A new McKinsey report, written about in Fierce Biotech and In the Pipeline, is stirring the pot once more regarding pharma so-called mega-mergers by stating that these have worked to create shareholder value. Derek Lowe, in particular, questions this in his blog citing the disruption to R&D pipelines/their productivity, internal politics jockeying for position, downsizing, and plain drama in people's lives. He further cites John LaMattina's support for this view as a key exec who lived through Pfizer's acquisition of Wyeth. He also pulls out the argument that we'll never know what might have been produced by the separae entitites -- an opportunity cost as it were. I see this latter argument as more speculative and less compelling. It might have been worse too.
For their part, McKinsey says shareholder value was created as evidenced by higher EBITDA, higher ROIC and increasing economic profit -- two years post-merger. The analysis was done on 17 deals larger than $10 B. McKinsey suggested that these should be divided into two camps as well -- deals that were consolidations and deals that were aimed at growth creation. Not surprising to me, consolidations kicked off way higher economic profits two years -- post merger. C'mon though. It is only TWO YEARS. This is the pharma industry where normal investment horizons are 15 years or more. The consolidated deals largely paid off due to accelerated revenue (for some), reduction in COGS, reduced overhead (i.e. we fired staff), R&D consolidation and rationalization (i.e. we fired staff). In other words, the dreaded S-word kicked in, synergies, which meant we cut programs and staff to pay for the merger. It did pay in this time span though, with a 60% growth in economic profit.
On the flip side, the so-called growth oriented mergers actually caused a 3% decrease in economic profits over the two year window. They didn't have enough people to fire. But they did increase trading multiples by nearly 60% for the acquirer, or 20% relative to top 20 peers. The market rewarded the promise in these deals. Maybe the promise will deliver and maybe it won't -- but from my perspective this cohort is more interesting to watch over an expanded time frame more conducive to the actual operation of the pharma business. The consolidations actually caused a 5% drop in multiples. Whereas their excess returns were positive over a 3 year period they were ALL negative by year 5. That suggests to me that these may NOT be judged successful over a more appropriate time span. Growth platform deals are 100% positive (TRS = total shareholder return) over that same 5 year span.
So despite the headlines, I think the jury is still out. I don't think a pharma company's "success" is judged over two years.
Posted by Bruce Lehr Feb 26th 2014.