In a recent blog post, The Wall Street Journal reported that Pharmaceutical companies are “continuing to boost global M&A volumes this year”. In a similar vein, an article from Forbes suggests that we can “expect to see big pharma grow their drug pipeline through M&A”. In this post, we take a look at the underlying trends driving this recent uptick in Pharma M&A activity, and how technology can help (or hinder!) a smooth integration process.
Underlying Trends Driving M&A Activities
Mergers & Acquisitions have become a rule rather than an exception in the pharmaceutical industry globally. The last decade saw mergers and acquisitions top US $ 690 Billion. Merger deals peaked to 180 in 2007 against 40 in 2000 – with four companies alone accounting for an acquisition ‘bill’ of US $ 250 Billion +.
There are many factors driving this activity, both then, and now. These include:
The need to shore up revenues. The number of drugs coming of patent in 2014/2015, will put some 46% of revenues of the top pharma companies at risk, say global management consulting firm, AT Kearney. In addition, regulatory pressures also contribute to revenue risks – developments and approvals are being closely scrutinised, and pricing and cost containment measures are being instituted. In the face of this situation, ‘big pharma’ – pharmaceuticals businesses with deep pockets – are on an acquisition spree as a route to bolster pipelines and increase revenues.
The need to internationalise. With demand for treatments from emerging economies growing fast, pharmaceuticals need to take steps to globalise in order to serve this growing segment. To cater to this growing demand we have seen Private Equity firms merge portfolio companies based on geographic spread considerations. A case in point is European Private Equity firm Cinven, which merged two of its portfolio companies – Mercury and Amdipharm. The merger has resulted in the creation of AMCo – a new entity with a global footprint.
Synergy Considerations. The sales force in pharmaceutical businesses often need specialist training – especially in the case of products that treat rare and uncommon diseases. It is not uncommon for mergers to be centred around a similar product portfolio in order to capitalise on these skills with a recent example been seen in the acquisition of ViroPharma by the Irish Pharma major, Shire.
Spreading Risk. A merger often serves to increase the portfolio of the acquiring company across new product groups. This helps reduce dependency on a particular product group enabling the acquiring company to reduce the risk associated with being a one product group focused company.
In addition to these core drivers, there are of course other factors can also play a key role including:
- Exploiting tax breaks in the country of an acquired business, as in the recent Michigan based Perrigo buy-out of Elan
- Access to low-cost manufacturing facilities as we have seen with the Mylan buy-out of Indian generics maker Strides Arcolabs injectables unit Agila Specialities through which they will gain access to Agila’s offshore facilities in India.
Impact of M&A on organisational processes
A by-product of any M & A activity is the deep impact it has on organisational processes. Existing processes are modified, and new processes come to be. Depending upon the drivers for the merger, different technology challenges need to be addressed:
- Transformation of ‘custom’ processes to ‘best practice’ processes. Many businesses – specifically home-grown, family-owned companies – tend to have business processes which do not fit into the workflows and processes prescribed by many software products available in the marketplace, and this can throw up many challenges in harmonising processes across the newly merged entities.
- Globalising existing processes. When Pan-European businesses merge with those that have a North-American focus it throws up its own set of challenges. A pharmaceutical business with its manufacturing base in the UK is suddenly confronted with having to monitor its products across a global supply chain in new regions and territories. This is especially relevant for the pharmaceutical industry in the context of the stringent and varying quality control requirements.
- Bringing an element of uniformity. Businesses that merge often have some fundamental process differences – for example year-end closing which means that the merged entity will need to migrate to a uniform year-end closing.
The role of technology
Cultural and process changes eventually do find their way into the IT systems that a business has – but the length of time this takes, and the degree of success in which this happens can vary very considerably. Very rarely does one find similar IT systems between the merging entities and, for this reason, it is important to have an IT system that firstly lends itself to the pharmaceutical industry and secondly can be quickly customised to fit the merged entity in terms of mapping new processes in their entirety. Clearly a fit between a software system and a business is as much about the appropriateness of the software solution as it is about an implementation partner who understands pharmaceutical business processes to effect a quick implementation.
SAP is one of the few solutions that fits the pharma business model well. The core product represents a 65 -70% fit into a pharmaceutical model. The remaining 30-35% can very easily be customised to suit business needs. In fact, companies like Invenio have built SAP Pharma accelerators that enable virtually every type of pharmaceutical business go live in SAP quickly, and with minimum disruption. And this is exactly what’s needed when you want to realise the benefits of a newly merged entity.
If you would like to find out more about how Invenio and SAP can help you ease the process of a merger integration please contact us for more information.