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.