the R&D pipeline. Our R&D strategy is
As we strengthen our product portfolio, we are ratio- sharply focused, concentrating on 30 high-potential
nalizing and consolidating our manufacturing sites projects.
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15-35 Part 3 Business Analysis and Valuation Applications

We are seeking unique products targeted at condi- company on the move. We are con¬dent that these
tions for which adequate treatment is unavailable. strategic initiatives in every area of the company
Our pipeline includes promising compounds in late- have positioned us to take advantage of future
stage development for cancer, certain types of opportunities.
stroke, head and spinal cord injuries and AIDS. I would like to thank our 16,900 employees world-
Upjohn™s plan for dramatically improving its perfor- wide for their hard work and dedication. Together,
mance in the short-term and eventually moving into we demonstrated in 1994 what our employees can
an industry leadership position is clear. By control- do when we believe in ourselves. I am proud of what
ling costs and re-engineering our processes, we are our employees have accomplished and look for-
The Uphohn Company


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