The Challenge of Holistic Value Creation With Pharma M&A

Two mega deals, right at the dawn of 2019 gave a flying start to Merger & Acquisition (M&A) activities, in search of inorganic growth, by some large pharma companies. The two biggest ones are Bristol-Myers Squibb’s (BMS) USD 74 billion buyout of Celgene, and AbbVie’s USD 63 billion purchase of Allergan, as announced on January 03, 2019 and June 25, 2019, respectively. However, overall in the second quarter of 2019, there were, reportedly, only 22 deals – ‘the smallest quarterly deal count for at least a decade.’

As a strategic option for greater value creation to drive growth, M&A is being actively considered over a long period of time. The key focus of such value creation for the company remains primarily on enriching the pipeline of New Chemical or Molecular Entities (NCE/NME) for revenue synergy, besides cost synergy. This is understandable. But, for various reasons, alongside, a key question also comes up for debate – is the core purpose of such value creation to drive companies’ growth, primarily with more number new drugs, sustainable? The query assumes greater relevance in the evolving new paradigm. This is because, a basic shift is taking place in the core organizational purpose of value creation.

Thus, it appears, the nature of value creation through M&A would also matter as much. Can it still remain a drug company’s financial health centric, any longer? Should the M&A initiatives also not take under their wings, the value-offerings expected by patients from a drug company – beyond innovative pills? Would a holistic value creation through M&A would now be the name of the game? If so, how?  The discussion of my today’s article will revolve around these questions. Let me initiate the deliberation by recapitulating the key motivation behind M&A initiatives of the drug industry.

A key motivation behind the M&A initiatives in the drug industry:

While recapitulating one of the key motivations behind pharma M&As, let me refer to some interesting and recent studies, such as, the 2019 paper of McKinsey titled, ‘What’s behind the pharmaceutical sector’s M&A push.’ It also acknowledges, the use of M&A to bolster drug innovation is unlikely to change any time soon.

That many drug companies actively pursue the M&A option as a game changer for inorganic growth, is vindicated by the recent big deals, as quoted above. Since early 2000 and before, the companies that made the biggest deals to create new value synergies with, have been paying heavy deal premium to enrich their new product pipelines. Quite often it includes several new and emerging classes of drugs, as acquisition targets.

This also gets corroborated in the Press Release of the 2019 BMS deal, which says: ‘The transaction will create a leading focused specialty biopharma company well positioned to address the needs of patients with cancer, inflammatory and immunologic disease and cardiovascular disease through high-value innovative medicines and leading scientific capabilities.’

Lesser yield of traditional pharma M&A than the broader market:

This was emphasized in the June 06, 2019 article, published in The Washington Post, titled ‘Big Pharma Has to Bet Big on M&A. Investors Don’t.’ The analysis found, the returns from the big pharma deals ‘don’t look as good compared to the broader market’, although for very patient investors many of these have resulted in longer-term gains. To illustrate this point, the paper pointed out: ‘Of the eight biopharma deals worth more than USD 40 billion that closed in the last 20 years, only one delivered better returns than the S&P 500 five years after it closed.’

Naming Merck & Co..’s USD 47 billion acquisition of Schering-Plough Corp. in 2009, the researcher justified: ‘That deal is arguably something of an accidental winner. Long-term success didn’t come from any of the products that Merck targeted in the merger; instead, an afterthought of an antibody that was initially set to be sold off became Keytruda, a cancer drug that’s projected to generate USD 15 billion in sales in 2021.’

Innovative product launches no longer a holistic value-creation for patients: 

Thus, unlike yesteryears, enriching new and innovative product pipeline through M&A won’t serve the key purpose of value-creation for patients to treat deadly diseases in a holistic way. The primary reason for the same was articulated in the Deloitte Paper titled, ‘Disruptive M&A: Are you ready to define your future?’ The article emphasized: ‘The confluence of technological change, shifting customer preferences, and convergence across sectors is redesigning how products and services are developed, delivered, and consumed.’

Thus, mere acquisitions of innovative product portfolios, intended to provide better treatment choices for patients, may not meet the holistic needs of consumers’ while going through the disease treatment process. In depth understanding of such preferences with all associated nuances, is absolutely essential in today’s complex business scenario. Which is why, it calls for avant-garde type or ‘disruptive M&As’, that can help alter the business growth trajectories, making the disrupted company disrupt the competitive space, being game changers of the industry.

Calls for avant-garde type or disruptive pharma M&As:

Today, it’s crucial for any drug company to create a unique treatment experience for patients. This is emerging as a pivotal factor for the success of a brand.

Even most innovative products will need to be supported by disruptive back-office technology for market success. Thus, acquisition of disruptive technology to effectively augment the brand value delivery process is equally important, in tandem with enrichment of new product pipeline. This is expected to emerge as a critical driver in pharma M&A. Such takeovers, I reckon, may be termed as avant-garde type or disruptive M&As – for holistic value creation for patients.

‘Disruptive M&A’ creates a much broader range of possibilities and targets:

For a holistic value creation through disruptive M&A focus for target selection needs to be significantly different from the standard models of M&As – and not just about the quality of NCE and NME pipeline. The above paper also highlighted: ‘Disruptive M&A opportunities requires evaluating and assessing a much broader range of possibilities and targets than traditional M&A.’

With the right kind of target selection after a thorough analysis of the business model, disruptive M&A may help the acquiring drug companies to go beyond achieving revenue and cost synergies. It can also provide cutting-edge business capabilities, alongside enriching and expanding the talent pool, key business processes, and, of course, the state-of-the-art technology –inorganically.

Initiatives and focus of drug companies of this genre, are expected to be more in the coming years, primarily driven by a new type of value creation to offer a unique disease treatment experience for patients with their respective brands.

A new type of value creation for patients in healthcare space:

It has already started happening in the recent years. For example, Amazon, on January 30, 2018 , announced, it is collaborating with Warren Buffet’s Berkshire Hathaway, and the bank JP Morgan Chase to create an independent, nonprofit health care company ‘with the goal of increasing user satisfaction and reducing costs.’ They also announced the organizational focus on two of the following areas, which are interesting and unconventional:

  • Technology solutions that will provide U.S. employees and their families simplified, high-quality and transparent healthcare at a reasonable cost.
  • Draw on their combined capabilities and resources to take a fresh approach.

As the New York Time (NYT) reported: ‘The alliance was a sign of just how frustrated American businesses are with the state of the nation’s health care system and the rapidly spiraling cost of medical treatment.’ The report further added: ‘It also caused further turmoil in an industry reeling from attempts by new players to attack a notoriously inefficient, intractable web of doctors, hospitals, insurers and pharmaceutical companies.’

Although, this has happened in the United States, it sends a strong signal to the state of things to come sooner than expected in the health care space, dominated, so far, by pure pharma and biotech players, across the world.  New types of value creation for patients of similar nature, especially by tech greenhorns in the pharma space, can be wished away at one’s own peril.

Consumer-focused digital companies redefining healthcare value creation:

‘2019 EY M&A Firepower’ report also highlights the innovative efforts of consumer-focused, digital companies to carve out a solid niche for themselves in the pharma dominated health care space. With ‘effective deployment of their ‘connected devices, data analytics skills and deep consumer relationships, these new entrants are positioned to have access to important real-world data that could, in part or in full, determine future product utilization and payment,’ as the report emphasized.

Such fast-evolving development also prompt pharma players to act fast. And the most practical way of doing so, with a high possibility of success, is through disruptive M&A. Ongoing entry of consumer-focused, digital companies in health care increase the urgency for life sciences companies to act, now.

Conclusion:

Thus far, pharma and biotech companies have been engaged in a massive wealth creation for themselves by using their biological and chemical know-how for novel drugs and devices. This ballgame has to change now, ‘as the lines between health and technology continue to blur’, according to the EY Firepower report.

Capabilities of big data and analytics will increasingly be more essential for success, regardless of having a rich pipeline of NCEs and NMEs, even with the potential to achieve blockbuster status in the market. Thus, the ballgame has to change.

Against this backdrop, the key challenge of pharma players for a brighter tomorrow would undoubtedly be ‘holistic value creation.’ Its core purpose should be to deliver a unique patient experience, encompassing the entire disease treatment process – going beyond innovative drugs. One of the quickest routes to create this virtuous cycle, I reckon, is through ‘disruptive M&As – moving away from the traditional model for the same.

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.

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