M&A in Pharmaceuticals and Medical Devices: How to Stop Value Leakage

M&A in Pharmaceuticals and Medical Devices: How to Stop Value Leakage

Most pharmaceutical executives would argue that M&A is critical to drive shareholder value. Transactions can help realize new discovery capabilities, procure new compounds to strengthen stagnant drug development pipelines, or save money, all of which can create a competitive advantage in the market.  The numbers speak for themselves. In 2015, healthcare M&A increased 66%, reaching a new full-year record of $724.4 billion. Thus far, in 2016, the momentum has continued, albeit at a slightly slower pace due to regulatory concerns and the impending election.

Based on our experience and active involvement in post-merger integrations, we often see the post-acquisition downside of M&A activity in the pharmaceutical and medical device industries. Value is often depleted instead of created.  Here are our lessons learned about three common areas of value leakage during a transaction:

  1. Employee disengagement during the deal. Employees often run for the door during a transaction to avoid potential layoffs following the deal. Those that stay are so enamored by corporate politics and trying to secure a seat in the org chart that innovation becomes stagnant and development progress is largely halted. People continue to be one of the largest challenges in post-merger integrations.
  2. Misidentification of integration risks for science and technology. Let’s face it, science is complicated, technology implementation is difficult and MBAs don’t know what they don’t know about drug discovery, development and commercialization. Largely, PhDs and technologists are missing on the deal team. Costs, timelines and dependencies are often missed during deal planning.
  3. 16-18 months after the deal closes, the real work starts. After the executives and strategy consultants moved on to the next transaction or initiative, middle-management is left with two full-time jobs: their day job and all of the integration activities. Execution requires expert planning and resourcing to realize the investment thesis.

While M&A activity often creates shareholder value, it comes at a cost. M&A activity in the pharmaceutical and medical device industry is ubiquitous and deal-making will continue as firms strive to remain competitive. To stop value leakage during a transaction, executives should:

  1. Plan for employee engagement during the transaction. A well-executed change management plan should include both succinct corporate communication and additional employee compensation and governance to maintain focus. This might include additional program management and incentive programs to ensure BOTH drug development and integration milestones are met.
  2. Blend the deal team.  Make sure the deal team is staffed with the appropriate blend of scientific experts, deep technologists and experienced M&A professionals to accurately identify risks, interdependencies and appropriate levels of resourcing to realize value throughout the transaction and hold period. For example, include laboratory, clinical operation and commercialization leads on the deal team to identify pharma specific domain, regulatory and organizational risks, and this team will ultimately help you decide if integration is the right path for value realization during the hold period.
  3. Engage specialized resources to execute post-integration activities.  By engaging additional resources to implement systems, re-engineer business processes and manage transaction activities, middle-management is able to maintain focus on core activities, such as drug development and commercialization.  Resources should be maintained beyond the initial integration or separation to manage tactical activities, such as enterprise resource planning or laboratory informatics system implementations throughout the TSA and/or hold period.

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Chicago, IL 60606
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