MERGERS CRU­CIAL FOR LONG-TERM BEN­E­FITS AND SUR­VIVAL

BioSpectrum (India) - - Bio Contents - DR. R B SMARTA MD, In­ter­link Man­age­ment Con­sul­tancy

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

Distri­bu­tion ca­pa­bil­i­ties

Is­sues after the M&A

In­te­gra­tion- process, plan­ning, or­gan­i­sa­tion, per­son­nel and so on

Per­for­mance mea­sure­ment (score card) in plan

• HR is­sues

Brand valu­a­tion

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.

Five ad­van­tages

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.

Syn­er­gies

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.

Con­clu­sion

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.

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