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.

 

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.

This article was also published with Contract Pharma.