INTRODUCTION The 1990¶s saw a highly fragmented pharmaceutical industry with many competitors. The top ten firms in pharmaceutical sales held 28% market share in mid-1995. The top 50 firms held just over 60 percent. Changes were occurring in the pharmaceutical industry in the 1990¶s. With pharmaceutical benefit management (PBM) firms working to reduce costs, pharmaceutical firms held less power. PBMs sought to reduce the number of supplier firms by only purchasing from the largest firms and requiring doctors to prescribe drugs from approved lists called formularies. Many pharmaceutical firms saw mergers as a means of reducing costs and increasing market share. On August 20, 1995, two pharmaceutical companies by the names of Upjohn Company and Pharmacia AB announced that they were forming a ³merger of equals.´ Upjohn Company, incorporated in the U.S., and Pharmacia AB, incorporated in Sweden, would combine to form the ninth largest pharmaceutical company in t he world. PHARMACEUTICAL INDUSTRY: PRE-MERGER The pharmaceutical industry at the time of the case was very attractive. The attractiveness of this industry can be determined using Porter¶s Five Forces, a model for industry analysis. This model looks at barriers to entry, supplier power, threat of substitutes, and buyer power as they relate to industry rivalry. BARRIERS TO ENTRYThe pharmaceutical industry has high barriers to entry. A company should expect to spend up to 15 years and up to $600 million to bring a new drug to market. On average, only one out of every 10,000 tested compounds becomes an approved drug. If a drug does make it to market, there is only a thirty-percent chance that revenues from the drug will exceed R&D costs. Based on these industry averages, a new firm hoping to enter the pharmaceutical industry should be prepared to dish out at least $600 million, without seeing an income for 15 years. It would be hard for a new entrant to obtain the capital necessary for this endeavor with little certainty as to if they will everbe able to pay it back. Further barriers to entry are probablein the future. The economies of scale created by the current consolidation occurring in the pharmaceutical industry will be hard to match.
