Mike Wokasch made this post to his Pharma Reform blog last week asking the question seen in the title of my blog post. Mike concluded that bigger was not better. He asked readers to mull over a list of negative consequences that might well result from increased size.
Most of these observations made sense to me. Many have to do with changes or difficulties in communication, resource allocation, lines of responsibility, and strategic direction alignment. As organizations get bigger, it does get more difficult to communicate effectively throughout - especially true in multi-divisional, multi-national, global companies. The environment does get very complex for senior mangement to oversee and it does get harder to connect the guy on the "shop floor" to the corporate strategy ina way that is meaningful for everyone in their day to day activity. Senior managers are also challenged with making right resource allocations (to the high return projects) across the business - usually without enough information to assess 'winners and losers' effectively.
Functional departments (with different leadership) tend to emerge and thus add a great deal of complexity to "Team" projects as there tends to be a balancing act that emerges between Team goals and individual functional department aims. If the balance shifts in wrong direction, the project usually does not succeed. This is often a point where clear responsibility for projects is "not so clear" and the fingerpointing emerges or the strong project advocate needed to maintain focus in a large organization is absent.
Anyway, you can read Mike's post for more details.
As so-called "mega-mergers" are one means by which Big Pharma is trying to compete at present, I was interested in learning what information might be out there to further substantiate or refute claim that "bigness" created value or decreased it. So I did a literature search. What did the professional analysts, industry observers and participants have to say. Here's what I found.
Amongst, academic and industry studies done on mega-mergers (> $5 B in assets), the consensus is that these don't add value. These mergers at best tend to provide some short term cost savings - usually through rationalization of marketing, sales, R&D staff, etc. (see recent Pfizer-Wyeth plans to layoff 19,000)- but don't normally provide the innovation to reinvigorate the pipeline. Evidence indicates that mergers of this sort don't provide long term sales benefits or any benefits beyond initial year's cost savings.
According to Charles Wheeler of Boston Consulting group, survival in pharma is innovation, "the day of hierarchal owning-it-all organizations are numbered". Research is a critical mass business. Once R&D is above critical mass, scale does not help - in fact it hurts by adding uneeded cost and further lowers the group's productivity/ROI. Analysts have concluded that "forcible merger of 2 big companies that lack innovation doesn't result in 1 company that now has it!"
Ironically, the big problem mega-mergers are trying to address are failures in their pipelines and the oncoming patent cliff. This is almost a "Hail Mary" type attempt to put off the short-term (and many times severe) pain of an innovation gap in the product pipeline. So how does a typical mega-merger proceed? Usually, but cutting staff, increasing marketing/sales spend to boost existing sales, and cutting R&D. Thus, it is a short-term approach that fails to address the issue it was trying to solve - i.e. close the innovation gap in the pipeline. Reducing R&D may actually go in the opposite direction. This may be particularly troublesome if the organization hangs on to the "block buster" strategy and starves out lesser drugs that would offer profitable sales opportunities but would not deliver blockbuster revenues in one fell swoop.
What's needed instead? Here's a few recommendations for various experts - analysts and managers:
Look to investing in small to mid-size biotechs with 1 or more drugs deep into pipeline. Currently, it's estimated that 40% of biotechs have less than 1 year's cash on hand. Therefore it is a good time to buy if you are big pharma with the cash. Instead of going mega-merger route - use cash to buy several biotech's. This allows better diversification of the portfolio and spreads the risk. It also directly addresses the pipeline dearth issue as you are specifically buying companies that have products near to market. Ideally, you will select companies in product areas that focus on specific diseases of interest or build out drug classes you care about. Companies like Roche, GSK and Novartis have pursued this multiple biotech M&A model with some success.
What else? Collaborate with other big guys. Companies like Merck/AZ and GSK/Pfizer have formed joint ventures to combine their assets in a specific therapeutic area - the former two with oncology programs, and the latter two combining their HIV programs. This allows both companies to rationalize their pipeline, make better resource allocation decisions, and to spread scientific and financial risk.
This type of pipeline rationalization further helps by cutting number of overlapping "me-too" drugs going to market that don't have clear competitive patient advantages. These are finding it increasingly difficult to get reimbursement approval anyway. This type of resource sharing does help with risk management and predictability of returns. By saving these resources with more efficient development, companies can divert this spending to address commercialization and regulatory issues - which are increasingly important to commercial success.
Need any more convincing? Datamonitor recently completed study of mega-merger activity from period 1995-2008. They found M&A activity followed one of 3 strategies.
- Buying growth
- Buying Scale
- Organic growth with some bolt on acquisitions
Merger results fell into too general classes they could identify - 1) Small and fast or 2) Big & flat. Basically, companies that made acquisitions for sales growth fared better. These generally targetted smaller companies at an earlier stage - example cited include J&J acquisition of Centocor, Abbott acquisition of Knoll, and Roche acquisition of Genentech - all of which delivered mAb therapeutics to the acquirer and resulted in fast sales growth. These were done early on and helped to deliver the faster growth. Companies like Lilly purchase of Imclone and AZ purchase of Medimmune can be expected to deliver more medium growth.
Big and flat poster children include: Pfizer-Wyeth, Merck-Schering/Plough, and Abbott-Solvay. The former two in particular talk about motivations for the merger as cost savings. But both have particularly high exposure to the patent cliff and also face competition from generics/biosimilars. Both are predicting flat to negative sales growth but are banking on increasing operating profits through savings. Many analysts feel this does not bode well for future success.
It's interesting that Pfizer has been down this path multiple times. They now have participated in 3 of the top 5 pharma mergers of all time - Pfizer-Warner/Lambert (1st), Pfizer-Pharmacia (5th), Pfizer-Wyeth (4th). The W/L merger did provide help with Lipitor (statins). Pharmacia has not been a success and it remains to be seen what will go on with Wyeth but many observers see that more similarly to Pharmacia. They're hoping that Pfizer will spend some its money on new drugs with biotechs before all the good candidates are gone.
The experts say to eschew the mega-merger for other models. Work on increasing innovation at lower cost. Look to small and mid-size biotechs for partners and acquisitions - especially when they're cash strapped. Big Guys should look for ways to pool resources on projects/programs to leverage organizational talents and diversify scientific/financial risk. Develop full portfolio of products that include generics and biosimilars. The industry is changing. The companies in it need to change. Being biggest isn't synonymous with being best. "Big" in this context is a liability on balance.
References:
Nature Biotech (2000) Are mega mergers good medicine for the pharmaceutical industry?
Pharma Focus Asia (2009) Mega-mergers: Are they turning pharma companies into zombies? (Love title)
Seeking Alpha (2009) Are mega mergers good for business?
Bloomsberg Business Week (2009) Mega-mergers can't cure the pharmaceutical industry
BIO (2010) Big pharma mega mergers 1995-2014: A 20-year perspective on how M&A has shaped leading pharmaceutical companies.
Posted by Bruce Lehr May 23rd 2010.
Sanofi-Aventis has been successful in acquiring elements of its pipeline through small acquisitions. Its CEO says they remain on the hunt for further such opportunities - especially in the cancer area.
http://www.businessweek.com/news/2010-06-07/sanofi-ceo-sees-stunning-results-for-cancer-drug-update2-.html
Posted by: bigredbruce | 06/08/2010 at 09:41 AM
Zacks.com provides analysis of recent merger activity and what to look for in the coming year.
http://www.zacks.com/stock/news/33503/Pharma+&%3B+Biotech+Stock+Review+-+April+2010
Posted by: bigredbruce | 05/24/2010 at 07:48 AM
Fortune's take on Pharma and Biotech relationship coming out of BIO meetings in early June.
http://money.cnn.com/2010/05/10/news/companies/pharma_biotech_marriage.fortune/
Posted by: bigredbruce | 05/24/2010 at 07:37 AM