Pharmaceutical and Biotechnology Mergers and Acquisitions: The Glass Ceiling

EXECUTIVE SUMMARY
Very few people close to the pharmaceutical industry need to be reminded of the extent of merger and acquisition (M&A) activity that the industry has experienced in recent years. Scarcely a day goes by without more media stories of new, continuing, failed or prospective contacts between companies, and a huge number of those employed in the industry have been affected by M&As in some way during their careers.

The purpose of this report is:

The strategy of M&A


. . . in the past
Strategy in the pharmaceutical industry is developed against a background of the risk/return equation that the market and the technology involved bring with them.

The return offered by the market for a successful product sold worldwide is enormous - within a few years of launch a product can, in ideal circumstances, reach annual sales of $2-5 billion, with margins of over 80%. The risk inherent in the technology is equally large - development timescales are commonly 10 years and usually cost hundreds of millions of dollars (and escalating rapidly), while the probability that such an investment will bring success is very low.

Against this background all companies are seeking to enhance shareholder value. This normally requires them to demonstrate both consistent improvements in earnings in the short term, and a strategic position that gives shareholders the assurance that results will continue to meet target in the longer term. Traditionally, US and UK shareholders have sought high performance on both of these criteria, with particular emphasis on the short-term aspect, while those in Europe and Japan have tended towards a greater emphasis on the long-term aspect. Because the returns in the industry can be so high, shareholder expectations in the short term are also very high. Frequently quoted earnings targets for the larger companies currently centre around 13% pa - implying an annual sales growth target of about 10%.

The task of management is to extract this kind of high-level and consistent performance against the naturally fluctuating risk background of the industry. M&A is a frequently adopted strategy to support this objective. In the past it has commonly been used to improve global coverage of important markets, to acquire promising products or technologies, to permit cost reductions through operating synergies, to diversify into what were thought to be synergistic business areas (generics etc), to cover for weak performance and, in recent years, in the simple search for size.

Many of these strategies have achieved their objectives. The attempt to use M&A to diversify has, however 'run onto the rocks' because there is generally less synergy than was expected in related healthcare markets and the returns are less good.

The use of M&A to seek greater scale seems to support this policy, but remains controversial. In order to investigate the argument that being larger, and therefore spending more on R&D, would improve overall performance, the authors created a model of the industry to examine what would happen over a number of years if companies try to sustain themselves just by spending given proportions of their sales on R&D. The authors discovered that there is indeed an advantage in getting bigger - sales growth becomes both faster and more consistent as size increases. However, there is a size above which it becomes increasingly difficult to maintain sales growth at optimal levels.

. . . in the future
Over the next few years we expect to see significant changes in the dynamics of the market and the technologies of drug development that will have a dramatic impact on M&A strategy - especially as regards to the current vogue for mega-mergers in search of size. The total effect will be to move both technology and the market from a past of trial and error and serendipitous inefficiency, where the patient was the least influential component in the equation, to a future of at least a modest degree of predictability and efficiency, with the patient much closer to the centre of influence.

The relatively crude nature of the past environment, with its high risk and high return, led to the blockbuster drug and the blockbuster company. The more sophisticated future environment, with a consequently lower level of both risk and return is expected to favour again smaller, more innovative and nimble players - or possibly big players who can demonstrate real nimbleness.

For these reasons, and others, the authors believe that the mega-merger trend will continue for a while but then cease - the glass ceiling will have been reached.

These changes will give renewed life to the niche R&D company ('biotechnology') concept, offering again the possibility that some will succeed in becoming fully integrated companies. Medium-sized European companies may gain some benefit as well, but most will need to find a new strategy.

At all levels, M&A will continue to be a standard management tool to achieve the more specific and narrowly defined objectives for which it was used in the past.

The implementation of M&A


Part II of the report includes a commentary on a survey into implementation practice conducted among senior and middle management in the industry and prominent industry analysts, as well as a detailed review of the way implementation was carried out in six recent cases of M&A across a range of company sizes.

The picture of pharmaceutical M&A "from the inside" is not entirely rosy, especially from the point of view of middle management. At the senior level however there is a fairly clear consensus on the errors made in the past and the way in which M&A deals should be implemented. This makes the individual examples reviewed a useful check-list of approaches to the main tasks that must be carried out.

PUBLICATION: May 2000
REF: BS1019E
PAGES: 200+
PRICE: �1,995/$3,995/�479,000

CONTENTS
LIST OF TABLES
LIST OF FIGURES
EXECUTIVE SUMMARY


ES.1 The strategy of M&A
ES.2 The implementation of M&A


SCOPE AND METHODOLOGY
ABBREVIATIONS
PART I M&A IN PHARMACEUTICALS - STRATEGY


CHAPTER 1 THE BASIC DYNAMICS
1.1 Recent pharmaceutical/biotechnology M&A deals
1.2 Distinguishing features of the pharmaceutical market
1.3 Key investment requirements - R&D
1.4 Key investment requirements - marketing
1.5 Global market differences
1.6 Pharmaceutical M&A


CHAPTER 2 OVERRIDING CORPORATE GOALS
2.1 Shareholder value
2.2 Earnings growth
2.3 Market share gains


CHAPTER 3 M&A STRATEGIES OF THE PAST
3.1 Geographic spread
3.2 Buying products
3.3 Buying technology
3.4 Buying scale
3.5 Business development
3.5.1 Generics
3.5.2 Diagnostics
3.5.3 Consumer health
3.5.4 Pharmacy Benefit Managers
3.5.5 Patient care
3.5.6 Related fields
3.6 Cost reduction
3.7 Site rationalisation
3.8 Defensive initiatives
3.9 Perception of activity and drive/muddying of the waters
3.10 Lost battalions


CHAPTER 4 ADDITIONAL FUTURE DYNAMICS
4.1 Positive trends
4.1.1 Economic/social operating environment
4.1.2 Market for pharmaceuticals
4.1.3 R&D processes
4.1.4 Corporate dynamics
4.2 Negative trends
4.2.1 Economic/social operating environment
4.2.2 Market for pharmaceuticals
4.2.3 R&D processes
4.2.4 Corporate dynamics


CHAPTER 5 BENEFITS OF SCALE - IS THERE AN OPTIMAL SIZE FOR PHARMACEUTICAL COMPANIES?
5.1 Assumptions
5.1.1 Underlying business
5.1.2 Product magnitude
5.1.3 R&D productivity
5.2 Results
5.3 Alternative scenarios
5.4 Conclusions


CHAPTER 6 CASE STUDY - GLAXO WELLCOME/SMITHKLINE BEECHAM
6.1 Product magnitude - the Achilles heel of mega-mergers


CHAPTER 7 SENIOR MANAGEMENT INTERVIEWS - STRATEGIC ASPECTS OF M&A
7.1 Operating environment for pharmaceutical companies
7.2 M&A in big pharmaceutical companies
7.2.1 Will there be more?
7.2.2 Does it work?
7.2.3 Merger versus acquisition
7.2.4 Regional differences
7.2.5 What drives M&A in big pharma?
7.2.5.1 Access to products
7.2.5.2 Scale
7.2.5.3 Synergies
7.2.5.4 Fear/fashion
7.2.5.5 Company ranking
7.2.5.6 Geography
7.2.5.7 Diversification
7.2.5.8 Access to technology
7.2.5.9 Therapeutic focus
7.2.5.10 Removal of competitors
7.2.6 Big pharma - influences on M&A
7.2.6.1 Anti-trust legislation
7.2.6.2 Role of the CEO
7.2.6.3 Manageability
7.2.6.4 Disruption
7.2.6.5 Public opinion/perception
7.2.6.6 Treatment of goodwill
7.3 Medium-sized companies
7.3.1 View of outsiders
7.3.2 View of insiders
7.4 Biotech companies
7.5 Summary


CHAPTER 8 FUTURE M&A STRATEGIES
8.1 Underlying trends
8.2 Big pharmaceutical companies
8.2.1 Next few years
8.2.1.1 'Pure-play' pharmaceuticals
8.2.1.2 Size as a strategic objective
8.2.1.3 Patent expiry
8.2.2 Longer term - the glass ceiling
8.3 Niche R&D companies
8.4 Medium-sized European companies
8.5 Japan
PART II M&A IN PHARMACEUTICALS - IMPLEMENTATION


CHAPTER 9 GOOD PRACTICE IN IMPLEMENTATION
9.1 Implementation planning
9.1.1 Understand the unique characteristics of the deal and plan the scale and pace of change accordingly
9.1.2 Link planning with due diligence
9.1.3 Prioritise synergy gains
9.1.4 Set the integration organisational structure
9.1.5 Draw up the integration plans
9.1.6 Push for fast results
9.2 Carrying out implementation
9.2.1 Track synergy expectations over time
9.2.2 Communicate endlessly
9.2.3 Know when enough is enough
9.2.4 Manage the culture
9.3 Summary


CHAPTER 10 SENIOR MANAGEMENT SURVEY - IMPLEMENTATION OF M&A
10.1 Introduction
10.2 Overall approach to the implementation process
10.2.1 Speed
10.2.2 Human aspects
10.2.3 Clarity of purpose
10.2.4 Careful planning
10.2.5 Involving staff in decision-making
10.2.6 Communicating
10.2.7 CEO role
10.3 Creating a single entity
10.4 Issues of national culture
10.5 Issues of corporate culture
10.6 Senior management - roles and selection
10.7 Selection of other staff
10.8 Use of consultants
10.9 Middle management survey - personal experiences of M&A
10.9.1 Management of the integration process
10.9.1.1 Leadership
10.9.1.2 Speed
10.9.1.3 Consultants
10.9.2 Creating a new management structure
10.9.2.1 Uncertainty and delay
10.9.2.2 Honesty
10.9.2.3 Fairness and objectivity
10.9.2.4 Geography
10.9.2.5 Top management team selection
10.9.2.6 Upper/middle management team selection
10.9.3 Communication
10.9.4 Culture
10.9.4.1 Company name
10.9.4.2 National cultures
10.9.4.3 Academic/commercial
10.9.4.4 Overall
10.9.5 Business objectives
10.9.5.1 Retention of key people
10.9.5.2 Product portfolio rationalisation
10.9.5.3 Investment for the future
10.9.5.4 Who received the most benefit?
10.9.6 Conclusions


CHAPTER 11 REVIEW OF SIX RECENT DEALS
11.1 Recent M&A examples - overview
11.1.1 Type of deal
11.1.2 Strategic reasons for merging/acquiring
11.1.3 Partner choice
11.1.4 Guiding principles
11.1.4.1 Creation of a single entity
11.1.4.2 Allocation of jobs
11.1.4.3 Speed of implementation
11.1.4.4 Communications
11.1.4.5 Underlying business
11.1.4.6 Retention of key staff
11.1.4.7 Line management decision-making
11.1.5 Motto
11.1.6 Timing
11.1.7 Consultants
11.2 Managing the integration process
11.2.1 Top-down planning
11.2.2 Integration management and support
11.2.3 Communications
11.2.4 Staff selection
11.2.5 Systems/working practices
11.2.6 Business portfolio
11.2.7 Culture
11.3 AstraZeneca
11.3.1 Strategy behind the deal
11.3.2 Principles underlying the integration process
11.3.3 Implementation
11.3.3.1 Pre-deal planning
11.3.3.2 Management of the integration process
11.3.3.3 Communication
11.3.3.4 Restructuring
11.3.3.5 Systems and working practices
11.3.3.6 Business portfolio
11.3.3.7 Culture
11.4 Aventis
11.4.1 Strategy behind the deal
11.4.2 Principles guiding the integration process
11.4.3 The integration process
11.4.3.1 Pre-deal planning
11.4.3.2 Management of the integration process
11.4.3.3 Communication
11.4.3.4 Organisation
11.4.3.5 Systems and working practices
11.4.3.6 Business portfolio
11.4.3.7 Culture
11.5 Sanofi-Synth�labo
11.5.1 Strategy behind the deal
11.5.2 Principles underlying the integration process
11.5.3 Integration
11.5.3.1 Pre-deal planning
11.5.3.2 Management of the integration process
11.5.3.3 Communication
11.5.3.4 Restructuring
11.5.3.5 Systems and working practices
11.5.3.6 Business portfolio
11.5.3.7 Culture
11.5.4 Conclusion
11.6 Gilead Sciences Inc
11.6.1 Strategy behind the deal
11.6.2 Principles guiding the integration process
11.6.3 Implementation
11.6.3.1 Pre-deal planning
11.6.3.2 Management of the integration process
11.6.3.3 Communication
11.6.3.4 Reorganisation
11.6.3.5 Cost synergies
11.6.3.6 Business portfolio
11.6.3.7 Systems and working practices and corporate culture
11.6.4 Conclusion
11.7 TerraGen Discovery
11.7.1 Strategy behind the deal
11.7.2 Principles guiding the integration process
11.7.3 The integration process
11.7.3.1 Pre-deal planning
11.7.3.2 Management of the integration process
11.7.3.3 Communication
11.7.3.4 Restructuring
11.7.3.5 Systems and working practices
11.7.3.6 Business portfolio
11.7.3.7 Culture
11.7.4 Lessons learnt
11.8 Geron BioMed
11.8.1 Strategy behind the merger
11.8.2 Principles underlying the integration process
11.8.3 Implementation
11.8.3.1 Pre-deal planning
11.8.3.2 Management of the integration process
11.8.3.3 Communication
11.8.3.4 Lessons learned
REFERENCES
APPENDIX 1 SUMMARY CHARACTERISTICS OF FIVE CASES OF M&A IMPLEMENTATION

LIST OF TABLES
Table 1.1 Top 10 pharmaceutical/biotechnology M&A deals in Europe and North America, 1999
Table 1.2 Other pharmaceutical/biotechnology M&A deals in Europe and North America, 1999
Table 1.3 Top 10 pharmaceutical/biotechnology M&A deals in Europe and North America, to March 2000
Table 1.4 Other pharmaceutical/biotechnology M&A deals in Europe and North America, to March 2000
Table 1.5 R&D spend of major pharmaceutical companies, 1998

Table 2.1 Summary of empirical studies of share price changes resulting from M&A activities
Table 2.2 AstraZeneca's target ranking in different therapeutic areas

Table 3.1 Former leading companies that have merged or been acquired, 1985-1996

Table 4.1 Opportunities and challenges facing the pharmaceutical industry

Table 5.1 R&D productivity targets of the major merged companies
Table 5.2 Average company - growth potential
Table 5.3 Average company - chance of meeting target
Table 5.4 Average company - chance of more than doubling sales
Table 5.5 Average company - consistency of growth over time
Table 5.6 Performance variability by company size
Table 5.7 Growth achieved by best performing company at each level
Table 5.8 Growth achieved by worst performing company at each level
Table 5.9 Alternative scenarios

Table 7.1 People interviewed from the top 30 pharmaceutical companies
Table 7.2 People interviewed from established middle-rank companies
Table 7.3 People interviewed from new/biotech companies
Table 7.4 Investors, bankers and analysts who were interviewed

Table 9.1 Failure rates of acquisitions
Table 9.2 Prioritisation of synergy gains

Table 10.1 Types of M&As

Table 11.1 Feedback questionnaire on the integration process

LIST OF FIGURES
Figure 2.1 Major company dependence on individual products in the US market

Figure 4.1 Number of pharmaceutical drugs losing patent protection and the estimated revenue loss, 1995-2005

Figure 5.1 Trends in R&D expenditure and sales within the pharmaceutical industry, 1983-2003
Figure 5.2 New molecular entities introduced onto a 20-country market, 1970-1998
Figure 5.3 Prospects of achieving various target growth rates for four different sized companies
Figure 5.4 $2 billion company - sales potential ($ million)
Figure 5.5 $5 billion company - sales potential ($ million)
Figure 5.6 $10 billion company - sales potential ($ million)
Figure 5.7 $20 billion company - sales potential ($ million)
Figure 5.8 $40 billion company - sales potential ($ million)

Figure 6.1 The product pyramid - Glaxo Wellcome products launched in 1995-1999
Figure 6.2 The product pyramid - SmithKline Beecham products launched in 1995-1999
Figure 6.3 The product pyramid - Glaxo SmithKline products launched in 1995-1999

Figure 9.1 Synergy release plan showing individual project contributions
Figure 9.2 Sample integration management structure
Figure 9.3 Example of a critical path analysis: Advent Building Society
Figure 9.4 Tracking expected synergy gains using @Risk

Figure 10.1 Leadership qualities (appropriate integration process)
Figure 10.2 Leadership qualities (inappropriate integration process)
Figure 10.3 Fairness and objectivity of job allocations
Figure 10.4 Structuring the new entity when head offices are in different countries
Figure 10.5 Allocation of top management positions
Figure 10.6 Allocation of upper/middle management positions - dissimilar sized companies
Figure 10.7 Allocation of upper/middle management positions - similar sized companies
Figure 10.8 Creation of a new culture in companies based in the same country
Figure 10.9 Creation of a new culture in companies of differing nationality
Figure 10.10 Creation of a combined R&D portfolio
Figure 10.11 Creation of a combined marketed product portfolio
Figure 10.12 Extent of benefit from the M&A transaction and process

Figure 11.1 Internal views on the management of integration
Figure 11.2 Assessment of the speed of the integration process
Figure 11.3 Assessment of the staffing process
Figure 11.4 Assessment of communication procedures
Figure 11.5 Integration goals

© PJB Publications Ltd. 2000
All rights reserved.