Heard that large mergers and acquisitions will hurt the R&D output rate of pharmaceutical companies?

Perhaps by fate, in the 1990s, the big overseas pharmaceutical companies launched a series of blockbuster blockbusters of billions, or even tens of billions of dollars

Centralized listing also means that the concentration ushers in the patent cliff

The so-called Whyn you can't innovate, merge

Note: The amounts in the article are all in US dollars

Pharma's history of mega mergers and acquisitions

Between 1950 and 2010, there were about 4,300 innovative drug companies worldwide, of which only 261 (6%) had made NME (IND

In the past 20 years, overseas pharmaceutical companies have experienced two waves of large-scale mergers and acquisitions

1999: Astra + Zeneca = AZ $89 billion;

2000: Glaxo + SmithKline = GSK 244 billion;

2000: Pfizer + Warner-Lambert 116 billion;

2003: Pfizer + Pharmacia 73 billion;

2004: Sanofi + Aventis 75 billion;

The second wave occurred around 2010, mostly large acquisitions of more than 50 billion yuan (big eat small).

2008: Eli Lilly acquires Implone for $65 billion; 2009: Pfizer acquires Wyeth for 68 billion;

2009: Merck acquires Schering-Bauer for $41 billion;

2009: Roche acquires the remaining 44.

2010: Novartis acquires Alcon

M&A Core Purpose

In fact, the core purpose of large-scale mergers and acquisitions is nothing more than:

1) Sustain growth; 2) Acquire core assets; 3) Optimize the return on investment ratio (expenses, tax rates, etc.

5) Business diversification; 6) Turn enemies into friends

Most of the mega-CAP pharma we see now are enthusiasts of large M&A, such as Pfizer, GSK, Merck, AZ, Bayer, Takeda, Roche and so on

From the perspective of return on investment, in the high-tech sector, large mergers and acquisitions seem to be particularly suitable for the biomedical industry

In addition, there are also studies that show that on average, since the completion of the M&A, the revenue contributed by the acquired enterprises has accounted for 37% of the total revenue of the enterprise, of which the revenue of newly added varieties accounts for 10%.

In addition, after two years of consolidation, the EBITDA margin can be increased by 4 percentage points (pp), and the ROIC can be increased by 14% !!!

Since the restructured company will save duplicate parts in expenses, forming an effect of 1+1<2 expenditure, the overall economic profit of the company can be increased by 50% in the 2 years after the merger!!

Take Pfizer's acquisition of Warner-Lambert in 1999 as an example, with EBITDA +10%.

After being fully acquired by Roche, Genentech, which was in a bottleneck period, increased its revenue CAGR to 4% and remained at 4%.

Xiaobian believes that the reason why the merger of Roche+Genentech is so successful is largely because Genentech has maintained independent operations

So what kind of impact does M&A have on R&D from other companies or from the industry average? Since large mergers and acquisitions are uncommon, a clear trend
cannot be seen by expanding the sample size.
However, many studies have pointed out through case by case analysis and personal experience that M&A has indeed hurt the company's R&D output rate
in many ways.

Let's look at the impact of M&A on R&D from both positive and negative aspects
.

Positive impact

Success rate of clinical progression

As can be seen from the figure below, the proportion of approved clinical phase 3 projects of the company after the merger within 5 years is significantly higher than that of the company without the merger, and the same is true for
the clinical phases 1 to 2 and 2 to 3.
And this difference is even more pronounced
in small companies in the start-up stage.

Although the apparent data seems to have a positive impact, this is actually a chicken-egg, egg-and-chicken problem
.
In the end, is the merger improving the success rate of R&D, or is the company with a high R&D success rate more inclined to take the road of mergers and acquisitions?

R&D productivity

1) Calculate R&D output or productivity over time: R&D output/R&D input

R&D output can be measured from multiple dimensions: the number of pipeline varieties, the number of newly filed patents, the value brought to patients (this is not easy to quantify), etc.
; The graph below for this article selects "Total Peak Sales Generated by NME in the 4 Years After M&A"
.
(For varieties that have not yet reached the peak, refer to Evaluate's peak prediction data)

R & D investment can be: time, funds, the following figure selects the R & D costs
.

2) If the ratio of post-merger productivity to pre-merger productivity is >1, the R&D output rate increases, which has a positive impact, and vice versa<1 is negative
.

As can be seen from the above table, in addition to the G+ SK = GSK merger and acquisition, the final R & D output rate of <1, the others are >1
.
Bayer and Astellas reached 35 and 24
respectively.
That is to say, from the perspective of sales revenue/R&D expenses, large M&A is basically a positive impact on R&D
.

！！！ However, it should be noted that "R&D output rate, value creation" is originally a relatively vague concept, and the result depends on what parameters
the molecular denominator chooses.
For example, the above study chose to use peak sales to measure R&D output
.
In fact, we think carefully, assuming that the peak sales of a drug reach 20 billion, but in terms of clinical efficacy, it is only better than the previous generation of varieties, belonging to me-too or me-a-little-better), more because of the price increase to sell larger, then this is to create the same amount of value?

In those days, drug price increases (including generic drugs) were routine practices in the
United States.

Let's take a look at the negative effects, which is also the focus of
this article.
The negative impact is highlighted not because I think there are more negative effects, but because the information in this area has been less exposed before
.

Negative effects

The first is layoffs

When two otherwise completely separate companies merge, if there is a duplication of business and resources, then layoffs and downsizing are inevitable
.
From the chart below, it can be seen that the number of layoffs is proportional to the amount of M&A, that is, the larger the total total size, the greater
the amount of layoffs.
(The data below is from Forbes and Evaluate)

Pfizer has experienced three major mergers and acquisitions of Warner-Lambert, Pharmacia, and Wyeth, adding 44,000, 43,000, and 47,000 jobs each time, respectively, but each time it can control the number of employees within 90,000 through layoffs within a few years
.

It is said that from 2000 to 2010, the overall number of employees in the Pharmaceutical Industry in Europe and the United States was 297,650, which was equivalent to the total number of employees
of Merck+GSK+Pfizer at that time.
(Forbes)

Of course, layoffs do not prove that the overall output rate of the industry has declined
.
First, the restructured new company simply reduces unnecessary resource duplication/waste, and most of the laid-off employees are re-employed
at other companies in the same industry.
So from the perspective of the industry as a whole, productivity has not decreased
.

So has the efficiency of R&D increased or decreased? We'll have to look at the other parameters
.

R&D expenses

For example, after the wave of giant mergers and acquisitions before 2000, the industry's overall R&D expenditure has increased
.
The wave of mergers and acquisitions in 2010 grew almost nothing, and from time to time there was negative growth
.

Number of new varieties

After 2000, the number of new drugs approved and the speed at which projects entered the clinic declined significantly (of course, this is not necessarily caused by the merger of companies), while after 2010, there was a clear upward trend, which is completely opposite
to the trend of R&D expenses above.
It can be seen that the simple cost and the number of new products are not enough to explain the increase or decline
in the industry's R&D output.

R&D expenses and number of patents

From the perspective of individual enterprises, the cost of research and development after the merger is reduced (which can be understood), and the number of patents is also significantly lower than that of the "hypothetical non-merger
".
Is this because the more pharmaceutical companies in the industry, the stronger the average independence, the more diversified the research and development ideas, and the more likely they are to develop new products and directions?

From dispersion to high concentration

In 2008, Pfizer invested 7.
9 billion yuan in R&D and Wyeth 3.
4 billion yuan, totaling 11.
3 billion, equivalent to 22%
of the total R&D expenditure of PhRMA members worldwide at that time.
In the same year, Merck's R&D expenditure was 4.
8 billion, and Schering-Baoya was 35 billion, totaling 8.
3 billion, equivalent to 17%.

Together, the four companies account for nearly 40% of R&D spending
.

Some scientists believe that innovation is inherently an exploration process with high uncertainty, and only by diversifying the exploration method/technique as much as possible (parallel path) can the probability
of success be improved.
In layman's terms: try different approaches to the same goal, and one will always succeed
.
Note that this is a diverse approach to exploring the same goal, not just a project
or disease area.

As can be seen from the chart below, the average level of diversification (parallelism) of the merged company is only 14% to 19%, which is very low
.
Eli Lilly, on the other hand, reached 43% to 54%, the only company
without a large M&A between 1989 and 2011.

From the decline in R&D expenses and the number of patents after the merger of the two companies, it can be seen that there must be some parallel paths that will be cut as a waste of redundant and repetitive resources
.

Economists within Eli Lilly firmly believe that M&A not only does not have the effect of 1+1>2, but sometimes even reduces the number of
listed varieties.
In fact, during that time, the number of newly approved products per year was indeed directly proportional
to the number of pharmaceutical companies in the same period.

In addition, in earlier years, when Biotech's biopharmaceuticals were still considered "high-risk" varieties, large pharmaceutical companies would face a situation
of choosing between biological drugs and small molecules in the same category of projects after acquiring them.
In most cases, pharmaceutical companies will choose small molecules and abandon biological drugs
.

Causality?

Whether it is because the "low-hanging fruit" has been picked and internal research and development is difficult to produce results, it is necessary to rely on M&A to introduce external power, or because M&A has led to a reduction
in the efficiency of innovative research and development.
No one can say for sure
.
Let's take a look at what people who have worked in the industry think.

The experience of people inside the industry

John L.
LaMattina, former head of global R&D at Pfizer, published a personal reflection in Nature in 2011, stating that he personally believes M&A will hurt the efficiency
of pharmaceutical companies' R&D.

LaMattina believes that the rate of new drug output is proportional to the number of companies (echoing above
).
In the 1990s, a new scientific breakthrough could attract about 20 companies to develop new drugs around it, of which 3-4 would successfully develop products
.

Beginning in the 2000s, large M&A not only cut projects, R&D funds, but even shut down multiple R&D centers
.
For example, Pfizer closed its R&D centers in four core regions around the world after three major mergers and acquisitions from 2000 to 2010, including the development of Lipitor and Viagra R&D bases
.
In 2012, Pfizer's R&D expense ratio guideline was only 11%, far below the industry average of 20%
at that time.

After the merger with Wyeth, the company's R&D expenses were reduced from 9.
4 billion to 6.
7 billion from
2010 to 2013.
Empirically, a business that spends $1 billion + a business that spends $300 million is only about 700 million in
total costs.
After Abbvie acquired Allergan, the total expenditure saved about 2 billion
.

About 40% of clinical phase 2 varieties stay in phase 2 for more than 3 years
.
On the one hand, this is because many of the company's business needs to be suspended during the restructuring process, on the other hand, changes in personnel and adjustments to strategic direction will also delay the progress of the project, and sometimes directly cut off the project
.
Clinical phase 3 (late) phase projects are less
affected.

LaMattina said that because R&D is the company's core IP incubator, there are many trade secrets and sensitive information, so the restructuring and adjustment of the R& D department is usually placed in the final stages
of M&A negotiations.
Discussions usually start with Phase 3 projects, followed by Phase 2 and Phase
1.
These negotiations are time-consuming and laborious, involving aspects such as: clinical data, commercialization issues, whether there is duplication, if the two companies' research and development models, clinical protocol are fundamentally different, how to unify, and some other trade-offs
.

This process lasts at least 9 months, during which time there will be basically no new projects and no new R&D personnel recruited
.

In 2008, the total preclinical R&D expense ratio for PhRMA members in the United States was 29%, compared to 16%
in 2019.
The main reason for this is that many capable scientists have jumped to Biotech, resulting in a continuous decline in the R&D output rate of large pharmaceutical companies, until cephas believe that continuing to increase in-house R&D investment will only bring more losses
.

Right now

In fact, we are also in the midst of a wave of blockbuster patent expirations, such as Avastin, Herceptin, Rituxan in the past few years, as well as Humira (2023 US), Eylea (2025), and other large varieties
shown in the chart below.
In addition, Pfizer's new crown vaccine comirnaty and antiviral drug Paxlovid may also shift from government orders to commercialization in the past one or two years, if the price is not raised, then the performance decline is more likely
.

So are we going to see another wave of big M&A
.
I personally don't think so
.

First, more companies are realizing that they can sustain core growth by divesting businesses that are dragging down performance, such as Johnson & Johnson and Pfizer
.
Many times the synergy effect between different sectors is not so strong, but it will bring a certain amount of internal friction (former Johnson & Johnson employee experience).

Large enterprises are already very large and very concentrated, and M&A will not only be very troublesome, but also may touch antitrust laws, which will outweigh the losses
.

There are more Biotechs
in 2020 than before.
For a core variety, can acquire small businesses and never acquire large enterprises, can authorize the introduction of a single variety, why risk buying an entire company? Biotech has R&D varieties that pharmaceutical companies lack, and large enterprises have clinical teams and sales strength
that small pharmaceutical companies do not have.
Together, they complement each other and avoid the 1+1<2 situation
mentioned earlier as much as possible.

From this point of view, in fact, large mergers and acquisitions are not good, and eating small is the best way
out.
Moreover, if the project is still in its early stages, it is better to retain independence as Roche did with Genentech and improve the probability
of success through parallelism.

Relevant literature recommendation

Large-scale mergers and acquisitions are inherently complex, and the impact on R&D cannot be entirely negative or completely positive
.
If you want to explore further, the following articles are worth reading:

Blockbuster is unattainable, and biomedical research and development is science, not technology
.
Technology is Engineering, built within our cognitive scope
.
And our understanding of science Science is only a drop in the ocean, so scientific progress and breakthroughs have a natural periodicity, we can only follow, not we want to develop a drug can complete this task
in the specified time.
So we also need to accept that not every blockbuster will perfectly connect to the patent cliff
of a breed.
Scientists understand this truth, they can wait, but the company must maintain growth, shareholders, investors may not be able to afford to
wait.
So how management resolves the contradiction between the two in an M&A process is a very profound science
.