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Making Money Through M&As

Mergers & acquisitions (M&As) have long been used as a critical strategic instrument in the pharma industry to spur R&D innovation, sustain financial growth, and generate cost efficiencies (1). Huge mergers in the 1990s and 2000s dramatically altered the landscape of the pharma industry, such as those between Ciba-Geigy and Sandoz (Novartis) in 1996, Astra AB and Zeneca (AstraZeneca) in 1998, and Glaxo Wellcome and SmithKline Beecham (GlaxoSmithKline (GSK)) in 2000. Likewise, large acquisitions by pharma companies of other organizations also pre-date today’s recent activity, again changing the face of the industry such as those by Pfizer (Warner-Lambert, 1999; Pharmacia, 2002; Wyeth, 2009), Sanofi (Aventis, 2004), Merck (Schering-Plough, 2009), Roche (Genentech, 2009), and more recently Actavis (Allergan, 2015).

But are M&As successful in achieving their strategic objectives? The practitioner business literature gives mixed signals on this question when looking at M&As across industries. Numerous studies cite a commonly held belief in a 70-90 percent failure rate for M&As; for example, as noted in 2011 and 2016 Harvard Business Review (HBR) articles (2, 3). An earlier published article in HBR noted a series of errors and challenges companies make and face when trying to accurately estimate the value of mergers (4). However, a more recent 2018 HBR article explained why the 75 percent failure rate for mergers is a myth, where companies that gain experience in doing M&As over time (noted as programmatic M&A)are more likely to achieve “real wins” (5). This study also noted that smaller M&A deals work out better, which would be intuitively consistent with the potential for greater errors and challenges in estimating the value of larger M&A deals.

Why do companies engage in M&As? A McKinsey study concluded that there are three fundamental motivations that drive M&As: 1) as a source of innovation, 2) to unlock synergies, and 3) to realign portfolios (1).

Recent Deals

Examples of significant deal-making activity seen in pharma industry:

  1. Amgen agrees to buy Otezla from Celgene in a $13.4 billion deal (August 2019) (A.)
  2. Gilead Sciences signs 10-year $5.1 billion partnership with Galapagos NV (July 2019) (B.)
  3. AbbVie Inc. agrees to buy Allergan plc for about $63.0 billion (June 2019) (C.)
  4. Pfizer spends $11.4 billion to acquire Array Biopharma (June 2019) (D.)
  5. Novartis spends about $1.6 billion for a group of drugs by acquiring a subsidiary of Boston-based IFM Therapeutics (April 2019) (E.)
  6. Merck partners with Eisai Co. Ltd. to develop and market the cancer drug Lenvima in a deal potentially worth up to $5.76 billion (March 2019) (F.)
  7. Bristol-Myers Squibb agrees to buy Celgene for $74.0 billion (January 2019) (G.)
  8. Takeda completes $62.0 billion acquisition of Shire (January 2019) (H.)
  9. GSK enters an agreement with Boston-based TESARO, Inc. to bolster its oncology pipeline for an acquisition cost of $5.1 billion (December 2018) (I.)

Further Reading

A. Financial times, “Amgen to buy Celgene’s Otezla in $13.4bn deal” (2019). Available at

B. The Wall Street Journal, “Gilead to expand its bet on research” (July, B1, B5, 2019).

C. The Wall Street Journal, “Drugmakers strike $63 billion deal” (June, A1-A2, 2019).

D. Pfizer, “Pfizer to acquire Array Biopharma” (2019). Available at

E. Biopharma Dive, “Novartis bets $1.6B on biotech’s anti-inflammatory drugs” (2019). Available at

F. Biopharma Dive, “Merck partners with Eisai in sweeping bet on Keytruda combo” (2019). Available at

G. Business Insider, “Bristol-Myers Squibb is buying Celgene in a $74 billion deal” (2019). Available at

H. Takeda, “Takeda completes acquisition of Shire, becoming a global, values-based, R&D-driven biopharmaceutical leader” (2019). Available at

I. In-Pharma, “GSK rebuilds oncology pipeline with $5.1bn acquisition” (2014) Available at

Recent changes in corporate tax law in the US ( i.e., the 2017 Tax Cuts and Jobs Act) were expected to have a stimulative effect on the number and type of

M&As in the pharma sector, with a Boston Consulting Group study noting some provisions of the tax law that would affect corporate strategy and M&A activity (6):

  • A reduction in the corporate tax rate from 35 percent to 21 percent
  • Mandatory repatriation of offshore cash, with a one-time tax of 15.5 percent
  • Immediate expensing of investment in tangible business property
  • New limits on interest deductibility

These corporate tax law changes make M&As more attractive to sellers, and provide greater incentives for companies to take their liquidity and invest in deals that allow them to achieve strategic objectives. The new tax law also encourages the repatriation of offshore cash held by pharma companies – among the largest held overseas by any industry – by reducing the tax charge on that money, thus allowing the net balance to be used for productive investments, such as M&As.

In addition, certain types of deals, such as Pfizer’s 2014 attempt to acquire AstraZeneca to significantly lower taxes through an “inversion” strategy by shifting the company’s location from a high-tax country (like the US) to a low-tax country (like the UK) are expected to eventually disappear (7), as the substantial lowering of the US corporate income tax rate places it in sync with other developed countries. Further restrictions placed by the US Treasury rules on implementing an “inversion” approach also now make such deals far less profitable and attractive.

While tax law changes have certainly had some effect on the number of recent M&As, and the type of deals, other pharma trends and market forces are also at play. M&As represent an opportunity for pharma companies to achieve strategic objectives. Maintaining a robust and productive R&D pipeline is the lifeblood for a pharma company. M&As may also be used to address a relative short-term issue such as a “patent-cliff problem”, which is not about buying R&D productivity, but rather purchasing an immediate acquisition of top-line growth to stabilize a worsening profit and loss statement.

Strategic Reasons for M&As

Drive productivity and synergies

a) Increase R&D pipeline productivity and opportunities to expand existing drug indications, especially in the oncology therapeutic area. Oncology has seen the greatest focus when it comes to new drug launches because of both the challenges and opportunities these medicines represent for development (20).

b) Need to find cost efficiencies through synergies derived from M&As and quickly expand and/or develop a company’s market presence (either within a therapy class or by geography).

Fund Portfolio Shifts

c) Shift to specialty medicines, especially in the areas of large molecules, biosimilars, genomic-based therapies (often targeted personalized medicines), and/or orphan drugs treating rare disease populations; traditional small molecule target opportunities have become heavily genericized and lack economic viability for continued development (20). The shift to specialty medicines coupled with advances in medical technology also fuels the need for continued innovation and the launch of new active substances to address continuing significant unmet medical needs.

d) Drive to find more value-based drugs (showing improvements in health and economic outcomes) as payers, providers, employers, and patients express greater concerns over affordability and access of new medicines (20).

Build Capabilities

e) Pressure to counter the trend of the increasing cost and risk of pharma R&D (21), as clinical and economic endpoints needed for commercial success become more challenging to attain (22, 23), and requires the building of internal capabilities through M&A activity to affect economies of scale (size) and scope (diversity of a firm’s development efforts) that can improve R&D productivity (24). Recent analysis of clinical development success rates for investigational drugs clearly show significant increases in inherent challenges in bringing new drugs across all therapy classes, and especially in oncology (23).

The oncology field deserves special attention when discussing M&As. Numerous companies recognize the oncology therapy area as a critical source of future growth and are expanding their market presence in this field. For example, companies like Pfizer, which was heavily involved in chronic disease areas like cardiovascular disease, or GSK, which previously dissolved its oncology presence, are now shifting a significant portion of their portfolios to oncology as a major driver of business growth (8). The market opportunity is huge for oncology. US spending on oncology comprised $58.4 billion (12.1 percent) in 2018 on a base of total non-discounted spending of $482.0 billion (9). Only the antidiabetics therapy class was greater in non-discounted spending for 2018 at $60.6 billion (12.6 percent). There are also substantial unmet medical needs in oncology (see Table 1 and 2). However, the oncology area also has its challenges, such as high inherent clinical trial failure rates (see Table 3) – expressed here as Phase Likelihood of Approval (LOA), according to the referenced research article (11). LOA denotes the probability of reaching FDA approval from the current phase, and is also expressed as a percentage. LOA is calculated as the product of each phase success probability leading to FDA approval. The n value associated with LOA is the sum of the n values for each phase success included in the LOA calculation. Their research also calculated success rates from phase to phase. An overall key finding of their research is that clinical development success rates are lower than previously thought. This would provide a strong reason for M&A activity in oncology to bolster clinical success rates to try and overcome greater inherent risks of clinical trial failure.

Table 1. Leading areas of new cancer cases (2019). Estimates by gender.

Source: See reference 10. Percentages represent a fraction of all new cancer cases.

Male new cases   Female new cases  
Prostate 174,650 (20%) Breast 268,600 (30%)
Lung & bronchus 116,440 (13%) Lung & bronchus 111,710 (13%)
Colon & rectum 78,500 (9%) Colon & rectum 67,100 (7%)
Urinary bladder 61,700 (7%) Uterine corpus 61,880 (7%)
Melanoma of the skin 57,220 (7%) Melanoma of the skin 39,260 (5%)
Kidney & renal pelvis 44,120 (5%) Thyroid 37,810 (4%)
Non-Hodgkin lymphoma 41,090 (5%) Non-Hodgkin lymphoma 33,110 (4%)
Oral cavity & pharynx 38,140 (4%) Kidney & renal pelvis 29,700 (3%)
Leukemia 35,920 (4%) Pancreas 26,830 (3%)
Pancreas 29,940 (3%) Leukemia 25,860 (3%)
All sites 870,970 All sites 891,480

Table 2. Leading sites of new cancer deaths (2019). Estimates by gender.

Source: See reference 10. Percentages represent a fraction of all new cancer cases.

Male   Female  
Lung & bronchus 76,550 (24%) Lung & bronchus 66,020 (23%)
Prostate 31,620 (10%) Breast 41,760 (15%)
Colon & rectum 27,640 (9%) Colon & rectum 23,380 (8%)
Pancreas 23,800 (7%) Pancreas 21,950 (8%)
Liver & intrahepatic bile duct 21,600 (7%) Ovary 13,980 (5%)
Leukemia 13,150 (4%) Uterine corpus 12,160 (4%)
Esophagus 13,020 (4%) Liver & intrahepatic bile duct 10,180 (4%)
Urinary bladder 12,870 (4%) Leukemia 9,690 (3%)
Non-Hodgkin lymphoma 11,510 (4%) Non-Hodgkin lymphoma 8,460 (3%)
Brain & other nervous system 9,910 (3%) Brain & other nervous system 7,850 (3%)
All sites 321,670 All sites 285,210

Table 3. Selected clinical development phase LOA for oncology investigational drugs

Notes: See the source article for the methodology to derive each of the selected clinical development Phase LOA. LOA means “Likelihood of Approval” and SPA means “Special Protocol Assessment” (11).

  Phase 1 LOA Phase 2 LOA Phase 3 LOA
Oncology – All indications 6.7% 10.5% 37.0%
Oncology – Lead indications 13.2% 19.1% 45.3%
Oncology – All indications by FDA classification 10.4% 16.2% 50.0%
Breast Cancer 5.7% 8.4% 39.2%
Non-small cell lung cancer (NSCLC) 5.7% 6.5% 21.7%
Prostate Cancer 5.6% 7.8% 37.5%
Colorectal cancer (CRC) 5.1% 8.2% 38.5%
SPA or orphan drug oncology 23.0% 27.1% 44.4%

Outcomes from previous research

There has been a good deal of empirical research in the academic business, economics, and scientific literature on the effects of M&A activity on pharma R&D productivity and shareholder value. Here, is an indication of general conclusions from a sample of prior research:

  • (a) 2001 study (12): There is no relationship between economics of scale (size) and increasing the success probability of individual R&D projects among a sample of large pharmaceutical firms. However, there is a strong positive effect caused by economies of scope (diversity of a firm’s development efforts). As noted by the authors, “Scope is confounded with firm fixed effects, however, suggesting an important role for inter-firm differences in the organization and management of the development function.” Economies of scope is likely to play a greater role in the success of M&As driven to improve oncology R&D productivity – given the nature of cancer research and cross-fertilization of ideas across sites.
  • (b) 2005 study (13):There is a strong positive effect of a firm’s overall experience for larger and more complex late-stage trials. Products developed through an alliance have a higher probability of success in phase II and III trials – and if the licensee is a large firm.
  • (c) 2007 study (14): Acquisitions create shareholder value but not mergers (though mergers do not diminish value). The effect of acquisitions varies depending on whether the target is based in the US, or elsewhere.
  • (d) 2007 study (15):In general, no value creation (using three performance measures – research productivity, return on investment, and profit margin) was found from M&A activity on a sample of large pharmaceutical M&As and independent non-M&A rival firms.
  • (e) 2007 study (16):Controlling for merger propensity, large firms that merged experienced a similar change in enterprise value, sales, employees, and R&D, and had slower growth in operating profit, compared with similar firms that did not merge.
  • (f) 2010 study (17): Reducing late-stage (phase II and III) attrition rates and cycle times during drug development are among the key requirements for improving R&D productivity. Investments in drug discovery and early clinical development, from target selection to clinical proof-of-concept, are essential to increase R&D productivity. Transforming biopharmaceutical organizations into a fully integrated pharmaceutical network will allow for funding the number and quality of pipeline assets.
  • (g) 2016 study (18): This academic-style and extensively-research working paper analyzing pharma mergers affecting European product markets found negative effects post-merger of patenting and R&D expenditures for the merged entity but also among non-rivals. This result is consistent with the majority of prior empirical studies they reviewed that found negative effects of mergers on innovation in the merged entity.
  • (h) 2017 study (19): This study noted that the prior literature on the relationship between mergers and R&D productivity is mixed. Their study of more recent large pharmaceutical mergers found a statistically significant increase from mergers on R&D productivity. They point to two factors as critical in driving R&D productivity: depth of scientific information and objectivity of decision-making based on that information, both of which could be expected to increase because of a merger.

Scale versus scope

Economies of scale says the average total cost to produce a drug decreases as more volume is produced. Traditionally, the pharmaceutical average total cost curve (total fixed cost + total variable cost)/volume starts off high because of the high total fixed costs relative to low volume. However, this then quickly drops as volume increases until it flattens over a large, relevant production range of output. It is possible the average total cost curve increases at very high levels of output due to diseconomies of scale (e.g., higher total average costs caused by logistical and administrative problems when running an extremely large organization – and other costs – due to size). However, generally in pharmaceutical production and cost theory and practice, we do not see the effect due to diseconomies of scale.

Economies of scope, on the other hand, say that the average total cost of a drug decreases with a greater variety of drugs produced from the same inputs. This is where “diversity” of the R&D portfolio enters and becomes critical – where resources under scope can be complementary to each other that are then used to generate novel medicines. There are numerous famous drug development examples; consider the discovery of Viagra for erectile dysfunction, which was the result of a cardiovascular study for the treatment of hypertension and angina pectoris; the creation of Viagra was an unintended effect. This type of discovery has been repeated many times in the history of pharma R&D discovery.

Further, the nature of oncology development and the building of new indications is likely more consistent with scope than scale (mere size). We see this in firms trying to create highly diversified oncology portfolios to gain economies of scope rather than economies of scale. This effect is also consistent with the fact that many drug discoveries are the result of serendipitous events. So, building R&D portfolios where the resources and clinical trials are more complementary to each other will more likely increase R&D productivity than simply having more (size) of the same resources.

Overall, the research literature is very mixed on the effect of M&As on R&D productivity and shareholder value. However, two effects do continually stand out in the literature: the role of economies of scope (developing a diversity of R&D expertise), and fixed-firm effects, meaning that M&A effects can be dependent on firm-specific attributes. The remarks from the 2017 study mentioned above echo these key findings and would explain, for example, the depth by which recent pharma mergers have taken to delve into the oncology therapy area to build scientific expertise and expand product franchises through additional clinical indications. This effect is also consistent with prior research that noted economies of scope as a more important driver of R&D productivity than economies of scale (size). Lastly, this study affirms the effect of firm-specific decision-making, which can be affected by an array of attributes, such as organizational network design and the role of analytics in helping to improve objectivity in decision-making, on the relationship of mergers and R&D productivity and shareholder value.

The importance of M&As

The preceding analysis highlights the importance that M&As will have on the future performance of pharma companies. M&As will be required to achieve strategic objectives by augmenting and/or complementing existing company R&D pipelines as the risks and costs of developing new innovative medicines increase over time. The challenges for pharma companies are making the right targeting decisions for M&As and tactically ensuring such deals achieve strategic goals.

As closing remarks, pharma executives should consider the following when contemplating M&As:

a) Taking into consideration all the instrumental factors for an M&A, a well-evaluated and orchestrated M&A is an essential instrument for pharma companies to increase R&D productivity and shareholder value over time. Having said that, a poorly planned M&A has equal probability to increase disruptions and prove counterproductive. Thus, detailed examination of the M&A will help shift the scales in the right direction.

b) Relying solely on a company’s internal R&D portfolio without M&As will likely not be sufficient to achieve strategic objectives over the long run.

c) Companies must improve on their therapy class target selection as a starting point for further development, and then seek out the right company targets to satisfy R&D objectives. This means building strength and expertise in selected therapy areas, and realigning your portfolio to the winning agents you find – which are generally found outside the company.

d) Companies are increasing their focus on oncology and rare diseases for further development for a variety of reasons; companies should use M&A to seek out areas of competitive advantage in an increasingly crowded field. However, M&As must not be seen as building “brands” but rather “franchises” based on increasing the indications from a single drug approved for multiple uses. This will increase the return on R&D, while allowing companies to differentiate better their franchises in the market.

e) Point d) also means that companies must decide whether to use M&As to continue with the traditional approach to R&D portfolio development; for example in oncology, by focusing on late-stage cancers and extending the life of patients; or to instead target early-stage cancers in the hopes of finding a cure. AstraZeneca recently announced a change in their cancer R&D portfolio strategy to focus on early-stage cancers as a way to differentiate themselves from the competition (20).

f) The execution of M&As to achieve strategic objectives carries with it many risks and uncertainties, given the nature of limited information at the time of assessing an M&A deal. Analytics need to be employed to assess accurately future costs, revenue, and synergies expected.

g) One key conclusion from prior pharma empirical research is that economies of scope (advantages gained through building research diversity) are far more important on the ability of an M&A to increase R&D productivity compared to increasing economies of scale (size).

h) Finally, another key conclusion from prior pharma empirical research is the effect of firm-specific attributes in realizing gains or generating losses through M&As. As noted by one previous article, achieving success through M&As is acquired through experience gained and learned over time (5). A useful research project would be to review all pharma M&As for the purpose of detecting whether some companies do it better than others and why.

Dr. George A. Chressanthis is Principal Scientist at Axtria, Aditya Bhandari is a Principal, and Rashi Thaper is a member of Aditya’s team.

This article was co-published with Axtria, a big data and analytics company.


Industry Perspectives

With Aditya Bhandari, Axtria Principal, and his team member, Rashi Thaper

What is – and will be – driving current and future M&A deals?

R&D is diverse and requires heavy investment. Organizations look for mergers that can save time and money, ultimately leading to a better return on investments. It takes approximately $2.6 billion to develop a new drug and most of this cost is incurred due to a very high failure rate, with 90 percent of drug development costs attributed to clinical trials that do not reach the market (25).

Most large pharma companies manage their product portfolio by organically working on a pipeline of drugs and/or engaging in M&A activities. Since a significant portion of drug development is done by emerging specialty pharma and biotech companies, these are lucrative targets for large pharma companies. For example, AbbVie’s acquisition of Allergan for $67 billion allowed it to bypass the risky process of R&D as it faced the loss of patent protection for Humira (26).

Also, research-patenting adds to the crowded R&D M&A space. If the research methods that are required are patent-protected by another organization or institute, this will necessitate an M&A.

Do M&As improve R&D productivity?

M&As allow large pharma companies to acquire small, innovative, specialty pharmaceutical and biotech companies to enrich/complement their product pipeline and solve the classic patent-cliff problem. M&A drivers include the constant need for innovation and enhancing the value (knowledge/technology) base of the organization to stay ahead of the competition.

On the other hand, there are theories suggesting that innovation intensity goes down after M&As due to a reduction in an entrepreneurial, innovative, and agile environment. Bain & Co. research shows that pharma companies spent an average

of $1.1 billion to develop and launch a new drug in the late 1990s (27). A decade later, that investment doubled to $2.2 billion. At the same time, R&D productivity, measured by the number of new molecular entities and biologic license applications per R&D dollar spent, declined by 21 percent a year. Also, analysis suggests that the likelihood of R&D success when large pharma companies are involved is comparatively higher.

Thus, to say that M&A by itself ensures R&D productivity may not be entirely true. The road to a successful M&A is paved with many factors, which, if orchestrated well, shall boost R&D productivity. However, if this equation is not balanced well then it may transfuse risk to the broader portfolio and prove to be detrimental.

Do M&As increase shareholder value?

At first, an M&A usually decreases the shareholder value as skepticism takes over for the short-term – usually until 2-3 years from completion of the deal. One example from 2018 is Takeda’s sinking valuation after it disclosed its interest in acquiring Shire, with a market cap of $40.79 billion on March 27, 2018, just before 

the interest announcement to $26.33 billion on December 28, 2018, prior to the announcement of the deal closure (28, 29). However, the trend prior to this announcement event was already downward, so how much the Shire interest announcement and subsequent deal negotiations contributed to further declines in Takeda’s market cap over time is up for debate and empirical analysis (30).

However, other M&A examples reflect significant growth in shareholder value, such as Roche & Genentech, Merck & Schering Plough, and Sanofi & Aventis (31). However, this question is hard to answer without looking at the deal value, asset portfolio, management ability to synergize different teams, optimally planning portfolio launch, loss of exclusivity, etc.

What kinds of analyses should companies conduct when considering M&As to increase the probability of such deals improving R&D productivity and increasing shareholder value?

The correct valuation of the assets being acquired and its impact on stock prices holds high importance. Large pharma companies have dedicated teams that continuously evaluate various targets and synergies between assets. Detailed analysis needs to be done on the following aspects:

  1. Identification of the best deals that blend well with the current resources of the acquiring company and align with strategic goals.
  2. In-depth analysis of both portfolios and a compatibility check.
  3. Evaluation of the value that can be unlocked from the combined resources of both companies and calculation of metrics defining the rate of return of the deal.

A deep-dive into all of the above parameters will help with improving the predictive accuracy of the success of the deal and the final go/no-go decision.

Signs of Success

By George A. Chressanthis, Aditya Bhandari, and Rashi Thaper

A recent Wall Street Journal article caught our attention, noting that the recent megadeals involving the Bristol-Myers Squibb acquisition of Celgene in November 2019 and the AbbVie acquisition of Allergan in June 2019 appear to have achieved their initial checkup toward eventual success (32). This is evidenced by the rebounding of share prices from their immediate post-deal declines, increasing pipeline success and new drug approvals from the FDA, strengthening and diversifying their existing portfolios, and building confidence with investors by moves made to pass regulatory hurdles (32, 33, 34).

But both deals are still in their early phases of execution. The companies involved must overcome several future elements of risk and uncertainty – both internal to each deal but also due to changing external environmental forces – to achieve long-term success. We look forward to hearing more about what executives and their operational teams did at both pairs of companies to achieve initial milestones of success, and how it affirms or rejects prior notions of the key drivers for M&A success.

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About the Authors
George Chressanthis

George Chressanthis brings almost 25 years of pharmaceutical industry knowledge and experience gained through working within companies advising senior executive teams, functioning as an outside consultant, and conducting research as an academic. He also holds a Ph.D. in economics from Purdue University and earned a full professorship in economics with tenure and graduate faculty status at Mississippi State University prior to his pharmaceutical career.

Aditya Bhandari

Rashi Thaper
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