We have seen a number of major mergers and acquisitions among pharmaceutical companies over the last few years. The question arises, is M&A the ultimate answer for Big Pharma? Is long term success in this industry an issue of size? This article will take a look at the reasons why mergers are so tempting. But it also discusses why becoming bigger is not enough.
The pharmaceutical industry is changing rapidly. There is an ever increasing demand world-wide for new treatments of diseases such as cancer, diabetes, Alzheimer’s etc. The world-wide pharmaceuticals market was estimated to be $825 B in 2010 and will break the one trillion barrier soon. This growth is driven by stronger near-term growth in the US market and the expansion of drug consumption in other parts of the world. At the same time, pharmaceutical companies are working hard to make a business model work that relies heavily on their ability to launch block buster drugs. These need to hit the market in time to finance the infrastructure necessary to invent, develop, manufacture, distribute and market new drugs.
Acquirer | Acquire |
t |
€/$ |
Schering Plough | Organon | 03/2007 |
€11 B |
GSK | Reliant Pharma | 07/2007 |
$1.65 B |
Shionogi | Sciele Pharma | 08/2008 |
$1.42 B |
Eli Lilly | ImClone | 10/2008 |
$6.5 B |
Pfizer | Wyeth | 01/2009 |
$68 B |
Roche | Genentech | 03/2009 |
$46.8 B |
Johnson & Johnson | Cougar Biotech | 05/2009 |
$1 B |
Dainippon Sumitomo | Sepracor | 09/2009 |
$2.6 B |
Merck | Schering Plough | 11/2009 |
$41.1 B |
GSK | Stiefel | 07/2009 |
$3.6 B |
Abbott | Solvay | 02/2010 |
$4.5 B |
Abbott | Piramal’s Healthcare unit | 05/2010 |
$3.72 B |
Pfizer | King Pharma | 10/2010 |
$3.6 B |
Novatis | Alcon | 12/2010 |
$51 B |
Forest Lab | Clinical Data | 01/2011 |
$1.2 B |
Teva | Taiyo | 05/2011 |
$460 M |
Takeda | Nycomed | 05/2011 |
$9.6 B |
Gilead Sciences | Pharmasset Inc. | 11/2011 |
$11 B |
Dainippon Sumitomo | Boston Biomedical | 02/2012 |
$200 M |
Fig 1: M&A Deals in Pharma between 03/2007 and 02/2012
Over the last few years we have seen a strong level of M&A activity across the globe (see fig 1 for key M&A deals between 2007 and February of 2012. Is M&A the Holy Grail for big pharma? Is size the ultimate path to long-term success? Without any question, one of the driving forces is the never-ending quest to improve the pipeline of these major players. The hope is that post-merger, the acquiring company will have a stronger pipeline of drugs that can be carried forward in their R&D organization. Additional benefits are an enhanced worldwide distribution system. In some cases, companies can retire plants because of redundant manufacturing infrastructure. These are the main reasons why it is so tempting for CEOs to look at M&A.
But there is a catch. It’s one thing to put an M&A deal together. It’s another to make a deal work. Overcoming post-merger integration issues is a non-trivial task. First, there are cultural issues between the two companies starting at the executive level down to the lab level. It takes years for companies to fully develop a combined culture, and sometimes it really doesn’t happen at all. Second, the promise of a solid pipeline of drugs could be overestimated. In other words: 1+1 < 2. Third, post-merger integration slows down a business considerably. The day a deal is announced people begin to worry about their future instead of being focused on the task at hand. What will happen to my organization? What will happen to me? Should I start looking for a new job? This kind of thinking happens on both sides – the acquiring company as well as the acquired one. During the integration phase, organizations spend a lot of time making it all work. Who is in charge? Who is part of the go-forward team? What should our process be?
In an industry where speed of drug development is everything, given that there is only a limited amount of time to benefit from a patent, slowing down the ability of an organization to execute is probably one of the least desired consequences of an M&A deal. It’s a hidden cost that is potentially in the billions of dollars and is not seen on any P&L statement. One thing is for sure. When the deal making is over, the ability to execute is essential. The fundamental necessity to drive execution from the board room level down to each and every project team will decide over the success or failure of a merger. Post-merger, it’s vital to gain traction quickly. Some will argue that a relentless focus on operational excellence early on would have made some of these M&A moves unnecessary.
Rick Maurer says
The long list of fairly recent mergers in pharma is a sobering reminder of the failure rate of these well-intended marriages. I just wonder how many of these will end up being good for owners over the coming years. As you suggest, it is too soon to tell. Mergers often take a long time to work — or not.
I agree with the points you make about the challenges of merger integration. And, that on the day the merger is announced, people begin to worry about their jobs.
The focus of my work rests on two questions: Why do people support change? Why do they resist it? Merger integration could be a poster child for a conversation on those two questions.
I look at three levels of questions: Level 1: Do people understand what’s going on? Level 2: Do they get energized by the possibility of this merger?, and Level 3: Do they believe that the leaders of the two organizations can work together in ways that do add up to 1+1 = 2.
If the answer to any of those questions is “no” or “maybe” then leaders are putting their merger at risk. They risk three types of resistance: I don’t get it (Level 1), I don’t like it (2), and/or I don’t like you (3).
A lot of mergers focus on what might be good for the company (positive Level 1 and 2) but fail to look at the situation through the eyes of those who will need to make this merger work. Too often, leaders pile on lots of data (Level 1) just assuming that’s what people need to hear. And, of course, they needs facts and figures, but these slide-heavy presentations often miss the Level 2 emotional component – fear or excitement. And they certainly do little to build trust in the leaders of this new entity (Level 3.
My suggestions to leaders who are considering a merger are:
After you’ve done the due diligence, ask yourselves:
Do we know how to explain the reasons for the merger so that both organizations see why we want to bring these two companies together? (Warning: if communication is one-way, and way too heavy on details, people will tune out.)
Do we know how to engage people from both companies in the integration process? (It’s inevitable that some will be afraid no matter what you do, so focus on building a critical mass.)
Do people trust us (and our counterparts) to tell them the truth and handle this merger in ways that are good for the companies and the people?
My suggestion to leaders who are in the midst of a merger that is not taking hold:
Find out what the Level 1 (information), Level 2 (emotional reaction), and Level 3 (trust) issues are. What seems to be working well at all three levels, and what isn’t.
Since you probably won’t be able to work on all the issues, identify those that you believe have the most leverage potential. For example, let’s say people from the acquired company are afraid that they will be out of work. Assuming that downsizing will be minimal, do whatever it takes to assure people that you truly want to complete the integration process in a way that that actually increases job security. Invite people into open conversation about ways to accomplish this. Allow people to be part of the change that affects them. The value of addressing a leverage issue is that it often dissipates some other concerns and it builds trust in the process.