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Internal vs. Horizontal Growth in Pharma

1. Organic or internal growth for pharmaceutical companies means expanding operations through investments in new capital, technology, and markets rather than mergers or acquisitions. Companies grow using their own resources through extensive research and development of new drugs. 2. Celgene chose horizontal integration over internal growth for two reasons. First, it eliminated competition by acquiring companies with overlapping drugs to gain market share and protect against impending patent expirations. Second, Celgene's revenue and share price would suffer dramatically if generic versions of its top drug entered the market, so growth through acquisition mitigated this risk. 3. While diversifying into unrelated sectors through conglomerate integration could reduce risk for Celgene from dependence on a single drug

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11 views3 pages

Internal vs. Horizontal Growth in Pharma

1. Organic or internal growth for pharmaceutical companies means expanding operations through investments in new capital, technology, and markets rather than mergers or acquisitions. Companies grow using their own resources through extensive research and development of new drugs. 2. Celgene chose horizontal integration over internal growth for two reasons. First, it eliminated competition by acquiring companies with overlapping drugs to gain market share and protect against impending patent expirations. Second, Celgene's revenue and share price would suffer dramatically if generic versions of its top drug entered the market, so growth through acquisition mitigated this risk. 3. While diversifying into unrelated sectors through conglomerate integration could reduce risk for Celgene from dependence on a single drug

Uploaded by

Chantelle O
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Data Response Question

1. Using pharmaceutical companies as an example, explain what it means for a firm to grow
internally.

Organic/ internal growth happens when a business expands its own operations instead of relying
on takeovers and merger. Organic growth can come about from: Increasing existing production
capacity through investment in new capital and technology or entering new markets. In the case
of pharmaceutical companies, they “spend billions of pounds researching and developing new
drugs” and even some of those drugs don’t make it to the market however, they have grown
using their internal resources instead of merging with bigger companies or partnerships in order
to grow.

2. Analyze two possible reasons why Celgene has chosen to grow through a process of
horizonal integration rather than to grow internally.

Horizontal integration is the joining together into one firm of two or more firms in the same industry
at the same stage of production. A company may choose to use horizontal integration to grow in
size and revenue, expand into new markets, diversify product offerings and reduce competition.

In the case of Celgene, one reason they chose to grow through the process of horizontal integration
was to eliminate competition. For example, Celgene was heavily reliant on one drug which it had a
patent on, however, they now face a patent cliff when patents on Revlimid begin to expire. This
makes it available for all pharmaceutical companies to make their own cheap generic copies to sell
to customers. Celgene views this as a threat and has struck agreements with more than 30
companies as well as taking over 2 companies completely. This makes them the pharmaceutical
company with the biggest market share and size and that can even lead them to becoming a
monopoly company.

Another reason why Celgene has decided to grow through horizontal integration instead of
internally is because they would see a fall in their revenue and their share value if they didn’t as
pharmaceutical companies would be selling their blockbuster drug accustoming for 65% of their
annual sales for just a fraction of the price. This means demand for their drug would fall drastically
and their product would no longer be price inelastic as many substitutes would have been made
available.

However, it depends on the brand loyalty towards Celgene because if customers have a routine and
have brand loyalty to Celgene then their sales may not drop as low as they thought. Another
drawback is that there may be less flexibility and could destroy the value rather than create it.

3. Discuss whether it would be better for pharmaceutical companies, such as Celgene, to


become conglomerates, rather than remaining narrowly focused on selling pharmaceuticals.

Conglomerate integration is the joining together into one firm where the purchaser merges with one
or more of its suppliers and their operations are unrelated. For example, a pharmaceutical company
might choose to buy a rubber company and sell rubbers and medicine. This means they have to
objective of selling both the rubber and the steel to maximize their profits.

An advantage of pharmaceutical companies such as Celgene becoming a conglomerate company is


that it reduces the risk of them losing most of their revenue after 2019 as the drug made up 65% of
their revenue. This was due to the expiry of their patent on Revlimid. So, for pharmaceutical
companies that base their revenue on the drug are at risk when they new drug is introduced to the
market for a fraction of the price. If pharmaceutical companies buy markets from different sectors,
then they have revenues coming in from that other sector to counterbalance the revenue they were
losing from the drug. For example, Celgene could buy a restaurant and the revenue they would be
gaining from the success of that restaurant will make up for the fact that they have lost over 65% of
their revenue from the pharmaceutical sector.

However, a disadvantage is that diversifying into a market where they have less knowledge in can
make the company’s mission and goals change. They may choose to focus more on the restaurant
more than the pharmaceutical company or vice versa, this distracts them from their main goal which
may have been the survival of the pharmaceutical company. Also, they are diversifying in a market
they know less about compared to a restaurant that has been in the market for years and knows
that sector well. This can lead them to look subpar as they are less use to the market and are getting
overshadowed by the restaurants that have been in the market for longer.

But for Celgene, they have significantly reduced their risk as they have bought and become a part of
some pharmaceutical companies which means there is less companies that are able to sell the drug
at a lower price than them meaning there is less risk. This also allows them to research and find out
the next available drugs to be able to market upon and put a patent on that drug.

Overall, I believe conglomerate integration is riskier compared to horizontal integration and they are
better off focusing solely on pharmaceutical companies as conglomerate integration is too uncertain
and not a market that Celgene is used to.

Common questions

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Horizontal integration offers Celgene immediate market expansion, reinforcing its position within the pharmaceutical sector by consolidating power and reducing direct competitors. This approach can safeguard revenue from flagship drugs and boost market influence. Conversely, conglomerate integration diversifies risk by providing revenue streams from unrelated industries, potentially stabilizing income as pharmaceutical patents expire. However, it carries higher execution risk due to unfamiliar market dynamics. For long-term strategic benefits, the choice depends on Celgene’s capacity to innovate internally versus managing diversified interests effectively .

Brand loyalty can mitigate the negative impact of generic drugs entering the market for a company like Celgene. If consumers have a strong preference for Celgene's brands due to established trust or habitual use, they may continue purchasing Celgene products despite the availability of cheaper generics. This brand loyalty can sustain Celgene’s sales and maintain some degree of price inelasticity for their flagship drugs, even during increased competition .

Becoming a conglomerate offers Celgene the advantage of reducing risk by diversifying revenue streams, particularly as their pharmaceutical revenue may decline due to patent expirations. This could involve acquiring businesses in unrelated sectors, like a restaurant, to offset lost pharmaceutical revenue. However, disadvantages include potential distraction from core pharmaceutical goals and risks associated with entering markets where Celgene lacks expertise. Additionally, doing so could change the company's mission and lead to underperformance compared to focused competitors .

Internal growth for a pharmaceutical firm involves expanding its own operations rather than relying on takeovers and mergers. Strategies to achieve internal growth include increasing existing production capacity through investment in new capital and technology, and developing new drugs using its resources. This approach, while involving significant investment in research and development, allows firms to grow organically without merging with larger companies or forming partnerships .

Horizontal integration reduces market competition by consolidating firms within the same industry and production stage, effectively increasing Celgene’s market power. This consolidation decreases the number of independent competitors, thus limiting alternative products and price wars. By acquiring or striking agreements with other companies, Celgene can control a larger market share and retain price-setting power, although it needs to adhere to regulatory guidelines to avoid anti-competitive behavior .

Celgene’s strategy of horizontal integration, involving acquisitions and agreements with numerous companies, aims to expand market share and reduce competition significantly. This potentially positions them closer to a monopoly, allowing greater control over pricing and distribution within the pharmaceutical market. However, achieving monopoly status would depend on factors like regulatory approval, antitrust laws, and market dynamics, which may limit their dominance despite extensive horizontal integration .

The pitfalls of conglomerate integration include the risk of losing focus on the core pharmaceutical business, entering markets without the requisite expertise, and potential dilution of strategic goals. These can lead to underperformance and diverted resources. Mitigation strategies involve ensuring strong leadership that balances diverse business interests, executing thorough market research before expansion into non-core areas, and maintaining a clear focus on the primary business’s competitive advantages .

Celgene might prefer horizontal integration because it allows the company to eliminate competition, expand market share, and protect revenue streams. Horizontal integration helps Celgene mitigate the risk of losing significant revenue when patents expire, by striking agreements and acquiring companies. This can prevent the fall in revenue and share value that might occur if competitors sell similar drugs at lower prices. However, risks include potentially reduced flexibility and the possibility of destroying rather than creating value .

Patent expiration poses a significant threat to pharmaceutical companies like Celgene, as it allows competitors to produce generic versions of drugs at lower prices, potentially leading to a substantial drop in revenue and market share. Horizontal integration helps address this issue by reducing competition through acquisitions and agreements with other companies. This strategy enables Celgene to maintain its market share and leverage its size and resources to continue driving growth despite the loss of exclusivity on key drugs .

Focusing on internal growth involves strengthening a company’s own capabilities, such as R&D, to develop new products, leading to sustained innovation and market penetration. However, this approach can be resource-intensive and slow. On the other hand, mergers and acquisitions, like Celgene's horizontal integration, can rapidly increase scale, reduce competition, and offer access to new markets and technologies. While providing immediate benefits, M&A must be carefully managed to integrate different cultures and systems to avoid value dilution .

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