The global pharmaceutical industry is passing through one of the leanest growth phases due to a variety of reasons. Being a highly R&D based industrial segment, the discovery and development of new drugs is an important element in any growth strategy. And yet, it is precisely in this area that the industry faces maximum challenges. With very few drugs being approved and marketed during the last 2/3 years and depleted pipeline of new drugs, the costs and prices are unaffordable to the investors as well as the consumers, the patients. Against this background, for sustained growth in this sector , productivity of R&D needs to be improved for which newer approaches and models need to be developed. The current thinking among the leading R&D based global companies is to acquire ‘optimal’ size of the corporation through mergers and acquisitions (M&As), to afford a longer time frame required and the higher costs for drug discovery and development. During the last four decades there have been a spate of mega mergers in the industry to achieve ‘optimal’ size. The impact of these mergers on sustainability , growth, R&D and share holder value is not yet clear.
In India while there have been very few mega mergers between Indian companies, there have been increasing number of cross border deals for alliances between MNCs and Indian Pharmaceutical companies to carry out specially selected tasks.. The impact of these developments need to be ascertained.
In a recent paper I discussed the current plight of the global pharmaceutical industry under the title ‘What Ails Global Pharmaceutical Industry’ ( Chronicle Pharma Biz October 8, 2009 ). What was pointed out was that if the industry is to survive and grow, it is essential to discover and develop not only better drugs, but also those which are made available at prices much lower than they are today. The compulsions for reducing the costs of drug discovery and development emanate from all stake holders including healthcare planners, funding agencies, patients, medical professionals , insurance companies and the tax paying public at large. There is no indication whatsoever that if the current models of drug discovery and development continue to be followed, such an objective will be realized. That means that if the costs involved in these activities are to be considerably lower, novel and innovative models need to be developed.
More recently, ‘Knowledge at Wharton’ the official newsletter of Wharton Business school published a report entitled ‘Cure for an Ailing Industry?’ (Knowledge@Wharton Oct. 22, 2009).This paper proposes as a cure, acquisitions of Indian Companies by large MNCs in the West and Japan to reduce costs of drug discovery and development which has reached around $ 2 billion for every new drug reaching the market. Reports in the media harp on the likelihood of many large Indian companies being candidates for acquisitions by large MNCs in U.S.A., Western Europe and Japan. The benchmark often quoted for such M&As is a natural follow up on the Ranbaxy - Daiichi Sankyo deal of over $ 2 billion for controlling stakes in the Indian company, which, a few years back would have never been considered even a distant possibility. Some industry observers feel that several such deals between large Indian companies and MNCs will unfold once their market valuations improve hopefully as a sequel to the projected impending global economic recovery.
In the meanwhile, during the last five years, the strategy of outsourcing of many of the activities of the pharmaceutical industry , particularly in the area of drug discovery and development from major R&D institutions and pharmaceutical companies in India is being increasingly adopted by large R&D based MNCs. During the period 1972 to 1995, collaborating with Indian companies and institutions in the R&D space for drug discovery and development was not a preferred option for MNCs, due to lack of protection for pharmaceutical innovations in India under the Indian Patents Act 1970. With the advent of the product patent era in India as a consequence of India legislating a TRIPS compliant patent act, confidence in working with the Indian groups has considerably increased.
M&As as growth engines for pharma industry
The first realization that to face the challenges and complexity of drug discovery, corporations need to have a minimum critical mass not achievable through vertical growth came in the early sixties when the European companies felt the need to change their mindsets if they were to compete with the then emerging and fast growing U.S. pharmaceutical companies.
Thus first major mega merger in the history of the industry was that of CIBA & Geigy of Switzerland in the early sixties. During the next four and half decades the trend not only continued, but even accelerated with Glaxo , Burroughs Wellcome, Smith Kline, Beecham, Bristol Myers, Squibb, Pfizer, Upjohn, Parke Davis, Panacea, Kabi, Hoechst, Roussel, Aventis, Sandoz, ICI, Astra , Pharmacia, Warner Lambert, Dupont Pharmaceuticals, Chugai, Knoll, May and Baker, Rhone Poulenc, Amgen, Immunex, Roche, CIBA GEIGY, Sandoz, Schering Plough, Genentech, Alza Corporation, all losing their individual identity and evolving into merged corporations .
In 2007, the total value of major mergers and acquisitions was $ 79.5 Billion, 43 per cent higher than that in 2006. In 2008 just one merger between Pfizer and Wyeth was valued at $ 68 billion, the highest for any single acquisition in the history of the industry. The merger of Merck and Schering Plough being finalised is another example of this new model for corporate growth in the U.S. Pharmaceutical Industry scene.
Apart from these, there have been several smaller ones such as for example the one between Roche and Genentech Johnson & Johnson and Alza Corporation etc which are examples of traditional pharma joining hands with leading biotechnology companies. Johnson & Johnson has been a major healthcare group which had consistently and effectively used this strategy over the last several decades with most of the companies under the holding company being acquired ones.
The M&A route enables corporations to fill in and extend their product portfolios, expand global market access, enables diversification and entry into related and sometimes even unrelated areas, reduces overheads and headcounts and brings in added management skills onto the merged organization. It was hoped that the larger corporations could better afford the ever escalating costs and long gestation periods for successful discovery and development of new drugs. In other words the philosophy seems to be ‘large tasks can be effectively carried out only by large corporations’ and since internal growth had limitations, the perceived answer was growth through mergers and acquisitions.
The impact of M&As
The basic questions which need to be asked prior to considering such an option are 1) Are M&As the best option for the company to grow? 2) What are the projected benefits for reducing costs of operations and increase profits and thereby shareholder value? 3) Will it improve and make R&D efforts more effective and less costly and complement current portfolio of pipeline products?
While the answers to these questions would vary a great deal depending on the company and its business plans, experience to date has given some broad indicators. One detailed study of selected pharmaceutical mergers has exposed the complexities involved, including problems of equitable merging of two different mindsets, organizational shake-up, attrition of human resources, prioritization of portfolios for marketing, research and development and reducing overheads. There is evidence, however empirical they are, that on most of these counts, unless there were other compelling reasons, growth through M&As may not have been the best option.
One study, though dated, published in Pharma Executive , based on some selected case studies reported that major mergers in the pharma sector have resulted in lowering of share holder values below the industry average, reduction in R&D productivity and lower employment satisfaction levels. Even expectations of increased market shares as a result of enhanced access to the markets have not fructified.
In addition, post mega mergers, there are necessarily compulsions to work mostly in therapeutic areas which have the potential to lead to blockbuster drugs with minimum annual turn over of over $ 1 billion each. The sheer size of the operations necessitates investments in R&D only in therapeutic areas which have the potential to generate minimum annual sales which was placed at a minimum of $ 350 million per product. That would preclude efforts to develop drugs for most of the diseases affecting major parts and populations in developing countries.
Indian scene
While a large number of transnational alliances in selected areas of pharmaceutical activities have taken place during the last three decades between Indian companies and MNCs , the first major acquisition of an Indian company in toto was the acquiring of controlling interests in Ranbaxy by Daiichi - Sankyo of Japan. Prior to that or since then there have been hiving off of parts of pharmaceutical companies to third party international companies. The takeover of Matrix by Mylan, Regent Drugs of JK Industries by TEVA of Israel, part of Dabur by Fresenius Kabi, Vedanta Drugs by Perrigo, Shanta Biotechniques by Sanofi Aventis, Divisions of Wockhardt by Abbotts and Vetoquinol are some of these. While there have been reports of at least part sell offs of even some of the larger companies including Cipla, Dr. Reddy’s Laboratory, Orchid, Nicholas Piramal etc, they have not been confirmed by any of the companies or their potential acquirers. Of course, the last two years have been very inappropriate even for considering such moves due primarily to the economic meltdown which has affected all countries and all sectors of business.
A number of Indian companies have acquired smaller pharmaceutical units and facilities in USA and Western Europe for producing , promoting and supplying generic products in those markets. In terms of size and operations they are relatively very small and are meant to represent the Indian companies in those markets. The largest acquisition by an Indian company has been of Beta Pharm of Germany by Dr. Reddy’s laboratory. By and large the strategy to grow through M&As has not taken significant roots in the Indian scene. Certainly there have been very little networking and synergy building among Indian companies, let alone M&As.
A related development among the Indian companies has been the building of alliances and offering services in the CRAMS (Contract Research and Manufacturing Services) space to international companies. Collaborative research and development efforts have also been initiated by a large number of MNCs and Indian companies. Agreements between Glaxo Smith Kline with Ranbaxy and Dr. Reddy’s, Pfizer and Aurobindo, Eli Lilly and Nicholas Piramal, Jubilant with Amgen, Biocon with Mylan and Amylin, Cipla with Adcock Ingram are all examples. In addition companies which had no marketing presence in India such as Watson Pharma, Lonza, Eisai, Etypharm, Astellas, TEVA etc are setting up major manufacturing and research bases in India.
Conclusion
By and large, the M&A route as an effective conduit for survival and growth has not turned out to be the best approach for the pharmaceutical industry, particularly if the main objective is to increase R&D productivity and the rate of discovery and development of new drugs. Empirical evidence points out that bigger does not necessarily mean better in the area of R&D. In spite of R&D based companies claiming fertile pipeline of products, the odds of reaching the desired goal posts for most of them appear bleak. This is in spite of the fact that several new tools including modern techniques of genomics and proteomics are offering new handles for drug discoveries. In fact in recent times important drug discoveries of candidate drugs are coming out of innovation driven and lean start up companies, while their development through expensive clinical evaluation is carried out by large pharma. It is also clear that the established model of seeking blockbuster high priced drugs through massive investments in R&D needs to be replaced by discovery of niche products at lower costs for large markets and underserved therapeutic areas.
To achieve the objective of discovery of drugs to meet medical needs rather than only market needs and make them available at affordable prices, other strategies and approaches outside the M&A route needs to be evolved, developed and implemented.
(The author is a senior research scientist and industry expert based in Chennai)