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McKinsey's View That Pharma Megamergers Work Is Short Sighted

Feb 24 2014, 7:16am CST | by

In the article, “Why pharma megamergers work”, McKinsey authors Myoung Cha and Theresa Lorriman argue that: “Unlike deals in many industries, big mergers and acquisitions among...

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29 weeks ago

McKinsey's View That Pharma Megamergers Work Is Short Sighted

Feb 24 2014, 7:16am CST | by

In the article, “Why pharma megamergers work”, McKinsey authors Myoung Cha and Theresa Lorriman argue that: “Unlike deals in many industries, big mergers and acquisitions among pharmaceutical companies generally have resulted in positive returns for shareholders.” They believe that megamergers have created shareholder value and that consolidation deals have generated greater economic growth.

Interestingly, they use the three megamergers that Pfizer engaged in over the past 15 years (Warner-Lambert, Pharmacia and then Wyeth) to help make their points. There is no doubt that from an immediate business impact, these deals can make a lot of sense. Benefits include a broader portfolio of products, opportunities to cut costs by eliminating duplication and overlap, and increased availability of working capital. Indeed, it is not unusual for a company’s stock price to increase when such an acquisition is announced.

However, a pharmaceutical company, by the nature of its business, requires a long-term vision. Because the drug discovery and development process can take 12- 15 years, oftentimes the impact of a major event isn’t felt for a number of years. The integration of two organizations is incredibly difficult. This is particularly true in an R&D organization. New organization structures need to be developed; new processes must be implemented; decisions need to be made as to which programs should progress, which should be eliminated; new leaders need to be selected, others moved aside; and, in order to generate the synergies promised to Wall Street, research sites need to be shuttered.

The disruption that the integration process causes is immeasurable. Winners and losers are created as a result of the leader selection process. Scars form as different research teams battle over which projects are superior to others. The angst even extends to one’s home life as people worry if their site will be closed and that they’ll be unemployed or, at best, be asked to uproot their families halfway across the country to a new research location. In such a situation, rumors are rife and speculation rampant. Focus that should be on science inevitably get diverted to one’s personal situation. This isn’t something that lasts just a few weeks. Often the integration process can take as much as a year.

The impact of these changes are not immediate. Rather, they take some years to become apparent. The Pfizer pipeline of experimental medicines, as published on its website, is about 60% of its peak about a decade ago, despite these acquisitions. Clearly, a company’s success isn’t assured by numbers, but one’s chances are enhanced by more R&D opportunities. I would argue these mergers have taken a toll on the R&D organization that wasn’t anticipated a decade ago.

One wonders why McKinsey chose to publish such an article. Perhaps the answer can be found in the article’s closing line. “Given the proven track record of consolidation deals generating economic profit, we would not be surprised to see them come back in vogue.” McKinsey would love for this to happen. They are usually in the middle of facilitating these mergers, generating their own economic benefits.

Source: Forbes Business

 
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3 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashing the workforce of 20,000 by 30 per cent ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

3 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH17" hits ho ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

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