Managing Director & Partner
Throughout the pandemic, biopharma M&A has continued at a brisk pace, with large companies focusing on small and midsize deals to help drive growth and innovation. These are deceptively complex transactions, with as few as six weeks between announcement and close, and there is a lot at stake. Acquirers are often paying a significant premium based on the target’s portfolio, technology, and talent, as well as on the potential financial benefits of combining the two companies.
One would therefore expect acquirers to work quickly after the deal is announced to define the integration strategy and the operating model for the combined company in order to identify the talent they want to retain, ensure business continuity, and preserve value. But in our work with more than 20 recent biopharma integrations, we saw acquiring companies often fall victim to several damaging myths about these transactions that delayed action and destroyed value. Acquirers need to dispel these myths and adopt an integration approach that focuses on value drivers first and cost synergies later, that quickly defines the combined operating model, that prioritizes talent retention, that is cross-functional and centrally governed, and that ensures readiness on Day One while maintaining a focus on value.
Benefits and Challenges of These Acquisitions
The number of small and midsize biopharma M&A transactions remains high. (See Exhibit 1.) From 2017 to 2019, the annual number of small deals (less than $3 billion) increased 44% from 316 deals to 455, and the combined value of those deals rose from $35 billion to $65 billion. Even in the very challenging 2020 environment, the total number of small transactions exceeded 400, with a combined value of $60 billion, just short of the 2019 record. Meanwhile, the volume of midsize deals ($3 billion to $30 billion) held relatively steady, with eight or nine deals each year during that three-year period. During the first quarter of 2021, deal activity remained strong, with 117 small deals and 3 midsize deals.
These small and midsize acquisitions enable larger buyers to gain access to new technologies, assets, and talent more rapidly than internal development will allow. In addition, the buyer’s scale can often increase the value of the acquired company’s products and platforms in the market. But to win these deals and secure access to assets, buyers are consistently paying premiums that can reach 150% or even more over the pre-transaction market value. Moreover, the handoff from the team that negotiates the deal to the integration team responsible for delivering on the deal’s promise is not always smooth. As a result, gaps in the integration team’s understanding of the deal’s rationale and value drivers often impede success.
Indeed, the period between announcing and closing the deal is particularly challenging for the acquiring company. If there is an information vacuum at the acquired company—and there often is—its employees don’t understand what the transaction means for them; they become anxious and start shopping their resumes and looking to the exits. At a certain point, efforts to retain talent become futile. The acquirer must move quickly to articulate to key employees of the acquired company how the new, combined company will operate and the value of being part of it. Only then will the acquirer be able to retain the talent it needs, maintain business continuity, and realize the full potential of the acquisition.
Why Acquirers Avoid Integration Planning
Despite the substantial premium that biopharma companies are paying to acquire small and midsize assets, many continue to downplay the need for disciplined integration of these companies. In our experience, such acquirers believe they can forgo robust integration planning because they have fallen victim to at least one of the following five myths. (See Exhibit 2).
How to Enable a Robust Integration
To help large biopharma companies avoid the value destruction that can result from failure to pursue a disciplined approach to integration, we recommend the following practices, which strike the right balance between too much and too little planning.
An IMO also helps keep senior leaders engaged and making the necessary decisions about sequence and timing, rather than delaying until the deal closes. The CEO of the acquiring company should serve on the integration steering committee; senior management should decide early who will lead the acquired company and place that person at the center of the integration process.
Having spent $3 billion or more of shareholders’ capital on small or midsize biopharma acquisitions, acquirers need to plan their integrations carefully, with a tight focus on value drivers. That means dispelling the myths that delay decision making and destroy value. With a robust, cross-functional approach, acquirers can address key questions and make their integrations a success. The extra value it generates will far exceed the extra effort involved.
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