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Several Mergers of Large Firms within Oligopolies Coursework

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Introduction

Grifols/Talecris Merger

Grifols, S.A. is a pharmaceutical company based in Barcelona Spain whose main specialization is the research, development and manufacture, and marketing of plasma derivatives. It also engages in the development of IV therapy, internal nutrition, diagnostic systems, and other medical materials. The main segments that the company deals with include bioscience, hospital, and diagnostic. Though headquartered in Spain, the company has subsidiaries throughout the world that help it make undertake the above tasks.

According to Bloomberg Business Week, the company’s year-over-year financials has recently experienced a bottom-line shrink from 148 million euros to 115 million euros. However, the company’s revenues experienced a bump increasing to 990 million euros from 954 million euros. in the first quarter of 2011, the company has experienced a rise in revenues increasing by 3.8% to 261 million Euros compared to the previous year.

Though headquartered in Spain, the company has operations across the world concentrating mainly in North America, Europe, and Asia including a facility in Los Angeles California. The latest subsidiary that the company acquired was Talecris Biotherapeutics Holdings Corp, a US-based company that also is involved in the production of plasma derivatives.

Talecris Biotherapeutics Holdings Corp. is a global biopharmaceutical company that specializes in the production of protein therapy products. These products are used to treat conditions such as immune system disorders, severe burns, and hemophilia. The products that this company makes, like those of Grifols, S.A, help in bleeding control as well as combating infection. Some of the products include Gamunex IGIV and Prolastin, which help in the treatment and control of immunodeficiency conditions and leukemia respectively. In the fiscal year ended December 2010, the revenues for the company topped 1601 million dollars representing revenue growth of 4.5% compared to the previous year. Talecris Biotherapeutics Holdings Corp. is based in Research Triangle Park, North Carolina, and has operations in the US, Canada, and internationally.

Incentives to consolidate

According to the Grifols management, the merger of the two companies will provide much-needed diversification of the global industry that provides life-saving and life-prolonging plasma protein therapeutics. The diversification will be a result of the established and strong presence of the firms in the US, Europe, and other markets worldwide.

Additionally, the combination of the two firms offers the best platform for the achievement of both company’s strategic initiatives through the creation of an efficient system for manufacturing, innovation, marketing, and sales of the products that the companies produce in the global market.

According to the company, the merger will avail a large pool of expertise and skills that will be driven by both companies’ legacies that emphasizes patient commitment growth and innovation. On this basis, the companies hope to increase the availability of high-quality plasma-derived drugs for patients globally.

According to the CEO and chair of Grifols Victor Grifols, the merger has enabled the creation of a vertically integrated company that has increased its global presence as well as its manufacturing scale. The transaction will enable the new company to achieve the objectives cited above through increased capacity that will enable it to optimize the use of collected plasma. Besides, the transaction will avail the company of a well-established plasma collection system to address the increasing demand for plasma-derived products from patients. Additionally, the merger will avail to it an enhanced R&D pipeline of complementary products that will ensure the sustainability of growth and a well-developed clinical research program in the United States. In addition, the new company y will be able to offer a wide variety of products that will satisfactorily address the need of the therapeutic markets ranging from immunology pulmonology and hematology.

The Firms in the Industry

The Grifols S.A. belongs to the larger pharmaceutical industry. Like many industries such as oil and manufacturing, the pharmaceutical industry is a multi-billion dollar industry that plays a crucial role in the economies of the world. Most of the top pharmaceutical companies that control significant portions of the market include Johnson and Johnson, Pfizer, Roche, GlaxoSmithKline, Norvartis, Sanofi- Aventis, AstraZeneca, Abbot Laboratories, Merck & Co, and Bayer Healthcare. The above form the top ten pharmaceutical companies in the world.

Johnson & Johnson is a public company that is traded in the New York Stock Exchange with established operations worldwide. Besides pharmaceuticals, the company deals with healthcare as well as cosmetics. The company posted revenues of over 60 billion dollars in the year 2010. Its net income for the same year was 13 million dollars with total assets and equity totaling 102 billion and 56 billion dollars respectively.

Pfizer like Johnson & Johnson is American and publicly traded on the NYSE. Founded in 1849, it has operations worldwide with revenues exceeding 67 billion dollars. Its net income is more than 8 billion dollars with assets and equity totaling 195 and 88 billion respectively.

GlaxoSmithKline Kline is a UK limited company that is traded in both the NYSE and the London Stock Exchange. The company was founded in the year 2000 through a merger between pharmaceutical companies, Glaxo Welcome and SmithKline Beecham. The company has global operations dealing exclusively in pharmaceuticals. Its revenues for the year 2010 amounted to over 28 billion pounds with a net income of 1.8 billion pounds in the same year.

Manufacture of protein derived products

The main raw material for the manufacture of plasma-derived products is blood plasma. It can be recovered plasma, which is separated from the blood, or source plasma that is obtained by plasmapheresis strict licensing and regulation is enforced in the collection of human blood plasma in most countries that have companies that undertake the processes. The regulation ensures collection sites meet the required standards, donor selection is done ethically, and testing is done on the plasma for the identification of transmissible diseases (Starr, 1999, p. 59).

There are various technologies involved in the production of plasma and the products that are derived from it. One of the most dominant technological processes is the Plasma Protein Purification System (“PPPS”) which ensures efficient extraction of plasma from human blood with powerful affinity separation materials in a multi-level process. The manufacturing process in the plasma extraction is referred to as Fractionation (Surgenor & Edwin, 2002, p. 88).

It involves the separation of fractions with biological functions from a mixture of serum and plasma. Various chemical and physical methods are used in the separation of plasma into various fractions so that the concentration of the desired activity and removal of unwanted activity can take place. The process also includes cold ethanol fractionation and chromatographic purification both of which help in the fractionation process.

Competition

The global pharmaceutical industry is dominated by a concentration of twelve firms that were listed earlier. The firms account for the majority of the sales and profits of the global pharmaceutical business. These companies set the trend in the industry thanks to their high returns. The high returns have enabled to generate enough cash which is key for rapid growth. This growth is, marketed by mergers and acquisitions. Although size does not guarantee success to a company, big pharmaceuticals use their size through capitalization of economies of scale in manufacturing clinic trials and marketing. Additionally, big pharmaceuticals are better to engage in research and development, which ensures the introduction of new products into the market effectively ensuring long-term stability.

According to Taggart (1993, p. 76), competition in the pharmaceutical industry comes in three forms. There is competition among the big companies themselves as well as the small companies that are experiencing rapid growth. The companies are also experiencing some heat in form of profit losses from generic drug manufacturers. Finally, the companies in the pharmaceutical industry are experiencing competition from healthcare sector industries.

The size of these companies and the resources at their disposal have ensured they affect competition through price control, price setting, and advertising they have also influenced competition in the market through protection patents and drug portfolio management. Dominant players like Johnson & Johnson and Pfizer are capable of carrying out the above competition practices (Warren-Boulton, 1990, p.43).

Concentration ratios

The pharmaceutical industry’s four-firm concentration ratio is composed of Johnson & Johnson, Pfizer, GlaxoSmithKline, and Roche together which account for US$ 205.09 billion of revenues in the year 2010 alone. On the other hand, the eight-firm concentration ratios for the industry comprises of the firms described above in addition to the next four that include Norvartis, Sanofi-Aventis, AstraZeneca, and Abbot laboratories. The firms together account for US$354.92 billion in revenues. On the other hand, taking using the eight-firm concentration ratios of the pharmaceutical industry, the Herfindahl Herschler will be 0.125 the industry.

Arguments for and against

According to Davidson & Greblov (2005, p. 98), output and pricing decisions in oligopolistic markets are complicated and no theoretical framework can provide a comprehensive answer to the issues that characterize it. For instance, price cuts in oligopolistic firms may be met with price reductions by other competing firms. On the other hand, if an oligopolistic firm rises its price other firms may not raise theirs. This ensures a prolonged period of price stability in oligopolistic markets. Pricing forms one of the fronts of competition in oligopolistic markets. There are both demerits and merits of this competition.

For instance, the merger between Grifols and Talecris Merger should go ahead because it’s likely to benefit consumers of protein-derived drugs in many ways. This includes the creation of an additional supply of drugs into the markets. The additional supply is likely to push down prices of the drugs whose ripple effect will benefit the consumer. The expected quality boost from the merger will ensure other companies involved in protein-derived drugs manufacturing increase the quality of their products directly benefit the consumer. The merger increases efficiency that will positively affect the labor market of the industry. Increased efficiency will lead to increased output hence better wages for workers or less working time. Companies involved in the manufacture of protein-derived drugs will likely invest more in technology to effectively compete with a company of the Grifols magnitude. Increased technology use will lead to efficiency the will indirectly and directly affect the consumers positively (Taggart, 1993, p. 76).

On the other hand, the merger may present problems both to the consumer and the industry of the country that it takes place. For instance, the Federal Trade Commission says that the acquisition of Talecris by Grifols will be anti-competitive through the lessening of competition in the American markets in some plasma-derived products. Additionally, stiff competition may force rival firms to institute restructuring in cost-cutting measures to stay competitive. Cost-cutting measures more often than not affect workers who are laid off dealing a blow to economic growth and personal development.

When looked at from an objective perspective, however, a competitive industry benefits society because most firms are forced to improve the quality of their products. The process of improvement also is capital and labor-intensive, which is beneficial to the economy. The acquisitions, mergers, and development of new companies may lead to a concentration of the oligopolistic market that may present mixed fortunes to the consumers.

A high degree of concentration of the market is not very beneficial to the consumer in the long run. This is because some firms are likely to be pushed out of the markets, which may affect the oligopolistic balance that exists. In the long run, the market may be dominated by a player who may exhibit a monopolistic behavior that is not beneficial to the consumer at all (Warren-Boulton, 1990, p.58). To counter the above situation it will be prudent for oligopolistic markets to adopt common standards that will help in the regulation of the industry in terms of technological exchange and other competitive practices that may derail the growth of the industry.

References

Davidson, L. & Greblov, G. (2005). The Pharmaceutical industry in the Global Economy. Bloomington, Indiana: Indiana University Kelley School of Business

Taggart, J. (1993). The world pharmaceutical industry. New York: Routledge

Starr, D. (1999). Blood, an Epic History of Medicine and Commerce. New York: Springer.

Surgenor, D. & Edwin J. C. (2002). The Development of Protein Chemistry. New York: Routledge.

Warren-Boulton, F. R. (1990). Implications of U.S. Experience with Horizontal Mergers and Takeovers for Canadian Competition Policy. Vancouver: The Fraser Institute.

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