In recent years there has been a great spurt in mergers and acquisitions taking place in the pharmaceuticals industry. Merger happens when two companies form a one bigger company by combining their capital and ideas. Mergers bring not only benefits but many negative side effects as well.
Let’s start by discussing the benefits. Some of the benefits of mergers are increase in shareholder value, increase in market share, increase in cost efficiency and increase in value generation.
The cost of research and development is extremely high, making drug discovery difficult for companies (1). On an average, new drug development and launch cost about $5 billion in 2013, compared to $1.1 billion in the late 1990s. To stay competitive, companies need to spend a big chunk of their turnover into research and development. Merger gives the companies access to new capital, new ideas and new technology.
At the same time, expiring patents are bringing the companies’ revenue down (2). Consolidation allows companies to cut costs and maintain profits. The newly created firm will have higher profit, which can be used to fund new research. Mergers also help companies to compete in the international market.
A McKinsey report supports the fact that big deals in the pharmaceuticals industry often work. Out of the eleven pharmaceutical companies that have ranked among the global Top-20 since 1995, seven have made acquisitions valued at above $10 billion each (3).
"Median excess returns for megamergers in our sample were positive, showing returns 5 per cent above the industry index two years after a deal's announcement," McKinsey reported after analysing 17 huge deals in the industry between 1995 and 2011. "This is in contrast to large deals in other industries, which have had marginal returns relative to industry indices, or, in the case of deals in the technology sector, sharply negative returns."
However, there are challenges to mergers too. First and foremost, R&D is likely to get affected. Analysis of data posted on Pfizer’s Website before the Wyeth merger in February 2008 and in February 2011 shows that 40 per of the compounds (except those from Wyeth) had been in Phase III development for more than three years.
Research scientists, in particular, are reluctant to working in bigger companies as they like to work individually and find greater freedom in a smaller company. A big company is like a school where the different departments are eyeing a bigger chunk of the budget.Moreover, with the acquisition of new technology and resulting business efficiency, fewer people are required to perform the same job. Consequently, the company may attempt downsizing of the workforce. For example, when Daichii Sankyo acquired Ranbaxy, many employees lost their job. There are chances that some offices will be shut down. Some employees may be moved to newer locations, while others may end up losing their job.
Furthermore, the two merging companies may also vary in ways of management. Some companies have centralized decision-making, while others give more autonomy to their regional companies. It’s likely that changes in structure and decision making will hinder the company’s path to success.
Still, benefits of mergers outweigh risks. Big pharmaceutical companies end up becoming more profitable despite the inevitable challenges posed by the mergers. Given that history, the companies will need to keep consolidating to survive in a market where drug discovery is important.
Work cited
- "Mega-Mergers In The Pharmaceutical Industry." 123HelpMe.com. 04 Dec 2014 <http://www.123HelpMe.com/view.asp?id=166372>.
- “Pharma Mergers Make Sense.” Bloombergview.com. 22 April 2014 http://www.bloombergview.com/articles/2014-04-22/pharma-mergers-make-sense.
- “Why Pharma Megamergers Work.” McKinsey.com. Feb 2014 <http://www.mckinsey.com/insights/health_systems_and_services/why_pharma_megamergers_work>
