hi, do you have knowledge in corporate strategy? i attached the document, please go through and give me feed back.
Also, i will like to have the excel spread sheet that shows the growth rate of which you used to make decision of whether to acquire the target company?
1. Identify potential sources of synergy in the proposed acquisition of Star Genomics. Identify a set of
problems that the acquisition may create. How can Pills & Co. address them? From the strategic
viewpoint, does it appear to be a sensible acquisition for Pills & Co.?
2. After much deliberation, Tony decided to proceed with the proposed acquisition bid. In your opinion,
how much should Pills & Co. be willing to pay for Star Genomics?
You may find that information available to you for making this set of important decisions is rather
limited. As you are probably already aware, this often happens when strategic decisions must be made
quickly. Please feel free to use any plausible assumptions wherever the necessary data is missing; make
sure to explicitly state those assumptions.
1. Acquisition dilemma at Pills & Co.
In the early evening of October 30th, 2010 Tony was sitting in his new corner office, pondering his next
move. Just a week ago, he was appointed VP for business development of Pills & Co., a large
pharmaceutical company headquartered in Houston. He was given authority to formulate and
implement any necessary corporate strategy actions that were required to alleviate the pressing
problems the company faced. He had to start by resolving an issue left for him by his predecessor:
whether to acquire a relatively small biotechnology company called Star Genomics, Inc.
As the CEO of Pills & Co. reminded Tony just an hour before, their company was facing several significant
competitive threats: not only the blockbuster drugs that the company relied upon were starting to lose
market share to the newer treatments offered by Pfizer, Merck, and Eli Lilly, but four of the Pills? most
profitable products, including the drugs for treating high levels of cholesterol, osteoporosis and
neurological disorders, which together generated annual sales in excess of $14 billion, were about to
lose their patent protection in 2011-2014. Moreover, the reliable methods of in-house drug discovery
were not as effective lately, with on average one compound out of 11,000 screened leading to the
development of a new marketable drug. The most promising way forward seemed to be the use of
modern advances in molecular biology in order to develop new, comprehensive diagnostic systems and
effective medicines. However, Pills, which in its hundred-year history had mostly relied on chemistrybased approach to generate new medicines, had very limited expertise in applying molecular biology
advances to the drug discovery process. An acquisition of a dynamic biotechnology company such as Star
Genomics, with its cutting-edge expertise, dedicated workforce, novel treatment development ideas and
promising intellectual property could possibly lead to at least two new blockbuster drugs that Pills can
commercialize and market within the next few years.
However, it was likely that Pills & Co would not be the only bidder for the promising biotechnology firm.
One competitor that particularly worried the Pills? top management team was the New York-based
pharmaceutical giant iTherapy. iTherapy was widely praised by analysts and industry observers for its
marketing prowess; the firm have also been very active in acquisitions, successfully completing three
major mergers in the last five years, in addition to a seemingly endless string of smaller deals. The latest
rumors indicated that one of iTherapy?s directors had recently approached the Star Genomics founder,
Dr. Sam McCoy, trying to convince him that iTherapy-Star Genomics combination would be a perfect
Tony was trying to decide what would be the right course of actions. Should Pills, despite its relatively
scarce acquisition experience, go ahead and bid for Star Genomics? How much should they offer to pay?
If iTherapy bids for Star Genomics as well, should Pills enter a bidding war? Will the acquisition be worth
more for iTherapy than for Pills? Will Pills be able to realize synergies from such a deal? Will Pills be able
to integrate Star Genomics without destroying the growing firm?s ability to generate new ideas and
discoveries? He knew that depending on his answers to those questions, the next several weeks may
turn out to be pivotal in Pills? quest to revive its ailing drug discovery process.
2. Pharmaceutical Industry
By 2010 sales in the global pharmaceutical industry increased to about $840 billion, up from $300 billion
in 1998. Growth of the industry was attributed to increasing life expectancy and the discovery of new
drugs for major diseases, such as coronary failure. One study found that the average life expectancy in 52
countries increased by almost two years between 1986 and 2000 and that 40% of this increase could be
attributed to the availability of new medicines. The North American market accounted for nearly half the
worldwide market at close to $400 billion, while Europe accounted for approximately $180 billion
despite a population larger than that of the U.S.
Grouped into about 30 major therapeutic categories according to targeted disease, the leading drugs
were cholesterol and triglyceride reducers?which included such blockbuster drugs as Lipitor. These
were followed by cytostatics such as Lupron, anti-ulcerants such as Nexium, and antidepressants such as
Zoloft. Blockbuster drugs?those with annual sales in excess of $1 billion ?numbered 94 (compared to
36 in 2000) and accounted for 33% of overall medication revenues.
There were approximately 600 publicly traded pharmaceutical and biotechnology companies in the
world with a total market capitalization of over $1.5 trillion. Despite industry growth and a return on
equity that averaged about 20%, a broad index of drug stocks had fallen 25% in five years, even while
shares of biotechnology companies soared. Although most of the major pharmaceutical companies had
existed for at least a century, there had been dramatic consolidation in recent years. Consolidation was
achieved mostly through mergers and acquisitions. Between 1985 and 2005, the value of pharmaceutical
acquisitions exceeded $1 trillion. While no company held 5% of the market in 1987, Pfizer,
GlaxoSmithKline, iTherapy and Pills & Co. all exceeded this mark by the end of 2007. Some of the biggest
companies in the industry merged several times between 1995 and 2005. Pfizer acquired WarnerLambert in 2000 for $89 billion and then Pharmacia in 2003 for $60 billion to become the world?s largest
pharmaceutical company. It was currently preparing to complete the integration of another acquisition
of a large pharmaceutical firm ? a $68 billion deal with Wyeth. In 2004, Sanofi-Synthelabo and Aventis
merged, in another $60 billion deal, to form the industry number three. Despite such significant mergers,
the largest 10 companies still accounted for less than 50% of worldwide industry sales. Many believed
consolidation would continue.
3. Drug Development Process
Annual R&D spending of a typical big pharma company was approaching 15% of sales, much higher than
3 per cent of sales averaged by manufacturing companies in the U.S. When a pharmaceutical company
decided to develop and commercialize a new drug from scratch, it could expect to spend on average 10
years and $1B to bring a new drug to market. Only one out of every 10,000 tested compounds became
an approved drug, and half of all development dollars were spent on products that never reached the
market. Among drugs that were developed and marketed, only about three in ten drugs produced
revenues that exceeded their R&D costs. As a result, most pharma companies were considered
successful if they managed to commercialize one blockbuster drug every few years. Currently there were
over 2,300 products in clinical development, up 10% from the year before and 30% in the last three
years. Pharmaceutical companies employed thousands of scientists and physicians, many specialists in
certain fields. Motivated by curiosity and the desire to make a meaningful contribution, some scientists
moved back and forth between industry and academia. However, relocating to a new laboratory could
disrupt a research program, and many were reluctant to move. The salaries those scientists typically
commanded continued to increase quickly. Ph.D. researchers could expect compensation of $100,000 a
year or more, while top research executives could earn upwards of $5 million. Although salaries at
biotech firms were usually less than at pharmaceutical companies, employees enjoyed greater flexibility,
responsibility, and stock options. At the same time, in several new key fields the average salaries have
been increasing sharply even in smaller companies: for instance, a qualified biostatistician could expect a
salary in the $140,000-$160,000 range.
Pharmaceutical research programs could either focus on specific therapeutic disease categories or seek
to exploit the science behind any newly discovered disease pathway regardless of therapeutic area.
Some in the industry believed that a focus on therapeutic categories increased efficiency, as scientists
could leverage their expertise and ties with outside opinion leaders and other researchers. Others felt it
was always possible to hire scientists to explore a new disease mechanism, provided the firm committed
to a long-term research program. Experts noted that knowledge and capabilities accumulated in the
pursuit of one therapeutic area could often be leveraged to others. The scientific bases of diseases,
although increasingly sophisticated, were widely and quickly disseminated among the research
community. Fast-growing therapeutic categories such as diabetes, Alzheimer?s, allergy, and anti-aging
attracted the most research money. In contrast, some diseases affected so few people that they had
often been ignored by pharmaceutical companies.
Traditionally drugs were limited to compounds that could be isolated from natural sources or chemically
synthesized: drug compounds were found, not designed. As a result, pharmaceutical companies built
vast libraries of chemical compounds that they tested against known diseases, and those firms that had
tested the most were at an advantage. Over the previous two decades, however, drug development had
become more molecular biology based. Scientists could now try designing compounds for their
effectiveness against a specific disease-causing mechanism or pathway. In addition, several new
methods, such as combinatorial chemistry and high-throughput screening, had accelerated the search
process. These advances allowed companies to screen up to 100,000 new compounds each year.
Computer modeling enabled scientists to manipulate compounds at the molecular level and run
simulations before synthesizing the actual drug.
The wide dissemination of scientific knowledge and the availability of new technologies facilitated the
development of me-too drugs that could compete with a blockbuster without infringing its patent. Once
a new disease pathway had been identified, multiple firms would research its mechanism and develop
drugs that perhaps differed slightly in chemical composition or construction. This led to a decrease in the
time a breakthrough drug could benefit from market exclusivity from a median of 10.2 years in the 1970s
to 1.2 years in the early 2000s. According to critics, only about 14% of drugs approved by the FDA
between 1998 and 2002 were considered by the agency to be ?a significant improvement? over products
already on the market. However, the industry argued that follow-on drugs often provided therapeutic
choices for patients.
The biotechnology firms have recently been playing an increasingly important role in the drug discovery
process. Encompassing a variety of new biological techniques and processes, the biotech industry grew
rapidly from its founding in 1976. By 2010 there were about 1,800 biotech firms in the U.S., many
founded by researchers from pharmaceutical companies and universities. The biotechnology sector
reached $52.7 billion in sales in 2005. However, few biotech firms had positive cash flow, and the entire
sector had lost money since its creation. Despite high hopes, biotech companies spent about the same
as pharmaceutical firms to develop and launch a new drug. Biotechnology firms had commercialized
several new technologies, including gene therapy, recombinant DNA, and monoclonal antibodies that
sped up and expanded the range of drug development. To capitalize on these technologies,
pharmaceutical companies had invested in their own capabilities and increased the number of
partnerships, deals, and joint ventures with biotechnology firms. These deals, which in the past had
pharmaceutical companies paying large sums for the rights to market drugs already developed by
biotech firms, began moving to earlier stages of the development process. Deals began to offer lower upfront payments with high payouts for attaining important ?milestones,? such as successful clinical trials,
to allow pharmaceutical firms more ?shots on goal.? A typical deal would involve an upfront payment
between one and ten million dollars, followed by up to $500 M in milestone payments to develop certain
treatments. Recently, some big pharmaceutical firms started to acquire the biotech companies relatively
early in the lifecycle in order to pre-empt their competitors.
4. Pills & Co.
Pills & Co. was founded in Houston in 1907 and grew rapidly until early 2000?s on the strength of its
chemistry-based research programs. By 2010, Pills had annual sales of $28 billion, 57,000 employees and
7 large R&D centers (five of which were located in the U.S.). Pills & Co. was very effective at assessing
prospective drugs in the early stages of development and was able to provide detailed biological and
chemical profiles of its drugs. The prevailing attitude at the company was to hire brilliant scientists and
let them follow their instincts. The company had focused on developing blockbuster drugs, regardless of
therapeutic area and that capitalized on newly discovered mechanisms or pathways. Its willingness to
exploit science outside of its traditional expertise allowed Pills to enter new fields, such as diabetes and
bone disease. The strategy was always focused on discovering new and better medicines through
To achieve this, the firm had been dedicated to recruiting top scientific talent, decentralizing R&D to
smaller facilities with perhaps no more than 200 to 300 scientists, and leveraging in-house R&D with
external collaborations. It viewed hiring scientists as one of its most important activities, seeking to find
the best talent regardless of their specific area of expertise. Scientists usually worked in relatively small
groups of 7 to 20 people, with sometimes intense competition between the groups. Almost all of the
leading scientists had been working for Pills for ten years or more, while the turnover among younger
scientists was relatively high. The sense of pride at their significant past achievements was fostered by
senior scientific personnel, and permeated Pills? R&D centers. This sometimes made productive
collaboration with external partner firms problematic and conflict-ridden. The top management team at
Pills had many more executives with scientific backgrounds than most of their competitors. Internally,
Pills was set up with separate research units in several locations, each focused on one therapy area, each
with its own chief scientific officer who could decide which experimental compounds should advance
into risky and expensive human testing.
Recently, Pills experienced a heartbreaking setback, when in January of 2010 three potential blockbuster
drugs failed in clinical trials, thus putting enormous strain on the Pills? development pipeline. In addition,
the top administrators privately began to express fear that the continuing dominance of scientists in the
top echelons of the company could severely restrict the strategic options available to the firm. The
recent marketing efforts, especially for breaking into new markets have also been underwhelming,
underlined by the relatively low level of productivity of Pills? sales force and lower level of training of its
In response to those challenges, Pills just announced that it would lay off as many as 550 researchers.
While the job cuts will only slightly dent the Pills? work force, they strike at the company's lifeblood: four
R&D labs charged with discovering lucrative new drugs. Pills? CEO has also announced that the company
would cut the number of areas in which it does new research. The top management already told
hundreds of scientists and technicians that it was about to eliminate their jobs. By the end of 2010, Pills
expects to have laid off between 4% and 6% of its research employees in an attempt to reduce its annual
R&D spending by about $2.2 billion. The CEO warned that the ongoing tough economic climate coupled
with additional uncertainty about the healthcare reform might eventually trigger even bigger cuts, if
cash-strapped consumers start filling fewer prescriptions or turning more to generics, or if there is an
additional price pressures on the Medicare prescription drugs. At the same time, internal analysis
predicted that the overall direct costs of the healthcare reform compliance would not exceed 1% of sales
in 2010 and 1.8% of sales in 2011.
For the past three years, Pills? investors have been losing patience with the mostly incremental measures
attempted by the company?s CEO. Some have been clamoring for a big acquisition to offset the failure of
some of the drugs in the company?s pipeline. Pills was one of few big pharma companies that had not
merged with another drug firm. The current Pills? CEO did not believe that huge R&D budgets and large
acquisitions led to more efficiency and once commented, ?We don?t see that large mergers could add to
our long-term growth. Our approach, in addition to investing in our own internal research, is to continue
to establish relationships with firms pursuing complementary research.?
Alex felt that he generally agreed with the company-wide philosophy that it is science, not size that wins.
At the same time, he thought that a strategy of a series of smaller acquisitions should still be considered.
He was also keenly aware of the fact that merging pharmaceutical firms were found to suffer from a 50%
decrease in operating profit three years after a mega-merger relative to similar companies that did not
merge. In early 2010, Pills unveiled a new strategy to narrow its research focus to ten ?priority disease
areas.? One such priority area was developing new allergy treatments and diagnostic methods, which the
top management believed to be one of the most promising directions for the next five to ten years.
However, Pills& Co. realized that it did not have sufficient expertise to develop those treatments and
methods in-house efficiently and quickly. The group of 57 scientists that already worked on such projects
in the firm?s Houston R&D center proved to be underperforming over the past five-year period, despite
carefully documented screening of over 75,000 molecular compounds.
iTherapy was a large pharmaceutical company with sales of $45 billion and 96,000 employees; iTherapy
had grown quickly, mainly through mergers. As a result, iTherapy was known as a ?hunter, not a
gatherer? of new drugs. Among these, 15 were leaders in their therapeutic markets, and more than eight
were blockbuster drugs. iTherapy was spending more than $8 billion on R&D, or about a third higher
than its closest competitor, and employed over 12,000 researchers. At the same time, industry observers
felt that iTherapy had ?the worst pipeline relative to its size in the global industry.? Sales of recently
launched drugs were disappointing, and the company was forced to delay the launch of many widely
anticipated drugs. iTherapy also faced declining R&D productivity. In 2002 it spent $53 million for each of
its products in development; by 2004, each product in its pipeline cost $70 million. Furthermore, despite
the fact that iTherapy had nine major labs, the firm had not developed a blockbuster drug in its own lab
in the past ten years.
iTherapy was known for having effective marketing and had the largest sales force in the industry with
nearly 9,000 reps. It was estimated that each iTherapy rep cost $200,000 per year including car,
computer, and benefits. High costs notwithstanding, the iTherapy sales force was recognized for its
excellence and was consistently ranked highly by physicians; it was well-trained and aggressive. The
company believed that its sales force could sell a broad line of drugs; because they were with doctors
more often, they could influence prescribing behavior, particularly for drugs with therapeutic equivalents
available. iTherapy also positioned itself as the ?partner of choice? for biotech firms in marketing their
Because of its large sales force and marketing capabilities, many smaller firms had turned to iTherapy to
market its drugs. iTherapy made more than 20 acquisitions of such firms, in addition to several megamergers. It had vast experience in integrating the targets; its CFO believed in strict financial discipline
before deal closing and quick integration after, and usually drew up integration plans calling for most of
the closed deals to be completely assimilated by iTherapy within three months. One of the recent megamergers made on that CFO?s watch was deemed to be a resounding success by most industry observers.
The postmerger integration cut $300 million in costs by eliminating overlapping spending in research,
sales and administration. Analysts speculated that much of iTherapy?s strong earnings growth in 1990?s
and 2000?s had come from cost cutting after acquisitions. After its recent mega-merger, iTherapy
announced it would close two major R&D centers and distribute many functions among the surviving
facilities; early research would be conducted at two U.S. sites with thousands of scientists each in pursuit
of economies of scale, while clinical testing of drugs would happen at five U.S. sites. iTherapy continued
work on about 75% of the drugs that their recent acquisition targets had been developing, although it
lost many scientists in the transition. Despite recent challenges, the iTherapy?s CEO has told investors
that the number of its pipeline drugs that are in the late stages of human testing jumped to 25 from 16 a
6. Star Genomics, Inc.
Star Genomics was founded in 2004 by two scientists, Sam McCoy and Stacy Monk, who assumed the
roles of CEO and Chief Scientific Officer, respectively. They used the string of their discoveries they made
while working at the Famous State University to develop new diagnostic systems for allergy patients.
They planned to commercialize their most promising product: a special suite that would include
combination of allergy diagnosis techniques that would recommend a customizable set of medications to
each patient; those customizable sets will also be developed by Star Genomics. The founders hoped that
at least one of the drugs developed by the firm can, in time, achieve a blockbuster status. Their
intellectual property consisted of three issued patents, two pending patents, and two patents issued to
the Famous State University that were licensed exclusively to Star Genomics, since McCoy and Monk
were the inventors listed on those patents. All those patents addressed particular genetic pathways for
human body?s allergy reactions and hence could create a solid basis for patenting exclusive drug
compounds in the future.
At the time described in this case, the firm was located in one of the U.S. hubs known for productive and
extensive biotechnology research, although in the geographic region far from both the Pills? and
iTherapy?s headquarters and the firms? major R&D laboratories. Star Genomics employed 45 scientists ?
mostly on the part-time basis ? and just two individuals in support functions. The firm outsourced most
of its clerical, HR and accounting needs. The scientists worked in three groups: AllergySuite group (17
scientists, of which five were clinical psychologists and two were computer scientists), drug development
group (23 scientists), and NIH grants (5 scientists). Drug development group worked mostly on the longterm drug development program which was not expected to produce any meaningful revenues in the
next two or three years. The grants group applied for and completed research grants from National
Institutes of Health and provided for much of Star Genomics? liquidity. AllergySuite group focused on
developing hardware and software for the future flagship product. That group was also developing
contacts with several healthcare service companies in…