Maximizing M&A integration synergies in a life sciences acquisition brings specific challenges during integration. Life sciences is a high-risk, high-reward industry where innovation is key to growth. New medical technologies take years to develop and are required to be validated through long and expensive clinical trials in which they must be compared to the standard of care. After demonstrating clinical acceptance and being proven pharmaco-economically worthy in the eyes of payors to achieve certain scale, larger players often acquire these assets at high EBITDA multiples.
Larger companies are looking hard for these growth assets, as they have been challenged by the lack of home-grown new blockbuster treatments, pricing pressures and medications becoming available as generics. Competition for assets is tough and driving valuation multiples higher. We have seen deals where the bidders have increased the offering price by 10% to 20% at a time, rather than the typical 2% to 5% increments.
Meanwhile, cost synergies, which can help mitigate those higher multiples, vary by subsector within the life sciences industry. An EY analysis of deals from 2010 to 2018 showed that pharma deals generated an average cost synergy of 20% of target revenue, one of the highest levels of all sectors examined, while the similar number for MedTech deals was 15%. This variance is likely due to pharma companies having a larger geographic footprint and have more direct duplication in the commercial, supply chain and operational infrastructure that can be eliminated.
Further, according to a recent EY survey, one third of life sciences executives stated that regulatory and global risks were the most significant challenges to achieving deal value, followed by inadequate diligence and ineffective deal model (27%).
Below are four suggestions to maximize M&A integration synergies and accelerate revenue growth in big deals where integration can take a long time.
1. Define the strategic intent of the acquisition internally
- Incubating a smaller brand, such as a large pharma company buying a smaller, natural, over-the-counter treatment: Focus on growing the business with new sales channels, rather than burdening it with multiple layers of non-value-adding administrative work streams.
- Adding adjacent categories or expand into other geographies to build additional scale: Consider more aggressive integration into the sales system to expand further.
- Accumulating larger businesses to add directly into their existing platform of care: Execute more thorough integration, encompassing the rationalization of the back office, R&D, salesforces, etc. When a company spends tens of billions of dollars to acquire another business, it will likely look for billions of dollars of cost synergies that can be made as quickly as possible to appeal to investor community expectations.
2. Understand cultural differences to keep key talent
- Depending on the asset, the culture of the acquirer and the target can be quite different. A big pharma company is likely to be more risk averse, given the regulated nature of the industry. The dress code, incentives for salesforce, tolerance for bureaucracy and a host of other cultural variables may be different than at a smaller biotech company that is being acquired. When does culture matter?
- If the goal is buying an existing pharmaceutical asset or technology, the cultural issues may not matter. It may be more important to get the drug into the acquirer’s commercial machine as quickly as possible or to use the acquirer’s network to enroll patients in clinical trials more quickly. Making it clear that the target will need to adapt to the buyer’s culture can be the right message and could even help speed up necessary headcount reduction as some employees of the target seek other opportunities.
- Conversely, if the target is, say, a pure oncology company, every scientist is an asset that the company may want to retain. In that case, it behooves the buyer to look for the incentives those employees value most. Knowing the acquisition rationale lets employees understand where they will fit in the new organization. For example: emphasizing the R&D capabilities that can help scientists at the target develop new treatments; showing the target’s employees the opportunities in a larger business; or letting them know that they will be able to operate as independently as possible.
3. Anticipate potential issues and react quickly to unexpected ones
- The integration plan can be working, and then something unexpected happens. Anticipate potential regulatory affairs issues that could come up during integration, be ready to act if something changes and be realistic about what products should or should not progress.
- Be aware of how your supply chain could be affected during integration and plan in advance. One large pharma company wanted to immediately rebrand the seller’s product in the market, which involved 4,000 registrations for Class I–III products in more than 60 countries. But doing so could cause distribution problems if not done properly, as local regulators needed to accept the new product registration. The company needed to make sure its customers had enough product on hand to cover the reregistration period, lest it be out of the market for a time and risk upsetting regular customers.
- Base product development decisions on science. The incentives for whether a product moves to the next phase of clinical trials can change, with there being financial incentives for moving to the next trial stage. A typical step in the industry is having a third-party consultancy group create a scientific advisory board to conduct external due diligence, validating assumptions around place in the care paradigm, pricing and size of the population that could use it.
4. Assign long-term deal responsibility
- Many of the transformative acquisitions in big pharma can take several years to integrate in order to realize all the synergies. But in that time, the CFO and people in the integration management office may have moved on to new positions and responsibilities, and the initial cost reductions and revenue growth that were accomplished in the first two years become the de facto baseline. In order to maximize synergies.
- Ensure the integration plan clearly lays out synergy benchmarks that go beyond the first two years. In one case we worked with, the CFO actually laminated the synergy plan and made sure to pull them out and review them regularly.
- Designate someone in the organization to stick with the deal long term and is responsible for continuing the integration. In at least one integration in which we have been involved, a senior person who was nearing retirement was given this responsibility and continued on to make sure the company continued to maximize synergies for several years.