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What Will Pharma Do When There Are No More Mega Mergers?

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Mega-mergers have been a fact of life in the pharmaceutical industry for decades now, according to a McKinsey article by Myoung Cha and Theresa Loriman earlier this year, “Why pharma megamergers work.” Their report refutes a common belief that such mergers have destroyed value in the pharmaceutical industry.  Looking at the activity from 1995 to 2005, the top 20 in pharma merged into 11 surviving companies—heavily concentrating their market power. However, in our own close look at what made these mergers successful then, we have to paraphrase Marshall Goldsmith: "What got the Pharma industry here, won’t get it there." Leaders of companies in this industry today will have to look beyond just market consolidation for new gains, and instead focus on their own leadership competencies.

[Note: This is a joint article co-written with Richie Etwaru, Chief Digital Officer Cegedim, a Pharma innovation company. We partnered to get Mr. Etwaru’s industry insight on the implications of the large concurrent paradigms shifting in Pharma, and what can be done beyond the Mega-Merger. I met Mr. Etwaru some years ago at a Constellation Connected Enterprise event where he spoke about digital innovation. Today he continues to lead and evangelize in the space, and has a keen focus on the Life Sciences industry, specifically Pharma manufacturers. ]

The approach to mergers per this McKinsey study (circa 1995-2005) made good sense in two different ways. Consolidation-focused mergers created 60% of economic profit in one year for the organizations involved. Growth-oriented deals helped the merged companies deal with longer-term issues over creating just short-term shareholder value. In our view, the strategy behind these prior mergers were primarily to:

  1. Buy an R&D pipeline or complementary Intellectual Property
  2. Buy market-share of the largest competitor in a therapeutic class
  3. Replenish an earlier-failed drug launch (of the acquired company), and try a new attempt with a different field sales force

However, challenges for Pharma today come from an entirely new set market pressures most of which have been emerging since 2005. These market pressures have materialized into multiple large paradigms shifting simultaneously in Pharma:

  1. Democratization of health intelligence through patient-to-patient and support-network online communities leading to rapid changes in consumer sentiment, health and medical knowledge, and informed preferences.
  2. Digital health and affordable consumerization of health tech creating new information supply chains, information sources, and health analytics.
  3. Massive changes in the regulatory environment particularly in the US market leading to new rules and increasing regulatory sanctions.
  4. New stakeholders, as payers and healthcare providers merge into accountable care organizations stemming from the Affordable Care Act (“Obamacare”). More doctors are joining integrated health networks and motivated to prescribe predetermined products, rather than any brand or drug they choose.
  5. Accelerated lowering of the barriers to entry through technology, drawing new competitors to Pharma from heterogeneous sources including silicon valley.

These paradigm shifts are shaking up what information is available and who is influencing the decisions on what therapies to seek, each from a different direction: (a) online communities and networks; (b) individual customers; (c) governments; (d) health networks; and (d) a heterogeneous community of new entrants into healthcare largely stemming from lowering barriers to entry. Collectively, they challenge pharma leaders to question the basic “why” behind their company and portfolio.

During 1995 - 2005, market pressures were largely centered around the supply and discovery of new molecules or compounds, the market share and marketing of a drug or Pharma brand, and the demand side of the healthcare provider, hospital or patient constituents. Pharma brands saw the compression other industries were experiencing and M&A solved for said compression pressures resulting in the effective capture and creating of value. 2015 will be very different form 2005.

We can all hope that mega-mergers are more than a one-trick pony and continue to produce results in 2005 - 2015 as well as they did in 1995 - 2005. However, with the variety of hyper-concurrent paradigm shifts underway, we are dubious if they will.

If mega-mergers do not continue to drive results today, or if opportunities run dry, what are pharma companies to do going forward?

In Part 2 of this article, Mr. Etwaru offered a simple answer that starts simple has a surprising degree of depth to it: “It comes down to leadership.”

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Richie Etwaru, is responsible for defining and delivering the global next generation enterprise product suite for health and life sciences as a member of the Executive Committee at Cegedim

Rawn Shah is an independent analyst. You can contact him for his services at LinkedIn, Facebook, or Twitter.