‘Diversity And Inclusion’: A Missing Link For Indian Pharma

Inadequate access to affordable health care to a vast majority of the population has been a favorite topic of debate, since long, globally. This discourse is generally centered around the least developed and the developing world, such as India. However, in the recent time, the reverberations of the same can be heard even from the most developed countries, like the United States.

Possible solutions in this area generally encompass several tangible issues, e.g. high cost of drugs and care, alleged unethical practices of the providers, infrastructure bottlenecks – to name a few. Curiously, despite the availability of an increasing number of innovative drugs, state of the art facilities and diagnostics, brilliant healthcare professionals and so on, disparities in the degree of access to all these, between different members of the civil society, keep steadily mounting.

This cascading socioeconomic issue, creating a widening the trust deficit, especially on pharma, throws a critical management challenge for long term sustainability of business, if not survival too.

Transformation to a customer-oriented, profit-making organization:

Building a profit-making organization is not an easy task. However, transforming a profit-making organization to a profit making through customer-centric policies, is several times more challenging. That’s because, making a true external customer-centric organization gets kick started from a significant cultural change within the organization. Systematically creating a pool of requisite internal customers (employees), with diverse background, experience, gender, belief, perspective, talent and, more importantly, ably supported by the organizational vision of inclusion, forms the nerve center of this transformative process. No doubt, why the quality of ‘Diversity and Inclusion (DI)’ culture of an organization is assuming the importance of a differential success factor in business excellence.

The August 25, 2016 E&Y article, titled “Embracing customer experience in the pharmaceutical industry” epitomizes its relevance by articulating: “It is the companies that focus on continuously delivering a better customer experience to build a trusted and transparent relationship over time that will win in the market. They will not only acquire customers that will remain loyal, but also win advocates that will refer the company or brand to more customers.”

The missing link:

It is now being widely established that creating a culture of ‘Diversity and Inclusion (DI)’ across the organization, is of critical importance to maintain sustainable business excellence, with a win-win outcome. Going a step forward, I reckon, although, this is an arduous task for any organization, but an essential one – even for long-term survival of a business. However, today, the very concept of DI is apparently a ‘missing link’ in the chain of sustainable organizational-building initiatives, particularly for most Indian pharma companies.

The role of DI in making a customer-centric business:

Health care customers, like many others, are generally of diverse backgrounds, financial status, ethnicity, gender, health care needs, expectations, and also in their overall perspective. Thus, to make a customer-centric organization for greater market success, and drive product and service innovation accordingly, pharma companies need to deeply understand them, empathetically. A competent pool of well-selected employees with diverse backgrounds, race, ethnicity, gender, perspectives, could facilitate this process, more effectively. However, the company should also create an environment and culture of inclusion for all to listen to each other’s well-reasoned views – expressed uninhibited and fearlessly for this purpose.

In making this process more effective to add a huge tangible and intangible worth to the business, pharma players need to untether the employee potential through empowerment, making them feel valued and grow. This would also help immensely in charting newer pathways of all-round success in many other high-voltage complexities of pharma business.

‘Why diversity matters’?

That diversity within an organization matters in several ways, has been established in several studies. For example, the February 2015 article, titled “Why diversity matters”, of McKinsey & Company says, “More diverse companies are better able to win top talent, and improve their customer orientation, employee satisfaction, and decision making, leading to a virtuous cycle of increasing returns.” The analysis found a statistically significant relationship between a more diverse leadership team and better financial performance (measured as average EBIT 2010–2013).

Why is inclusion so important?

In a large number of organizations that include Indian pharma, senior management staffs generally seem to appreciate hearing more of what they want to hear. This culture quickly percolates top-down – encompassing the entire company, probably with a few exceptions. Personal ‘likes’ and ‘dislikes’ of various nature and degree spread wings within many organizations. Such a situation is created from intrinsic apathy to patiently listen to and accept another employee’s viewpoint – even on critical customer-centric issues. Employees, in that process, also get branded as ‘argumentative’ and often ‘disloyal’, if not a ‘socialist’. The major decisions often get biased accordingly – sometimes unknowingly.

Whereas, inclusion entails empowerment and close involvement of a diverse pool of employees with dignity, by recognizing their intrinsic worth and value. Moving towards a culture of inclusion would require creation of an organizational desire to communicate professionally and learn how to listen to each other’s well-thought-through arguments with interest.

The business should accept that it is not really important in getting along with everybody on all issues – every time. Neither, does it make sense for professionals to develop personal ‘likes’ or ‘dislikes’ on other fellow colleagues, based on issue-based differences, while finding out ways and means to improve organizational performance, image or reputation. Inclusion helps employees to learn to work closely, despite personal differences on all important issues.

Has Global pharma industry started imbibing DI?

Yes, many global pharma majors, such as, GSKNovartis and Merck and several others, have started practicing DI as a way of organizational life and culture. Some of them like GSK India has put it on its country website. But, generally in India, the scenario is not quite similar. Though, many head honchos in the country talk about DI, the February 16, 2017 edition of Bloomberg/Quint carried a headline “Most Indian Companies Do Not Value Diversity At Board-Level Hirings,” quoting Oxfam India.

A voluntary survey of ‘company diversity’ conducted by US-based DiversityInc at Princeton, ranks the companies on four key areas of diversity management: talent pipeline, equitable talent development, CEO/leadership commitment, and supplier diversity. It revealed an interesting fact in its 2016 study. The survey reported, while diversity continues to improve in the overall perspective, its ‘Pharma 50’, as a group, ‘is right in the middle of the industry pack when benchmarked against the Fortune 500.’  The survey also brought to light significant differences in the levels of gender, national, and ethnic diversity even at the company boards and executive committees of individual companies. Nonetheless, some global pharma entities are taking significant steps in this direction. But, these are still early days in many organizations.

Conclusion:

The E&Y article quoted above, also says that pharma “customers are becoming resistant to push sales and marketing, and are instead preferring to relate to the overall experience provided in their pull interactions with the company. The customer experience will be the next battleground for the pharmaceutical industry. The deployment of a customer experience capability is a transformational journey in often unchartered territories. The key to success is to start early and drive a process that is both rigorous and iterative, allowing the organization – and its customers – to learn along the way and always to be ready with the next best action in place.” DI, I reckon, plays a critical role in attaining this goal.

Pharma companies are also realizing that building a profit-making organization with blockbuster high-priced, high-profit making molecules, such as Sovaldi is possible, but this may not be sustainable. It isn’t an easy task either, not anymore. There lies the urgency of transforming a profit-making organization to a profit making through customer-centric business entity. This process, I repeat, is several times more challenging, but the business success is much more sustainable.

Organizational transformation of this nature is prompting the global pharma majors to use Diversity and Inclusion (D&I) while achieving their key financial and people goals. Both D (Diversity) and I (inclusion) work in tandem for taking any fairness-based organizational decisions, irrespective of whether it’s staff or customer decision.

DI has the potential to help an organization to create and chart new and more productive pathways almost in all functions within the company – right from R&D, communication, service delivery to market access. In all these initiatives, customer focus to occupy the center stage – for a win-win outcome – significantly reducing the degree of difficulty for access to affordable medicines. DI is not a panacea to mitigate this problem totally, but would help significantly, nonetheless – with the help of employees with diverse background but having fresh eyes. Many global pharma majors have initiated action in this direction. However, in Indian pharma business generally, DI still remains a missing link, as it is seen today.

By: Tapan J. Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Will AB-NHPM Mitigate Indian Healthcare Crisis?

Since long, hypes have created on several healthcare schemes in India, by the successive Governments of different political dispensation. These attracted mostly positive vibes at the time of announcements. Nevertheless, as we move on, a vast majority of Indians continues to live in the midst of a health care crisis, as it were.

The National Health Policy 2017 also acknowledges this crisis as it writes: ‘growing incidences of catastrophic expenditure due to health care costs, which are presently estimated to be one of the major contributors to poverty.’

More recently, the May 31, 2018 article, published in the British Medical Journal (BMJ) continued to echo the similar concern. It reiterated, since both government funding and social health insurance contributions are insufficient to meet health care needs of households, over three-fourth of all healthcare payments are paid Out of Pocket (OOP) at the point of service delivery while medicine purchase (approximately 63 percent) account for the single largest component of these payments.

A major cause of catastrophe and impoverishment at the household level is undoubtedly the OOP expenditure on health care, including medicines. According to the above BMJ paper, 29 million households, implying about 38 million persons were pushed into poverty in the year 2011–2012, only because of this reason. Although, this study was based on a cross- sectional analysis of ‘National Sample Survey data, 1994–2014’, the public health expenditure in India has not shown any significant increase since then, either. On the contrary, the public spending in some health-related areas has come down in the recent years.

Is a health care crisis primarily a ‘financial’ crisis?

The issue of budget allocation and adequate public expenditure on healthcare in India assumes significance to understand this point better. It is generally believed that ‘a health care crisis is primarily a ‘financial’ crisis in which countries cannot successfully meet people’s access to medicine due to the rising cost of health care services and, more importantly, pharmaceuticals.’ A sincere political will is absolutely necessary to resolve these issues, meaningfully – the paper points out.

But, there doesn’t seem to be any financial crisis in the country now, as the Government claims. India is the fastest growing nation in the world. Why is then the health care crisis continuing for the majority of Indian, if not worsening? Why isn’t public expenditure on health care increasing despite such spectacular financial achievements? Could it be due to lack of requisite political intent?

On paper all health care related schemes look good:

Yes, I reckon, on paper all health care related schemes look reasonably good, assuming these will be implemented well. These may include, National Health Missions (NHM) covering both rural and urban poor or even the likes of Rashtriya Swasthya Bima Yojana (RSBY). So is also the most recent one - Ayushman Bharat – National Health Protection Mission (AB-NHPM) announced by the Government during 2018-19 Union budget presentation and approved by the cabinet on May 21, 2018. However, its implementation on the ground seem to be wobbly, too. Thus, many wonders whether this new scheme on the block will help the nation tiding over the existing health care crisis.

I broadly discussed this subject on February 5, 2018, in this Blog. However, in this article, I shall try to ferret out the reasons of such apprehension on the AB-NHPM, against some critical parameters, just as illustrations:

Who contributes and how much to health expenditures: 

From the National Health Account Estimate (NHAE) of October 2017, one gets a broad idea of who contributes and roughly how much of the health expenditures in India, as follows:

Union Govt. State Govts. Local bodies Enterprises, including insurance NGOs External donors OOPE
8.2% 13.3% 0.7% 4.4% 1.6% 0.7% 67%

Where does the treatment take place?

Place Urban (%) Rural (%)
Public healthcare 21 28
Private healthcare 79 72

It is interesting to note, although private health care costs over 4 times more than the public healthcare, more patients are compelled to go for private health care. (Source: National Sample Survey 2014, Ministry of Statistics and Program Implementation.)

Reasons for not using public health care facilities:

Around55.1percent of households are not using public health facilities.The reasons for not using public health care facilities by the members of the household when they fall sick, as reflected in the National Family Health Survey (NHFS) data, are interesting. Following are the main reasons:

Poor quality of care No nearby facility Long waiting time Inconvenient facility timing Health Personnel absent
48.1% 44.6% 40.90% 26.4% 14.8%

Addressing these reasons would help significant reduction in OOPE:

The February 2018 report of the ‘Centre for Technology and Policy Department of Humanities and Social Sciences, IIT Madras,’ vindicates this important point. It provides unambiguous evidence that strengthening the basic infrastructure of Health Sub-Centers (HSC), along with trained personnel and adequate medicines, ensure diversion of patients from expensive private facilities – increasing patients’ access to affordable health care. Consequently, OOP expenditure by families in health care and particularly medicines, sharply comes down.The study reported that such reduction in outpatient care varied between 77 percent and 92 percent in a pilot project on ensuring universal health coverage.

Break-up of healthcare expenditure – primary care costing the most:  

One gets a broad understanding on the general break-up of health care expenditure in India from the (NHAE) of October 2017, as follows:

Primary care Secondary care Tertiary care Patient transportation Governance & supervision
45.1% 35.6% 15.6% 4.6% 2.6%

It is worth noting that transportation costs are significant for many patients, just for accessing the existing public or private health care facilities, besides getting important diagnostic tests done, or even to buy many medicines. This expenditure would continue to exist, even if NHPS is put in place. On the other hand, strengthening the low-cost Government HSCs, would help greater patient access to health care, bringing down the OOPE, remarkably.

Currently, a sizeable number of reasonably decent medical treatment points, are located quite far from many villages. Thus, availing any decent health care facility by a large number of rural folks, no longer remains a matter of choice, up until the disease turns into a life-threatening one, due to protracted negligence. One such example is a large number of child deaths occurred at the state-run BRD Medical College hospital in the Gorakhpur city of Uttar Pradesh, in 2017. Most of them were brought in a critical condition from far-off villages.

Highest OOPE expenditure incurred for outpatient treatment:

According to the December 2016 publication titled ‘Household Health Expenditure in India’  of the Union Ministry of Health, one will get an idea of top 3 key consumption areas, out of the total OOPE on health care services, which are as follows:

Outpatient care Inpatient care Preventive care
54.84% 31.96% 4.26%

However, of the total OOPE, 53.46 percent was spent on medicines and 9.95 percent was spent on diagnostics. More importantly, 82.29 percent of the total OOP medicines expenditure and 67 percent of total OOP diagnostic expenditure were in outpatient treatment, the report highlights.

New NHPM excludes two major components of OOPE: 

Based on the above facts, it is interesting to note, while the maximum expenditure for health is incurred towards Primary Care and Outpatient treatment, the brand new NHPM does not cover both. In that case, how will it address the health care crisis in India and significantly reduce OOPE on health?

Does the total cost for AB-NHPM reflect in any budget allocation?

In this context, let me touch upon the other aspect of AB-NHPM, which is giving shape to 150,000 ‘Health and Wellness Centre (HWC)’ in India.On April 14, 2018, the first HWC – under the AB scheme was launched by the Prime Minister of India at Bijapur in Chhattisgarh.But, the fund allocated in the Union Budget 2018-19 for HWCs is just Rs. 120 million, which realistically is expected to support just around 10,000 HWCs. Whereas, 150,000 HWC would cost around Rs. 3 billion. The same issue of abysmal budgetary allocation, both by most of the state governments and the center, has been raised for NHPM, as well.

As we have seen in the chart of ‘who contributes and how much to current health expenditures’, that OOPE stands out, it should in no way be allowed to remain around that number in India, because of continuing low public health expenditure on health care.

Conclusion:

Coming back to what I started from – the issue of ongoing health care crisis in India with incredibly high OOPE expenditure of the households on health. Many health care schemes have come, gone or about to be jettisoned – getting replaced by the tweaked versions of the old ones – of course in a new Avatar, supported by much expected media hypes, virtually terming it as a panacea. But, the key problem of sincere implementation of those schemes still lingers.

Sharp Government focus, backed by adequate budget allocation, on primary health care and bringing down outpatient treatment cost, which contribute to a high proportion of OOPE, remain as elusive as ever. Thus, I reckon, AB-NHPM is unlikely to mitigate the health care crisis in India, at least,in the short to medium term.

By: Tapan J. Ray    

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

 

Increasing Consumerism: A Prime Mover For Change in Healthcare

Increasing ‘consumerism’ has already become a strong prime mover to reckon with, even in healthcare, including the pharma industry, across the world. Patients’ longing for better participative treatment experience at an affordable cost, has started gathering momentum as a major disrupting force in the healthcare space of India, as well.

In this article, which discusses a different topic from what I said in my last article that I will write this week, let us try to fathom today’s reality in a fast expanding area, primarily by connecting the emerging dots, both globally and locally. However, before doing so, it won’t be a bad idea to recapitulate, in the general term, what exactly is ‘consumerism’ – and then looking at it in context of healthcare.

What it really means?

The Oxford dictionary defines ‘consumerism’ as: ‘The protection or promotion of the interests of consumers.’ As an example, it says, ‘The impact of consumerism emerges as a factor of stabilization, as do the different understandings of stability and stabilization.’ Whereas, consumerism in healthcare is an assertion of patients’ right to be a key participant in their healthcare decision making process. As aptly put by Healthcare Success: “It is a movement from the ‘doctor says/patient does’ model, to a ‘working partnership’ model.”

Should pharma strategic marketing process, not take care of it?

When the above question is asked differently as: If the pharma strategic marketing process is effective, why is healthcare consumerism increasing across the world, including India? To find an answer to this, let’s go the basic of the definition of ‘marketing’. American Marketing Association (AMA) defines it as: ‘‘Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.’ A more specific definition of pharma marketing (Olszewska A. Strategic management in pharmaceutical marketing. Chemik 2006: S91-4.)is: ‘A management process that serves to identify and meet patients’ needs in a profitable way.’

This prompts the key question, if the above basic process of ‘marketing’ is followed by the pharma industry as it ought to be, why should there be an increasing trend of ‘consumerism’ in Healthcare, in general, and the pharma industry in particular?

The major drivers:

NRC Health through various surveys, has captured the major drivers of consumerism in healthcare. I am listing below a few of those, as I understand, just as examples:

  • Significant increase in health care cost to payers, including the patients.
  • Consumers are the fastest growing payer in the industry.
  • They foot most costs of their health premiums and out-of-pocket co-pays.
  • As consumers have more money at risk, they want to get more engaged with their own treatment decision for the best value for money.
  • One-way monologue for treatment doesn’t not enough for most patients.
  • 3 of 10 patients defer necessary treatment to avoid self-confusion and expense.
  • 4 out of 5 find difficult to compare costs Vs. drug quality.
  • 3 out of 4 feel their health care decisions are the most important and expensive
  • Patients face difficulty to compare cost, quality, and access to physicians.

In my view, sooner than later, the emerging situation in India will also be no different, especially with its increasing digitally empowered population.

Is pharma marketer cognizant of this emerging trend?

It will be unfair to make any sweeping statement that they are not. This is based on what I see and experience around, mostly in the global arena. But locally, although significant publicity of a large number of pharma training programs appear in the social media, most of these are apparently based on the ‘buzz of the time’.

Besides a few sporadic exceptions, generally the Indian pharma marketers still appear to believe in the same age-old model – what the ‘doctor says/patient does’. As a result, increasing consumerism keep haunting the industry – the Government often responds – mostly with sound bites, though, the industry keeps lamenting on the ‘ease of doing business’ or the lack of it, in India. The much avoidable cycle continues.

A prime mover for change in healthcare:

Increasing health care consumerism is a prime mover to usher in significant changes in this space. These changes are mostly unexpected and disruptive, but usually good for the patients. I shall illustrate this point here with just two examples, out of many. The first one comes from three global corporate head honchos of unrelated business, aimed at their own employees. And the other is related to all patients with the initiative coming from within the healthcare industry, including pharma.

The first example of an unexpected move comes from the announcement of three corporate behemoths – Amazon, Berkshire Hathaway and JPMorgan Chase, saying they would form an independent health care company for their employees in the United States. This was reported by The New York Times (NYT) on January 30, 2018. The alliance signals how frustrated American businesses are not just with their health care system, but also rapidly spiraling cost of medical treatment – the report said. The NYT also quoted Warren E. Buffett of Berkshire Hathaway as saying:“The ballooning costs of health care act as a hungry tapeworm on the American economy.”

The initial focus of the new venture, as announced, will be on “technology solutions” that will provide U.S. employees and their families with “simplified, high-quality and transparent healthcare at a reasonable cost.”  They also plan to “bring their scale and complementary expertise to this long-term effort.Nevertheless, it is unclear how extensively the three partners would overhaul their employees’ existing health coverage to reduce healthcare cost and improving outcomes for patients. They may simply help workers find a local doctor, steer employees to online medical advice or use their muscle to negotiate lower prices for drugs and procedures. While the alliance will apply only to their employees, these corporations are so closely watched that whatever successes they have could become models for other businesses – NYT commented.

The second examplecomes from an article, titled ‘Consumerism in Health Care’, published in NEJM Catalyst on January 11, 2018. It says, another important change that is a direct outcome of the consumerism of health care is personalization of care to facilitate health outcomes. However, ultimate personalization, that is, a “one-to-one relationship” between a company and an individual appear increasingly possible with the data and analytics that are now within the reach of many global pharma players, the paper says. However, most Indian pharma players, I reckon, still lack wherewithal that’s required to build capabilities to deliver high degree of personalization for patients.

As a result, pharma industry, in general, is still charting in the primary stages of delivering personalization, although, progress made by some global players in this direction is quite encouraging.

Consumerism in healthcare to gather momentum in India:

A September 2016 paper, titled ‘Re-engineering Indian health care’, published jointly by FICCI and EY points to this direction. The results of their survey done as a part of this study indicates, the aspirations of the middle and upper classes are evolving and their demands for convenience, participation and transparency in the health care delivery process are indicative of the shift from being a docile patient to an informed “health consumer.”

Thus, it is irrefutable today that digitally empowered patients are fast increasing, even in India. This is fueled by rapid expansion of broadband Internet in the country – a bottomless source of information. In this scenario, would the general pharma marketing assumption in India - what the ‘doctor says/patient does’, still yield results? Indian pharma marketers may need to possibly do some crystal gazing in this area – sooner the better.

Conclusion:

Accepting the reality of increasing consumerism in the healthcare space, both globally and locally, pharma players, especially in India, need to clear all clutter in the pathway to reach out and directly interact with their end-customers – the patients, aiming at improving clinical outcomes, the way patients would want – individually or in a cluster.

In a nutshell, what do patients want through increasing consumerism: Personal and meaningful involvement in their healthcare decision making process, based on requisite credible information from independent expert sources. Thus, what pharma the players should gear up to be: Cultivating a truly patient-centric approach in their business. And, there lies the real challenge for many in the industry, as it will mean all marketing and related organizational decisions will revolve around in-depth understanding of the patient’s mindset, along with their associated needs, want and health aspirations.

While moving towards this direction, providing personalized care by leveraging optimally selected modern technological platforms, will be a cutting-edge tool for pharma business excellence and achieving sustainable all-round growth – over a long period of time. As I see it, increasing consumerism will continue to remain a prime mover for unexpected, but welcoming changes in the healthcare space, at least for a medium term. It is to be taken rather seriously, with as much care as it deserves.

By: Tapan J. Ray    

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Drug Innovation and Pharma M&As: A Recent Perspective

The 21st CEO Survey 2018 of PwC highlights a curious contradiction. This is based on what the Global Pharma Chief Executive Officers (CEOs) had articulated regarding their business outlook for 2018 and beyond. The report says: Despite highly publicized hand wringing over geopolitical uncertainty, corporate misbehavior, and the job-killing potential of artificial intelligence, the CEOs expressed surprising faith and optimism in the economic and business environment worldwide, at least over the next 12 months.

As the survey highlights, beyond 2018, CEO sentiment turns more cautious. They expressed more confidence in revenue growth prospects over the longer term than the immediate future. In the largest pharma market in the world – the United States (US), acquisitions appeared to be the core part of the 2018 growth playbook for the CEOs. More of them plan to drive growth with new Mergers and Acquisitions (M&A) for this year. The US CEOs intent in this area came out to be more than their peers globally.

Thus, in this year we may expect to witness several M&A deals, at least by the pharma majors based in the US. As the saying goes, the proof of the pudding is in the eating, the success of any strategic M&A process should get clearly reflected in its revenue, profit and cost synergies over a period of time, consistently.

In this article, I shall try to look back, and attempt to fathom the net outcome of M&As in the pharma sector. Its key drivers for the global and Indian pharma players are somewhat different, though. In this piece, I shall focus on the M&A activities of the global companies, and my next article will focus on the Indian players in this area.

2018 – best start to a year of healthcare deal making:

The finding of the 21st CEO Survey 2018 that more global pharma CEOs plan to drive growth with new M&A for this year, has been reiterated in the January 22, 2018 issue of the Financial Times (FT). The article titled “Big Pharma makes strongest start to M&A for a decade” writes: “Healthcare companies have announced almost $30bn of acquisitions since the beginning of the year in the sector’s strongest start for deal making in more than a decade, as Big Pharma scrambles to replace ageing blockbusters by paying top dollar for new medicines.”

Big names involved and the reasons:

On February 18, 2018, an article published by the BSIC wrote, the M&A value in the healthcare sector recorded its strongest start to a year in more than a decade, excluding 2000, with almost USD32bn of global deals announced since the start of January 2018. Of these USD32bn, Sanofi SA and Celgene Corporation performed almost a combined USD26bn value of acquisitions for the American Bioverativ Inc. the cell therapy provider Juno Therapeutics, respectively.

As many would know, the FT also wrote in the above piece that Sanofi is trying to offset declining sales of its top-selling insulin – Lantus, which has lost market share following the introduction of cheaper biosimilar versions. Celgene is preparing for the loss of patent protection on its top cancer medicine, Revlimid, which will face generic competition from 2022 at the latest.

Is new drug innovation a key driver of M&A?

The core intent of M&A is undoubtedly creating greater value for all the stakeholders of the merged entity. Nevertheless, such value creation predominantly involving the following two goals, revolve around new drug innovation activities, as follows:

  • New value creation and risk minimization in R&D initiatives
  • Acquisition of blockbuster or potential blockbuster drugs to improve market share and market access, besides expanding the consumer base.

There could be a few other factors, as well, that may drive a pharma player to go for a similar buying spree, which we shall discuss later in this article.

However, in the international scenario, with gradually drying up of R&D pipeline, and the cost of drug innovation arguably exceeding well over USD 2 billion, many companies try to find easier access to a pipeline of new drug compounds, generally at the later stage of development, through M&A.

Thus, I reckon, one sees relatively higher number of big ticket M&As in the pharmaceutical industry than most other industrial sectors and that too, very often at a hefty price.

At a hefty price?

To give an example, the year 2018 has just begun and the pharma acquirers have agreed to pay an average premium of 81 percent – a number that is well above the 42 percent paid on average in 2017, according to Dealogic. The examples are the 63.78 percent bid premium paid by Sanofi SA on Bioverativ Inc. and the 78.46 percent premium paid by Celgene Corporation to acquire Juno Therapeutics.

A key reason of paying this kind of high premium, obviously indicate an intent of the acquirer to have a significant synergy in drug innovation activities of the merged company.

Do drug innovation activities rise, or decline post M&A?

A paper titled “Research: Innovation Suffers When Drug Companies Merge”, published by the Harvard Business Review (HBR) on August 03, 2016 answers this question. This research involves, pre and post M&A detailed analysis of 65 pharma companies. After detailed scrutiny of the data, the authors wrote: “Our results very clearly show that R&D and patenting within the merged entity decline substantially after a merger, compared to the same activity in both companies beforehand.”

Having also analyzed companies that were developing drugs in similar therapeutic areas, but hadn’t merged, the paper recorded: “We applied a market analysis, the same one used by the European Union in its models, to analyze how the rivals of the merging firms change their innovation activities afterward. On average, patenting and R&D expenditures of non-merging competitors also fell – by more than 20% – within four years after a merger. Therefore, pharmaceutical mergers seem to substantially reduce innovation activities in the relevant market as a whole.”

‘Other critical objectives’ may also drive pharma M&A:

As I had indicated before, besides attaining synergy in innovation activities at an optimum cost through M&A, there may also be other important drivers for a company to initiate this process. One such example is available from Sanofi-Aventis merger in 2004.

Just to recapitulate, Sanofi was formed in 2004 when Sanofi-Synthélabo (created from the 1999 merger of Sanofi and Synthélabo) acquired Aventis (the result of the 1999 merger of Hoechst and Rhône-Poulenc).

A June 2016 case study of the Sanofi-Aventis merger titled ‘Does M&A create value in the pharmaceutical sector?’, and published by HEC Paris – considered a leading academic institution in Europe and worldwide, brings out the ‘other factors’ driving pharma M&A.

The research paper says that Sanofi-Aventis deal ‘is the perfect example of the paramount importance that external factors have on M&A activity, which sometimes are more critical than the amount of value created from a particular deal.’ It further says, ‘facing a changing pharmaceutical industry (heightened competition and consolidation trend), Sanofi-Synthélabo decided to merge with Aventis as a defense strategy.’

This strategy ensured, even if the merger had not ended being a successful one, it would achieve the following two ‘other critical factors’:

  • Manage to save Sanofi-Synthélabo from being acquired and disappearing.
  • Comply with the French government pressure to create a national champion in the pharma industry, to ultimately benefit the French population.

Conclusion:

In the pharma business, M&A has now become a desirable strategic model for shareholder value creation. In the global perspective, one of the most important drivers for this initiative is, greater and less expensive access to new drug innovation or innovative new drugs, beside a few others, as discussed above.

In-depth expert analysis has also shown that “R&D and patenting within the merged entity decline substantially after a merger, compared to the same activity in both companies beforehand.”  Moreover, as other independent researchers have established that inside the merged companies, there’s a great deal of disruption in many areas, including people, besides the global drug market getting less competitive with declining number of players.

Pharma M&As may well be any stock market’s dream and could a boost the merged company’s performance in short to medium term. But the important points to ponder are:  Does it help improve drug innovation or its cost related issues over a reasonably long time-frame? Does it not ultimately invite even more problems of different nature, creating a vicious cycle, as it were, putting the sustainable performance of the company in a jeopardy?

By: Tapan J. Ray  

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.