After the passage of the Patient Protection and Affordable Care Act (PPACA) in March, 2010, the pharmaceutical industry faces a bit of a daunting environment with rising costs, enormous new tax burdens, and stagnant drug innovation. In one of the most heavily regulated industries in the world, another 2,046 page bill hardly adds to industry appeal. Mergers and acquisitions are common, with some of the world's largest firms acquiring 10 or more companies annually. GlaxoSmithKline, one of London's leading pharmaceuticals firms (which also has substantial operations in the United States), stated that the model the industry was following was flawed and as a result, pharma companies need to change their strategy.
The new strategy focuses even more on mergers and acquisitions, and also differentiating their market offering by breaking into consumer markets, vaccines, and emerging markets. To fill this gap in product offering, the company is taking a bold forward move to acquire small companies to allow them to expand. As the market consolidates, buyer power decreases, and the pharmaceutical company will have more bargaining power. GlaxoSmithKline is leading the front for this new strategy, having completed 20 M&A deals in the last 2.5 years. Every one of the 20 is generating far more revenue than their cost of capital. With their expanded product line, GSK is hoping to elevate the revenue per dollar of research and development. Currently, they experience return on R&D of 11%, but have goals to raise it to 14% with their new umbrella of companies. Also on their agenda is breaking into new international markets, like China and Brazil, where sales growth is higher in the US and Europe.
