MERGERS CRUCIAL FOR LONG-TERM BENEFITS AND SURVIVAL
India has witnessed a remarkable evolution in the pharmaceutical industry over the last 40 years, with wide range of capabilities in the complex field of drug manufacturing and technology. Today, Indian pharmaceutical sector accounts for about 2.4 per cent of the global pharmaceutical industry in terms of value and 10 per cent in terms of volume, and is expected to grow at a CAGR of 12.89 per cent over 2015–20 to reach USD55 billion.
The Indian pharma industry is among the top five emerging pharmaceutical markets, accounting for 20 per cent of global exports in generics, 5 per cent of the total FDIs (Foreign Direct Investment) into India, with biosimilar annual growth rate of 30 per cent, third largest global generic API (Active Pharmaceutical Ingredient) merchant market, also second largest number of Abbreviated New Drug Applications (ANDAs), and also is the world’s leader in Drug Master Files (DMFs) applications with the US.
Industry needs drivers to boost growth and profits, one of the drivers observed since last many years is M&A.
Reasons for companies to go for M&As
Over the past decade, the pharmaceutical industry is facing a difficult period wherein the shareholders, market and regulations have created a pressure on the industry to change, along with issues of low productivity in R&D, attrition, demonetisation and pricing issues, regulations and patent expirations etc., leading to saturation of volume and growth. Avenues for growth have become limited because of declining prescriptions of branded drugs and the advent of generic drug products. Branded drug products of the larger pharmaceutical companies face pressures to cover up for the declining margins. All these factors contribute to the rising merger and acquisition phenomenon in the pharmaceutical industry as it is one of the ways to deal with such issues.
Mergers are crucial for long-term benefits and survival of the pharmaceutical industry.
Pharma, healthcare and biotech have witnessed significant increase in M&A activities over the years.
Over the last three years, pharmaceuticals segment has accounted for more than 70 per cent of M&A deals. In 2015, mergers and acquisitions deals in pharmaceuticals sector accounted for USD3.2 billion in India, according to IBEF. The available reports state that there is a potential growth in this sector by 16 per cent in 2016.
Issues in working on M&As
Analysts believe that M&A may fail to create desired value, for the merged organisation as they are perceived as source of disruption for the ongoing research and development programmes as well as other critical initiatives. However, the overall benefits of the merger and acquisition strategy supersedes the disruptions at all points.
According to analysts, the mergers are critical for the long-term benefits of the pharmaceutical industry and for their short and long-term survival. The global phar-
maceutical landscape is like a big ocean where the larger fish eats the smaller fish for its survival. In an identical manner, the ecosystem of the pharmaceutical industry works as well.
Certain common issues a company faces while entering into M&As are:
Arriving at the purpose which is not reactive
Lack of focus in setting objectives, studying business needs, identifying key synergies and developing strategy
Scanning of potential target (in-depth analysis of targets)
Lack of support in the negotiation
Non-financial due- diligence such as:
Operations and technology due diligence
HR due diligence
Market assessment, brand evaluation
Issues after the M&A
Integration- process, planning, organisation, personnel and so on
Performance measurement (score card) in plan
• HR issues
Coordinating with bankers, legal experts
• To realign entire purpose with the time taken for
merger and acquisition
Three parameters for consideration
While working on M&A companies must look at these three parameters:
1. Strategic fit
The element of strategic fit includes vision and mission of the partner, growth objectives, customer value, commitment and powerful synergies (one plus one is greater than three). All the above factors are not equally important, however evaluation is vital.
2. Operational fit
The component of the operational fit encompasses geographic coverage, HR policies, distributed physical plants, sales force composition, market goodwill, brand, production facilities, and R&D capability.
3. Cultural/ chemistry fit
Ingredients of cultural fit have a more qualitative dimension. However, cultural fit is necessary as humans are crucial for the success of any alliance. Factors include compatible work ethics, trust and integrity (institutional & personal), long–term commitment to the industry, community, company, people, and stability of personnel.
These parameters will enable merger or acquisition to be stable and progressive.
There are many advantages for a new entity through an acquisition or merger.
The following five advantages will assist companies to realign their revenues, balancing their portfolios through investment in M&A.
1. Building a pool of manpower with varied skills and
knowledge of the industry.
2. It could be a good option for underperforming companies, wherein instead of investing in internal expansion they can either merger or acquire an existing business.
3. It may also result in a wider customer base and helps
increase the market share.
4. It may also lead to increased fund availability through shared marketing budgets, increased purchasing power and lower costs.
5. M&A helps in gaining additional assets to the company. Also, resources will be combined resulting in reduced costs and increase revenue.
Companies have entered into various sorts of agreements for various diverse purposes with distinct organisations. The structure of the pharmaceutical industry is as complex as any molecule. Perhaps drugs and pharmaceuticals is the only industry with such a complicated industry structure.
Novartis acquired Sandoz, which had a huge customer base and brand entity. Novartis used the brand equity of ‘Sandoz Calcium’ in the market to acquire the customer base.
However, Pfizer acquired Parke Davis which had a strong image amongst prescribers, but Pfizer did not recognise the entity and hence possibly did not get mileage of Rx market, as it would have by buying Parke Davis entity base.
So one company achieved synergy while the other did not.
Why do M&A fail?
1. Alignment before and after acquisition changes, can
lead to failure
2. Paying too much.
Companies may end up spending more than they may acquire as they may feel they need a competitive edge over other companies, but this may lead to difficulty in achieving satisfactory return on investment.
3. Lack of strategic clarity.
The deals may sometimes be opportunity based rather than strategy based.
4. Slow decision making
Lack of decision making between higher authorities of both the companies can lead to disordered situations within the companies.
5. Poor integration planning and execution.
Before deciding on the M&A, proper integration planning and execution needs to be done, stated with incharged personnel for the work with timelines, for desired outcome from the M&A.
6. Erosion of business fundamentals. M&A between two companies includes a lot of alterations within the companies. Employees could be burdened with additional work which could astray them away from business development activities, and could lead to unpleasant atmosphere within the work environment causing a down rail in revenues, profits, etc.
7. Less productive workforce. Acquisitions may create a less productive workforce if employees are not happy with the new authorities, it may lead to disruption of work flow.
Alliance as an entity is a quick driver
It may be a called an alliance, partnering, pacts, agreements, joint ventures, tie-ups, collaborations, it is difficult to make out who is the competitor and who is the collaborator
Alliances have an edge over M&A when it comes to the speed and flexibility it offers, following are the points a company looks for while entering an alliance:
1. Faster access to market and expanded product offerings
2. Cost savings through contract manufacturing
3. Faster and cost effective R&D efforts and commercialisation of products.
A small variation includes marketing and co-marketing of the product. Few of the joint R&D efforts not only stop at development of product (formulation/ product/bulk drugs) but also go to the extent of commercialisation of the product by contracting on issues such as marketing and distribution of the products.
As we have a practice rule of lease and buy is there a possibility that alliance can become a requisite and first step for M&A, so that one of the most important considerations of cultural fit or chemistry fit is understood and well looked after.
It is not always possible to get cultural and chemistry fit merger or acquisition. Although there is a possibility of at least ensuring that the purpose of M&A does not get diluted and later on does not take care of both strategic and operational fit whereby pool of acquired manpower along with skills and knowledge gets disappeared.