Andreas Scherer, Ph.D.
We have seen a number of major mergers and acquisitions among pharmaceutical companies over the last few years. Is long term success in this industry an issue of size? And most importantly how do we mitigate the risk of large M&A transactions? This article will take a look at the reasons why mergers are so tempting and how to mitigate some of the inherent risks.
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.
Over the last few years we have seen a number of large scale mergers across the globe. We have seen large drug companies consolidating their operations (Pfizer and Warner Lambert, Merck and Schering-Plough, Astra and Zeneca, Novartis and Alcon, Glaxo and Wellcome, Sanofi and Genzyme). In addition there have been a number of acquisitions in this area. In a recent article with Contract Pharma I surveyed the deal landscape over the last few years. 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 to access strategic markets such as China. 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.
However. 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?
So, if M&A is an inevitable part of today’s reality within Big Pharma, then how do we adequately manage the associated risks? Well, there is only a little we can do to avoid the occurrence of issues such as cultural misfits, shell-shocked employees, in-fights on power, processes etc. These things will happen. However, two companies that are going together should create ahead of time a plan around. Here are three quintessential must-dos.
- Install a Governance Board: One of the biggest issues in M&A is the leadership vacuum during the transition. Executives at the C-level as well EVP-level are departing or changing roles. In the meantime, both strategic and operational issues need to be resolved. Establishing a governance board that is empowered to make decisions will mitigate the leadership vacuum problem. In case of a merger seek representation of both companies in that governance board. Allow escalations to bubble up quickly. The decisions of the Governance board should be final to avoid lengthy re-reviews.
- Ring-fence key assets: Prior to all post-merger integration efforts, do this first. Identify on both sides all key assets such as strategic drug development projects. Establish strong leadership teams to manage these assets. Make sure that the teams are empowered to act regardless of the changes in the rest of the organization. Most likely, these assets were one of the major reasons to enter into the merger in the first place.
- Tag key people early: In times of uncertainty it is for key people on both sides important to know that they have a future. The high performers always have options. Competitors will try to poach your best employees in times of uncertainty. Consider retention bonuses or similar incentives. Avoid that mixed messages are sent out to those, who are most crucial to the success of the go-forward organization. Communicate early and often, to minimize any irrational decisions. Keep in mind. Post merger, it’s all about people.
In an industry where speed of drug development is everything 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. Post-merger, it’s vital to gain traction quickly. Focusing on those three steps will ensure that at least the essentials are getting done.