You are on page 1of 19

UVA-F-1015

Version 1.1


This case was prepared by Robert F. Bruner, as a basis for classroom discussion, while he was a Citicorp Global Scholar
and visiting professor at INSEAD in Fontainebleau, France. Copyright 1992 by the University of Virginia Darden
School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenpublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or
otherwisewithout the permission of the Darden School Foundation. Rev. 6/98.



RHNE-POULENC RORER, INC.


The interest with which industry analysts, the financial community, and our
shareholders have responded to RPR has been encouraging. As evidenced in the
strong performance of our stock during 1990 and the attendant decline in the CVR
since issuance of the security by Rhne-Poulenc S.A. in August, many among our key
audiences have moved from curiosity to confidence in RPRs ability to fulfill its
ambitious sales and earnings goals for the future.
Company, 1990 Annual Report

. . . leadership requires, first, critical mass in order to compete effectively in
research and marketing; second, a global presence to leverage these investments;
and third, advantageous partnerships. . . .
Company, 1989 Annual Report

Dsormais, le succs dpend de notre talent et non plus de nos moyens. . . .
1



In August 1991, a year had elapsed since the $3.2 billion merger that created a major
multinational pharmaceutical company, Rhne-Poulenc Rorer (RPR). The merger, noted for its size,
novel terms, and ambitiousness, provoked considerable comment and some skepticism about the
projected synergies. Now, a year later, the company had shown rapid post-merger integration and
initial synergy gains. The skeptics were not completely muzzled, however; some doubted that the
growth and cost savings could be sustained.

The expected performance of RPR was of crucial importance to at least one shareholder of
the companyRhne-Poulenc S.A., the seventh largest chemical manufacturer in the world, which
owned 68 percent of RPRs shares. In the merger, Rhne-Poulenc gave the minority shareholders a
contingent value right (CVR) that, in effect, promised to pay them on July 31, 1993, any shortfall
between $49.13 and the then prevailing stock price. At year-end 1990, Rhne-Poulenc carried this


1
Henceforth, success depends more on our talents than financing, a quotation of Igor Landau, president of the
Health Sector at Rhne-Poulenc S.A. in Isabelle Chaperon, Affairs a Suivre, La Vie Francaise, June 7, 1991.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-2- UVA-F-1015

contingent liability on its balance sheet at 4.96 billion French francs (about US$ 827 million). On
August 1, RPRs shares closed at $45.75 and the CVRs closed at $2.50.


The Company

Rhne-Poulenc Rorer, Inc. (RPR), was created on July 31, 1990, in a merger between Rorer
Group, Inc., and the Human Pharmaceutical Business (HPB) of Rhne-Poulenc S.A. As Exhibit 1
indicates, RPR reported sales of $2.9 billion for 1990, but if sales were annualized to include a full
year of HPBs operations, RPRs sales would rise to $3.6 billion, ranking it as the 13th-largest
pharmaceutical firm in the world. (See Exhibits 2 and 3 for comparisons of RPR with its key
competitors.) Contenders in the field were numerous, and even the largest firms did not account for
more than a 5 percent share of the market.

Worldwide pharmaceutical sales were estimated to be $145 billion, having risen at a rate of
13 percent a year in recent years. The growth rate in worldwide pharmaceutical sales was expected
to slow, however, to 9 percent per year.
2
The largest markets were in the United States and Japan,
which represented, respectively, sales of $44.5 and $31.3 billion in 1989.

RPRs mission statement dedicated the company to becoming the best pharmaceutical
company in the world. This statement had been revised somewhat from a version published in the
1988 annual report (see Exhibit 4 for the comparison). The company defined its products according
to three categories. Strategic products involved those that already enjoyed a broad international
market or were expected to do so. The merger positioned RPR as the leading seller in Europe of
over-the-counter (OTC) drugs, with sales of $280 million (see Exhibit 5). These products were
earmarked for heavy investment in marketing and were expected to grow at 19.2 percent per year
through 1994. (One analyst assumed only 17.2 percent growth because of the maturity of the
Maalox brand.)
3
Specialty items were defined as products with clearly defined regional markets, or
limited sales potential, because of either maturity or the narrowness of the market. These products
were expected to grow at about 8.5 percent per year. Finally, RPR estimated that new products to be
rolled out in the near future would produce sales of $715 million in 1994. Given the uncertainties
associated with introducing these products, however, one outside analyst expected only $422
million.
4


In its 1988 annual report, Rorers chief executive officer, Robert Cawthorn, had celebrated
this firms sales level clearing $1 billion for the first time and reaffirmed the goal of producing
growth in earnings of 15 percent or better. An important component of this growth strategy had
been a program of acquisitions, because sales growth in the companys existing product lines was


2
P. Chandarana, Company ReportRhne-Poulenc Rorer, Elyses Bourse, October 2, 1990.

3
Chandarana, Company Report, noted that Informations Mdicales et Statistiques predicted demand for antacids
sold OTC to rise 6.3 percent per year by the year 2000, compared with a 1.3 percent annual fall in sales for prescription
antacids. Also, competitors were known to be increasing their marketing efforts to sell OTC antacids.

4
Chandarana, Company Report.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-3- UVA-F-1015

characterized as mature. One observer described the Rorer strategy as playing offense in an
effort to remain independent.
5


Rhne-Poulenc S.A. (RP), the diversified chemicals manufacturer, owned 68 percent of RPR
shares. In turn, the French government owned 100 percent of RPs voting common stock. RP had
been nationalized in 1982 and had since struggled to modernize and attain its goal of a ranking
among the five largest chemicals producers worldwide. With the French government under its own
budgetary pressures, RPs growth had been financed internally and through an increasingly
sophisticated series of financings in the corporate capital markets. As yet, RP had not met its stated
goals. Analysts expected that RP would be privatized in 1993 after the next general assembly
elections in France, when the conservatives were expected to be returned to power.

Following the merger, Rorers Robert Cawthorn continued as RPRs CEO, although the firm
did assign a new chief financial officer and executive in charge of European operations and
marketing. (These individuals are profiled in Exhibit 6.) The new senior executives came from
Rhne-Poulenc. Outside observers believed that RP would slowly take over the company.
Cawthorn, however, considered RPR to be a freestanding pharmaceutical operation with its own
mission statement and Rhne-Poulenc S.A. to be merely an important shareholder.
6


Some observers questioned RPRs claim to cultural integration and independence. The
skeptics pointed to the predominantly American management team, an American-style mission
statement, and a waning effort on the part of the American executives to learn French.


The Merger

Takeover rumors concerning Rorer had first appeared in the late 1980s, as the firms
relatively low cash balance and rising level of debt seemed to be handicapping its strategy of growth
by acquisition. The final confirmation of this constraint surfaced in 1989, when Rorer bid for and
lost the opportunity to take over the pharmaceutical business of A. H. Robins. Rorer thus surprised
analysts with its announcement of a merger with the Human Pharmaceutical Business of Rhne-
Poulenc. Later, the news emerged that several companies had expressed an interest in acquiring
Rorer, including Hoffman-La Roche, Ciba-Geigy, Sandoz, Yamanouchi, Monsanto, and Du Pont.

The $3.2 billion combination with Rhne-Poulenc coincided with a wave of mergers in the
pharmaceutical industry, including Merrill-Dow buying Marion Laboratories, the $2.1 billion
acquisition of Genentech by Hoffman-La Roche, SmithKline and Beecham, Bristol-Myers and
Squibb, and major joint ventures between Sanofi and Sterling Drug and between Du Pont and
Merck. One observer commented, Early evidence shows that the few mega-mergers that have been
completed have been a stunning success, and we anticipate further duplication.
7



5
Janet Novak, Please Pass the Maalox, Forbes, August 7, 1988.

6
Mike Ward, RPR Takes the Global Stage, Financial Times, July 23, 1991.

7
Alan Archer, Alliances Offer a Model, Financial Times, July 23, 1991.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-4- UVA-F-1015

Prior to the RPR combination, Rhne-Poulencs Human Pharmaceutical Business had
virtually no position in the United States and Japan, although it was strong in some European
Community markets. Moreover, its channels of distribution were not fully utilized. Rorer, on the
other hand, lacked a position in Europe and the channels with which to access the market. After the
combination, the company ranked among the top three in Europe and had improved its position in
the United States. One goal of the company was to rank in the top 10 pharmaceutical companies
worldwide.

The merger was consummated in a three-stage transaction, by which Rhne-Poulenc
obtained 68 percent of Rorers common stock (91.6 million shares), which was enough to permit
Rhne-Poulenc to consolidate Rorers results for financial reporting.
8
First, Rhne-Poulenc would
tender for 50.1 percent (43.2 million shares) of Rorers common stock for $36.50 cash per share.
(Rhne-Poulenc, by borrowing the funds to finance the tender offer, increased its debt/capital ratio
to 45 percent, well above competitors capitalizations of 20-30 percent.)

Second, Rorer assumed $265 million of RP debt (guaranteed by RP), made a $20 million
cash payment to RP, and issued 48.4 million new common shares to RP in exchange for RPs HPB
division.
9
Observers believed that Rorers bylaws would require at least 85 percent of all shares be
voted in favor of the issuance of new shares and, more generally, of this entire transaction.

Third, Rhne-Poulenc issued the 41.8 million CVRs to the remaining minority shareholders
in Rorer. A CVR entitled the holder to the right at the end of three years, July 31, 1993 (or four
years, at RPs option), to a cash payment of US$49.13 (or $53.06 if the payment were made at the
end of four years) reduced by the higher of the value of the RPR share at that date or $26.00. Thus,
if the value of the RPR share exceeded $49.13 (or $53.06), there would be no payment. The
maximum amount of RPs liability on December 31, 1990, was FF4,960 million (FF5,165 million at
the date of the issuance of the rights).
10


The total market value of the rights on December 31, 1990, was FF844 million (FF1,306
million at the date of their issuance). The maximum amount of RPs liability at the date of issuance
was hedged. Any changes in the value of the CVRs resulting from fluctuations in exchange rates, as
well as the amortization of the cost of the hedge, were recorded directly into the consolidated equity
of RP. The CVRs were quoted on the American Stock Exchange and traded independently of the
shares of RPR, which were listed on the New York Stock Exchange (NYSE).



8
RPR split its common shares 2:1 on May 17, 1991. To avoid unnecessary confusion, all share numbers and prices
reported in this case are given on a post-split basis. Actually, the acquisition terms involved half the number of shares
and twice the share price reported here.

9
The transfer of RPs health sector excluded RPs business units in veterinary products, serums, and vaccines and the
firms minority interest in a French pharmaceutical concern, Roussel-Uclaf.

10
In general, the disclosure of contingent liabilities by a firm depended on whether the likelihood of realizing the
liability was probable, possible, or remote. If the probability of realization was less than 50 percent, accounting
conventions required that the liability be disclosed in the footnotes to the financial statements. The accounting rules
contained no prescribed way, however, to estimate the magnitude of contingent liabilities.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-5- UVA-F-1015

Rorer and Rhne-Poulenc jointly announced that they believed that the package of CVR and
minority share in RPR was worth $36.50 and thus equal to the price at which RP was tendering for
shares of RPR. Rorer investors responded favorably to the announcement of an agreement in
principle to merge. During the week of the announcement (January 12 -19, 1990), Rorer shares
increased by $7.313 over the ex ante share price of $24.625, or 28 percent (net of the changes in the
Standard & Poors 500 Index over the week). This gain equaled about $632 million in new value.
Meanwhile, RPs nonvoting common shares, traded on the Paris Bourse and the NYSE, lost 4.4
percent net of market during the announcement week, or about $175 million.

On April 7, 1990, Warren Buffett, an American investor with an unusually successful
money-management record, announced that he had acquired 8 million shares of Rorer (5.8 percent of
the total) at an average price of $32.85. As of March 31, 1991, RPRs 8,175 minority common
stockholders were dominated by large institutional investors, including 30 mutual funds (2.1 million
shares), 61 investment advisors (22.1 million shares), 36 banks (2.77 million shares), and 8
insurance companies (4.4 million shares). The institutions accounted for 23 percent of the 137.4
million shares outstanding and 71 percent of the 44 million shares not held by RP.


CVRs and Contingent Payments in Acquisitions

Contingent payments tended to appear in acquisitions involving a large potential difference
between the target transaction prices of buyers and sellers or when the sellers were seeking some
protection for the remaining minority shareholders against unfair treatment by the acquirer.
Acquisitions in the pharmaceutical industry featured some of the most innovative forms of these
contingent-payment schemes; Exhibit 7 summarizes the terms of three other contingent deals and
compares them with the RPR terms.

CVRs had been used as merger vehicles since 1985, although they did not gain widespread
recognition until used in 1989 in the takeover of Marion Laboratories by Merrill-Dow, the
pharmaceutical subsidiary of Dow Chemical. The creation of Rhne-Poulenc Rorer was modeled on
the Marion/Merrill-Dow deal.

On September 13, 1991, Dow Chemical stunned the markets by announcing that it would
redeem for cash the contingent value rights on Marion Merrill shares that were soon to mature.
Analysts estimated that the payment per CVR would be about $10.00. Marion Merrills share price
plunged $8.125 to $29.50 on the announcement; the CVRs rose $4.875 to trade at $11.00. The
announcement deflated investor expectations that Dow Chemical would extend the life of the CVRs
for another year and make a bid for the 32 percent of Marion Merrill that it did not already own.
Analysts pointed out that Marion Merrills growth appeared to be slowing because of its failure to
find new blockbuster drug products in the face of several imminent patent expirations. Indeed,
analysts expected that Marion Merrill would not be able to market any new products for several
years. Thus they speculated for Dow to redeem the rights now would be cheaper than to delay and
redeem them in a year and cheaper than buying the remaining shares. Analysts also pointed out that
Dows earnings were under pressure. Dows share price closed up $0.25 on September 13.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-6- UVA-F-1015

The Outlook

CEO Cawthorn implemented an aggressive post-merger integration process at RPR that
rationalized the merging manufacturing operations, reorganized the R&D function to heighten
collaboration and foster the exchange of ideas, and sold nonstrategic assets.
11
The successful post-
merger integration permitted RPR to report that synergies and asset sales projected for 1990 were
achieved. In its merger prospectus, the company had projected sales and earnings through 1994 (see
Exhibit 8), and the results for 1990 and the first two quarters of 1991 were indeed consistent with
these projections. Earnings and dividends per share for RPR showed the following trends:










1991



1988

1989

1990

Quarter 1

Quarter 2

Earnings per share (EPS)
EPS (before restructuring
charges)
Dividends per share
Return on equity

$0.965


$0.40
13.8%

$1.215


$0.41
14.7%

$0.01

1.26
$0.42
20.8%

$0.39


$0.105
--

$0.50


$0.11
--


Observers worried, however, about the sustainability of RPRs record. First, the cost of new-
product development in the industry was risingfrom an average $125 million per product in 1987
to $230 million in 1990. Industry R&D expenditures had been rising 15 percent per year since
1985, yet the number of new drug applications worldwide had fallen at the rate of 10 percent per
year (also since 1985). Second, analysts predicted that governments would get tougher on the cost
of drugs in an effort to slow down rapidly rising health costs. As a result, demand for drugs might
shift from prescription remedies to OTC products. Other strategic risks included patent expiration
and competition from low-priced generic drug manufacturers and decreasing product life cycles. On
the positive side, analysts noted that computers and biotechnology were aiding new-product
development, that the world population was aging, and that RPR was marketing harder than it had,
which would boost the payback from its more aggressive R&D spending.

The following table summarizes comments by securities analysts about RPR in early 1991.


11
RPR retained First Boston and Shearson Lehman to assist in the sale of certain assets. Asset sales were managed
according to two key objectives: (1) to sell only if the net present value of future cash flows from retaining the assets
would be less than the NPV of selling the assets and (2) to achieve earnings neutrality in the future.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-7- UVA-F-1015



Analyst and Date

Expectations for RPR

Comments

J. P. Riccardo,
Bear, Stearns & Co.
May 10, 1991

Stock price = $41.00

EPS

1991e $2.33
1992e $3.08
Gross margins will
improve from 62.8%
to 68% of sales.

The company may struggle to achieve its sales target of $4,050
million in 1991. . . . While we remain concerned over the outlook
for 1992, we believe that the Cawthorn-led team will pull off the
right strategic moves to insure RPRs stated goals through 1994.
On that basis, we would rate the stock a long-term buy.

R. C. Carryl,
Value Line
August 9, 1991


Stock price = $46.00

1991e $2.25
1992e $2.40

Rhone-Poulenc Rorer appears to be entering a period of
sustainable double-digit earnings growth . . . reflecting the
shuttering of redundant facilities, a reduction in the employee
head-count, and the cross-selling of each others products. . . .
Despite the positive long-term earnings outlook, investors looking
for a drug stock would do well to consider other opportunities. . . .
RPRs margin remains well below that of its industry counterparts,
primarily reflecting a higher cost of goods sold/sales ratio.
Furthermore, with overseas operations accounting for a whopping
75-80% of its total business, the drug makers income stream is far
more sensitive to foreign currency exchange swings than any of its
peers. Investors skeptical of RPRs growth prospects might want
to consider the contingent value rights (CVRs) which guarantee a
cash payment.

Jami Rubin,
Smith Barney
February 12, 1991

Stock price = $37.50

1991e $2.15
1992e $3.15

We rate Rhne-Poulenc Rorer a BUY. Because of its dramatic
profit margin expansion potential, [it] is expected to be the fastest-
growing company in our universe30% per year compared with
16% per year for our eight-company drug composite. . . . Few
major Wall Street brokers actively follow the company; therefore,
these strong fundamentals are not efficiently reflected in the stock
price, in our opinion. . . . RPRs explosive EPS growth reflects
dramatic margin expansion. . . RPR could trade around $46 per
share in 12-18 months.

S. Weisbrod,
Merrill Lynch
February 26, 1991
Stock price = $40.50

1991e $1.95
1992e $2.90

We recommend purchase . . . by long-term investors. We think the
stock is fully valued near term. . . . The dramatic margin expansion
gives us more confidence in our 1992 and 1993 projections.

P. Chandarana,
Elyses Bourse
October 2, 1990

Stock price = $30.50

1991e $2.25

A possible long-term buy, but risks on earnings growth and dollar.
. . . Our own more conservative projections call for sales to
advance 12% a year and net 32%. . . . Trading at $30.50, the stock
has little upward potential. . . . Investors could take an interest with
an eye on the long term.

Zacks Earnings Estimates
March 30, 1991

Average over
Eight Analysts

1991e $2.75
1992e $3.63
EPS growth
rate next
5 years 21.1%

Industry
EPS growth 14.2%



This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-8- UVA-F-1015

RPRs estimated beta was 1.1. The sigma (standard deviation of returns) on RPR shares was
about .18 (see Exhibit 9) and compared with an average of .27 for 12 pharmaceutical companies.
12


On August 28, 1990, an analyst for Bear Stearns had recommended that investors buy CVRs
and RPR common shares at a ratio of 1.4 to 1. At the time, the CVRs were trading at $6.56 and RPR
common at $31.50. In March 1991, he recommended that the ratio be adjusted to 1.8 CVRs per 1
share of RPR common; by then the stock price had risen to $40.625. He said,

You will not lose money (from todays prices) unless RPR EPS falls below $2.50 per
share at the CVR expiration in 1993; if RPR does not fall lower than $15 per share,
your return will be greater than 10 percent to the CVR expiration.
13


Exhibit 10 graphs the price movements of RPRs common shares and CVRs after the
merger, and Exhibit 11 gives information regarding current capital-market conditions. Over the
previous 18 months, the price/earnings ratio of the S&P 500 Index had varied between 18.07 and
14.21; the P/E ratio at the last market peak (August 25, 1987) was 16.3 times and at the last market
trough (August 12, 1982) was 7.6 times.


12
Exhibit 9 estimates sigma over the prior 31 weekly closing prices. If sigma were estimated over the prior 52 weeks,
its value would be .1875. Estimated over the 79 weeks since RPR shares began trading, the sigma was .266.

13
B. Cohen, Bear Stearns & Co., Rhne-Poulenc Rorer, Research Highlights, March 15, 1991.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-9- UVA-F-1015

Exhibit 1

RHNE-POULENC RORER, INC.

RPR Selected Financial Data
(dollars in thousands)





1988

1989

1990

Net sales
Cost of products sold
R&D expenses
Net interest
Restructuring costs
(Gain) loss on asset sales
Gain on contract termination fee
Other expense
Income taxes
Minority interest
Net income

Capital expenditures
New headquarters
Other
Depreciation

Working capital
Property, plant, and equipment
Total assets
Long-term debt
Shareholders equity

Employees
Sales per employee

$1,041,612
377,750
103,952
39,608
0
7,065

11,890
33,299

61,841


10,835
59,942
56,494

312,403
395,651
1,388,012
564,599
$ 414,171

8,394
132

$1,182,152
428,626
121,806
41,608
9,981
(30,870)
(19,949)
28,828
38,848

86,467


29,308
82,107
63,817

436,922
488,167
1,791,716
882,525
$ 439,944

8,527
140

$2,917,364
1,075,992
350,178
137,801
289,256
(78,835)

35,474
9,542
6,343
989


92,073
124,785
144,693

391,391
1,930,702
4,084,982
1,634,352
$ 693,454

23,454
150


Source: Company 1990 annual report.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-10- UVA-F-1015

Exhibit 2

RHNE-POULENC RORER, INC.

Data on Leading Pharmaceutical Companies





Home
Country

1990
Sales
($m)

1990/91
Growth
(%)


Merck
Bristol-Myers Squibb
Glaxo
SmithKline Beecham
Hoechst
Ciba-Geigy
Johnson & Johnson
American Home Products
Sandoz
Eli Lilly & Co.
Bayer
Pfizer
Rhne-Poulenc Rorer
Hoffman-La Roche
Takeda
Schering-Plough
ICI
Marion/Merrill-Dow
Upjohn
Wellcome


U.S.
U.S.
U.K.
U.K.
Ger.
Switz.
U.S.
U.S.
Switz.
U.S.
Ger.
U.S.
U.S./France
Switz.
Japan
U.S.
U.K.
U.S.
U.S.
U.K.


6,425
5,980
5,286
5,001
4,628
4,592
4,200
4,022
4,005
3,720
3,720
3,684
3,613
3,471
2,670
2,652
2,474
2,438
2,420
2,260


9.4
8.0
9.2
0.0
18.2
11.7
12.4
-3.0
8.7
16.8
8.3
10.7
7.4
19.6
-23.9
6.4
8.6
3.0
3.8
15.5


Source: Alan Archer, Alliances Offer a Model, Financial Times, July 23, 1991. Sales reported in
the article were given in pounds sterling and have been converted here to dollars at the rate of 1.78 to
the pound.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-11- UVA-F-1015

Exhibit 3

RHNE-POULENC RORER, INC.

Information on Comparable Firms
in the Pharmaceutical Industry









P/E
Ratio





Beta



Long-
Term
Sigma



Expected Growth of:

Sales Profits





Debt/Equity

Expected
Dividend-
Payout
Ratio


American Home Products
Bristol-Myers Squibb
Eli Lilly & Co.
Marion/Merrill-Dow
Merck
Pfizer
Rhne-Poulenc Rorer
Schering-Plough
Upjohn
Warner-Lambert


15.0
21.0
16.3
17.6
23.5
22.5
20.4
18.0
15.8
16.9


1.00
1.00
1.10
n.a.
1.00
1.05
1.00
1.10
1.05
1.10


.25
.29
.23
n.a.
.23
.28
.176
n.a.
.25
.31


7%
11
16
13
14
13
15
11
9
12%


10.5%
15.0
19.5
16.0
17.5
14.0
27.5
17.5
12.5
17.0%


.124
.042
.053
.111
.031
.031
2.00
.087
.299
.220


55%
56
41
43
42
47
20
1

41
41
42%
















1
RPRs quarterly dividend had been raised to $.11 per share at the June 30 payment date, up from $.105 per share.

Source: Value Line Investment Survey, August 9, 1991. The sigma for RPR was obtained from Exhibit 8 of this case. Sigmas on
other firms were obtained from J. Cox and M. Rubinstein, Options Markets (Englewood Cliffs, N.J.: Prentice-Hall, 1985), pp. 346-
58.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
UVA-F-1015

-12-
Exhibit 4
RHNE-POULENC RORER, INC.
Mission Statement

Mission Statement, 1990 Annual Report

Mission Statement, 1988 Annual Report

Our Mission is to become the BEST pharmaceutical company in
the world by dedicating our resources, our talents, and our energies
to help improve human health and the quality of life of people
throughout the world.


Being the best means:

Being the BEST at satisfying the needs of everyone we serve,
patients, health-care professionals, employees, communities,
governments and shareholders;

Being BETTER AND FASTER than our competitors at
discovering and bringing to market important new medicines in
selected therapeutic areas;

Operating with the HIGHEST professional and ethical standards
in all our activities, building on the Rhne-Poulenc and Rorer
heritage of integrity;

Being seen as the BEST place to work, attracting and retaining
talented people at all levels by creating an environment that
encourages them to develop their potential to the full;

Generating consistently BETTER results than our competitors,
through innovation and a total commitment to quality in everything
we do.

The Rorer Mission

To improve human health while maximizing shareholder value by
becoming a world-class pharmaceutical company, able to compete
effectively with any other company in selected therapeutic areas in
the major developed markets of the world.

The Rorer Credo

We believe:

That customer satisfaction is our first responsibility. To provide
value for the people who benefit from our products and services,
we must emphasize quality and integrity in everything we do.

That we must treat each other fairly, with trust and respect, in an
environment that fosters involvement, open communication, and
teamwork.

That we must continually adapt and renew our business. We must
encourage and reward innovation, experimentation, and change.

That we are responsible to the communities in which we work and
live. We will actively support civic improvement, better health,
and education.

Source: Company annual reports.

This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-13- UVA-F-1015

Exhibit 5

RHNE-POULENC RORER, INC.

Data on OTC Drug Sales




A. World Drug Sales (in $ billions)



1990
1986

Prescription

120
90

OTC

25
20

Total

145
110



B. OTC Drug Sales in Europe by Company (in $ millions)



Country of
Headquarters

1990
Sales

Rhne-Poulenc Rorer
Bayer
Sanofi
SmithKline Beecham
Procter & Gamble
Boeringer Ingelheim
Boots
American Home Products
Nicholas Laboratories
Warner-Lambert
Sterling Drug
Hoffman-La Roche

U.S./France
Germany
France
U.K.
U.S.
Germany
U.K.
U.S.
U.S.
U.S.
U.S.
Switzerland

280
210
180
170
170
150
150
140
120
110
100
100



Source: Clive Cookson, Roche Deal Puts Fizz in Drugs Race, Financial Times, June 4, 1991.

This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-14- UVA-F-1015

Exhibit 6

RHNE-POULENC RORER, INC.

Profiles of Senior RPR Executives


Robert E. Cawthorn (age 55)

Chairman, president, and CEO. Joined Rorer in 1982 as executive vice president (EVP) and
president of its international pharmaceutical subsidiary. President from February 1984; CEO
from May 1985. Chairman from May 1986.


Jean-Jacques Bertrand (age 51)

EVP and group president [specifically in charge of Europe, Africa, the Middle East, South
America, and Asia (excluding Japan and Korea)]. Served as president, Worldwide
Pharmaceutical Operations of Rhne-Poulenc Sant from 1987 to 1990. From 1985 to 1987,
served as president of various RP pharmaceutical operations.


Ralph H. Thurman (age 41)

EVP and group president, North America, Japan/Korea, Australia/New Zealand, and
Worldwide Industrial Operations. Vice president, Personnel from 1985 to 1987. Senior vice
president (SVP), Organization and Administration in 1988. EVP and president of U.S.
subsidiary in 1989.


Gilles D. Brisson (age 39)

SVP, Corporate Development. 1989-90 area vice president of Northern Europe for Rhne-
Poulenc. 1987-89 deputy SVP of Worldwide Pharmaceutical Operations of Rhne-Poulenc
Sant. 1983-87 general manager of Theraplix.


Patrick Langlois (age 45)

SVP and chief financial officer. 1988-90 SVP, Corporate Finance and Acquisitions of
Rhne-Poulenc. 1975-86 director of International Financings of Rhne-Poulenc and finance
director.



Source: Company merger proxy statement, 1990.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-15- UVA-F-1015

Exhibit 7

RHNE-POULENC RORER, INC.

Landmark Acquisition Payment Structures in the
Pharmaceutical/Biotechnology Industries



Deal

Eli Lilly and
Company Buys 100%
of Equity in
Hybritech, Inc.

Rhne-Poulenc Acquires
68% of Equity in
Rorer Group, Inc.

Dow Chemical
Acquires 67% of
Equity in
Marion Laboratories

Roche Holding Ltd.
Acquires 60% of Equity
in Genentech

Date of
closing

February 1986

July 1990

July 1989

February 1990

Total
estimated
payment
(US$)


$412.8 million


$1,600 million


$5,700 million


$1,295 million

General
structure

One-stage exchange per
each Hybritech share:

(1) $22.00 cash or
par value of 10-yr. conv.
notes paying 6.75%.
Conversion price
$66.31 per share.

(2) 1.4 warrants to buy
Lilly common stock at
$75.98 per share.

(3) One contingent-
payment unit (CPU)
paying up to $22.00 in
dividends over 10 years.

Three-stage transaction:


(1) Cash tender offer for
50.1% of stock in Rorer.
At $36.50 for 43.2 million
shares, the initial cash
outlay is $1,577 million.

(2) RP transfers its
worldwide HPB to Rorer.
Rorer pays RP $20 million
and assumes $265 million
of RP debt. Rorer issues
48.4 million new common
shares to RP.

(3) RP issues 41.8 million
CVRs (for terms of
payment, see text of case).

Two-step transaction:


(1) Dow acquires 38.9%
of Marion through a cash
tender offer at
$38 per share.

(2) Dow contributes its
pharmaceutical
subsidiary, Merrill-
Dow, and 92 million
CVRs in exchange for
new Marion shares.

Two-step transaction:


(1) Roche purchases a 20%
interest in Genentech
through the purchase of
newly issued shares at
$22 per share.

(2) All non-Roche common
shares are exchanged for
$18 cash and share of
redeemable common stock.

Following the transaction,
public shareholders will
own 40% of voting stock;
Roche will own 60%.

Contingent
terms

Annual dividend of CPU
equal to:

[6% of sales
+ 20% of gross profits
- ($11 million * (1.35
t
)]
divided by number of
Hybritech shares.

t = years since 1986.
Sales and gross profits
are for Hybritech.

CVR entitles holders to
receive from RP the
amount by which $98.26
a share exceeds either a
$52.00 floor price or
the average market value
of Rorers share price
60 days before the rights
maturity date of July 31,
1993. Maximum payout
$46.26 per share.

RP has the right to extend
maturity of CVRs for an
additional year to July 31,
1994. In that event, the
ceiling rises from $98.26 to
$106.12. Maximum payout
increased to $54.12.

Similar to RP CVR: a
put spread guarantees
shareholder returns
within a predetermined
range of stock prices
through 1992.

Redeemable common stock
entitles Roche to redeem
the shares at predetermined
prices until June 1995.
Thereafter, these shares
will automatically convert
into an equal number of
regular common shares.

Redemption price starts at
$38.00 at closing and rises
$1.25 per quarter to the
maximum of $60 per share in
April-June 1995.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-16- UVA-F-1015

Exhibit 8

RHNE-POULENC RORER, INC.

Five-Year Projected Financial
Performance Forecasted by RPR
1

(in millions of dollars except per-share data)






1990

1991

1992

1993

1994

Revenues
Interest expense, net
Depreciation
Restructuring costs
Income before tax
Net income

Earnings per share

Cash
Total assets
Debt (including current portion)
Stockholders equity

Capital expenditures
Ratio of debt to debt plus equity
Pretax interest-expense coverage,
excluding restructuring costs


$2,533
100
131
218
37
7

0.065

184
3,731
2,021
640

$ 173
76%

3.4

$4,053
176
165
--
497
328

2.43

135
3,855
1,812
902

$ 208
67%

3.7

$4,657
168
173
--
599
462

3.42

95
3,968
1,505
1,225

$ 150
55%

5.0

$5,276
137
186
--
906
600

4.45

95
4,141
1,158
1,615

$ 157
42%

7.3

$5,906
107
197
--
1,125
743

5.50

95
4,341
774
2,061

$ 176
27%

10.8




1
The financial projections . . . were developed by the managements of Rhne-Poulenc and Rorer Group, Inc., over a period
of several months. The projections . . . represent the base case in the view of senior management of both Rhne-Poulenc and Rorer
Group, Inc. There are numerous assumptions and attendant uncertainties with respect to these projections which are set forth in more
detail below.

The 1990 data assume that the transactions are completed on June 30, 1990, and that the combined accounts include 12
months of results for Rorer Group, Inc., and 6 months of results for the Human Pharmaceutical Business as well as interest on the debt
incurred in the restructuring from June 30, 1990. The projections also assume provisions of $218 million (before taxes) in 1990 for
one-time costs related to the transactions.

The financial projections reflect substantial benefits anticipated from the combination and assume, among other factors: (1)
increases in sales of existing products and introduction of new products, receipt of regulatory approvals required for new products
within the planned timeframes and achievement of marketing plans for both new and existing products; (2) reduction of sales in
certain markets from overlapping products; (3) some disruption in sales from the business combination together with declines over
time on products which will be less actively marketed by the combined company than previously; (4) exclusion of sales increases
which may result from increased marketing emphasis on certain core products by the combined sales force; (5) price increases on
existing products of both companies throughout the period on a basis generally consistent with historical experience; (6) improvement
in operating margins, particularly in the first three years after the transactions, which improvement is expected to result from the
consolidation of manufacturing operations, sales forces, marketing, distribution and administrative functions, and research and
development activities.



Source: Rorer Group, Inc., merger proxy statement, 1990.

This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-17- UVA-F-1015

Exhibit 9

RHNE-POULENC RORER, INC.

Estimation of RPR Stock-Price Volatility
across 31 Weeks, January 1991 to August 1991




Weekly
Closing
Stock Prices
1


Price
Relative

Log of
Price Relative

Squared Error of
Log of Price
Relative

Jan. 11






























Aug. 2

$34.69
33.75
34.00
34.56
35.00
36.13
38.79
39.56
40.75
40.69
41.44
40.44
40.50
39.31
39.75
39.44
39.56
39.38
41.99
41.25
41.19
41.13
41.88
42.00
42.50
41.50
41.63
41.75
42.38
41.50
43.38
$45.75

Sum
Average


0.973
1.007
1.016
1.013
1.032
1.074
1.022
1.030
0.999
1.018
0.976
1.001
0.971
1.011
0.992
1.003
0.995
1.066
0.985
0.999
0.999
1.018
1.003
1.012
0.976
1.003
1.003
1.015
0.979
1.045
1.055


-0.027
0.007
0.016
0.013
0.032
0.071
0.022
0.030
-0.001
0.018
-0.024
0.001
-0.030
0.011
-0.008
-0.003
-0.005
0.064
-0.015
-0.001
-0.001
0.018
-.003
0.012
-0.024
0.003
0.003
0.015
-0.021
0.044
0.053

0.304
0.010


0.0012
0.0000
0.0001
0.0000
0.0006
0.0041
0.0002
0.0005
0.0001
0.0001
0.0010
0.0000
0.0014
0.0000
0.0002
0.0000
0.0001
0.0033
0.0005
0.0001
0.0001
0.0001
0.0000
0.0000
0.0010
0.0000
0.0000
0.0001
0.0008
0.0014
0.0021

0.017998
0.000599

Number of price relatives: 30
Number of stock prices: 31
Adjusted weekly variance: 0.000620
Annual variance: 0.032
Annual std. deviation: 0.180 = Sigma or volatility

Comment: In this table, stock prices are converted into price relatives (which are simply the ratio of todays price to yesterdays
price). Then the price relatives are transformed into logarithmic values (in order to normalize the distribution). In the right-hand
column, the squared deviations of the logarithmic values are computed from their mean value (0.010). The weekly variance is
computed by dividing the sum of the right-hand column (.018) by the number of price relatives (30) and then multiplying by a
correction factor (30/29) to adjust for sampling bias. The annual variance is obtained by multiplying the weekly variance by 52. The
standard deviation is the square root of annual variance. For a more detailed discussion of this estimation procedure, see J. Cox and
M. Rubinstein, Options Markets (Englewood Cliffs, N.J.: Prentice-Hall, 1985), pp. 255-58.

___________________________

1
These stock prices include dividend payments as of ex dividend dates.

Source of stock prices: Datastream, Inc.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-18- UVA-F-1015

Exhibit 10

RHNE-POULENC RORER, INC.

Graph of Prices of RPR Common Stock and CVRs since July 1990
(all values indexed to 1.00 from first day of trading)









Security Prices



July 2, 1990

August 1, 1991

RPR common stock

RPR CVRs

Standard & Poors Index

$ 36.88

5.56

$196.23

$ 45.75

2.50

$210.99



Source: Datastream, Inc.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.
-19- UVA-F-1015

Exhibit 11

RHNE-POULENC RORER, INC.

Current Capital-Market Conditions,
Early August 1991





August 9, 1991

July 26, 1990

Equity-market multiples
Median price/earnings ratio
Median dividend yield


15.2
3.0%


13.3
3.7%

Equity-market indexes
Dow-Jones Industrial Average
S&P 500 Index
NASDAQ
1
OTC Composite Index


3,017.67
380.96
504.15


2,920.79
365.91
455.43

Change in equity-market indexes over past 12
months (%)
Dow-Jones Industrial Average
S&P 500 Index
NASDAQ OTC Composite Index


+5.3
+10.1
+17.6


+10.8
+4.1
-1.6

U.S. Treasury yield curve (yields by maturity, %)
3-month bills
6-month bills
1-year notes
2-year notes
3-year notes
5-year notes
10-year bonds
30-year bonds


5.69
5.89
6.17
6.85
7.09
7.74
8.16
8.35


7.83
7.85
7.90
8.09
8.20
8.26
8.47
8.53

Benchmark corporate costs of funds (%)
Prime rate
Aaa corporate bond rate

Other bond rates:
A-rated corporates (25 yrs.)
A-rated financials (10 yrs.)

Preferred stocks, dividend yield:
A-rated utilities
A-rated financials


8.5
8.9


9.6
9.15


8.99
9.37


10.0
9.3


9.67
NAv.


NAv.
NAv.




1
National Association of Securities Dealers.

Source: Value Line Investment Survey, August 9, 1991, and August 3, 1990.
This document is authorised for use only in MBA ACF course at INSEAD Jan/Feb 2014 by Professor P. Hietala.
Copying, printing or posting is a copyright infringement.