Sometime soon, it’s entirely possible that Pfizer will buy AstraZeneca for a price that would exceed the gross national product of all but about 50 countries worldwide.
Should that happen, a long, complicated process will unfold. Pfizer (NYSE: PFE) will talk about bringing together two titans with franchises in big fields like oncology, inflammation, and cardiovascular disease, while its financial people tout massive tax savings. Shareholders of AstraZeneca (NYSE: AZN) will walk away with a lot of extra cash and perhaps stock. Analysts will prognosticate the new company’s pipeline and footprint, and where they think the stock will go. Years from now, it’ll be looked at as either a huge success, or the latest in a long line of pharma megamerger follies.
From the ground level, however, the view of deals like this is much different. Thousands of jobs become expendable, or up for review, as the word ‘synergy’ is thrown around. A complex integration process ensues. Some people lose their jobs. Others flee on their own, and a handful start their own companies. When Pfizer bought Wyeth for $68 billion in 2009, for instance, it announced plans to cut about 20,000 jobs. It subsequently closed several research centers in the U.S. and U.K.
The fallout from these megamergers also lands, often heavily, on the companies’ biotech partners. Communication is at a premium as everyone wonders what’s going on. A portfolio review takes place, and biotechs across the globe start to realize their standing as a partner with the new, giant company—and scramble if the news isn’t good.
NPS Pharmaceuticals president and CEO Francois Nader has seen this type of thing first-hand several times. He’s logged more than 30 years as a biopharmaceutical executive, and much of that time was spent riding out the deals and international mergers that have culminated in the company known today as Sanofi. He’s also recently felt the ripple effect of a big merger from his current post at Bedminster, NJ-based NPS (NASDAQ: NPSP). NPS had a licensing deal in place with the Swiss firm Nycomed to help develop and sell two late-stage drugs for the rare disorders short-bowel syndrome and hyperparathyroidism. Nycomed was scooped up by Takeda in a multibillion dollar deal in 2011, leaving the drugs subject to a portfolio assessment by Nycomed’s new Japanese owner. (Takeda wasn’t interested in rare disease therapies, so NPS ended up reacquiring the rights to the two drugs, teduglutide (Gattex) and recombinant human parathyroid hormone (Natpara), last year.)
“These [deals] should be done for the right reasons, and the right rationale, and the rationale has to be more than just putting two struggling companies together, because the odds are, the joint company won’t be stronger than the two struggling companies individually,” says Nader, though not talking specifically of a potential Pfizer/AstraZeneca combination.
With all this in mind, I spoke recently with Nader, an Xconomist, about the ins and outs of pharma M&A from three perspectives: the rank-and-file employee, the executive, and the nervous outside biotech partner looking in. Here are some excerpts from our conversation:
Xconomy: What’s the biggest reason, in your mind, that megamergers either do or don’t end up working?
Francois Nader: Cultural fit at the top, and throughout the organization. I went through some of these where, frankly, there was a cultural fit, and the integration was seamless from a human interaction perspective. Others were just the opposite, and did not survive for very long. So I think the culture is very important and very often underestimated. At the end of the day, one of the reasons these mergers fail is because you lose people, you lose the passion, [and] products and projects get delayed. Synergies might be found, but they’re not where they should be found. Synergy by attrition is not good news. You create a culture that is nonexistent, and after three, four, or five years, the company is completely different from the concept where it started. And all of a sudden it looks for another merger, or another acquisition.
X: How have you seen that play out unsuccessfully?
FN: [In the Hoechst, Rhone-Poulenc merger that created Aventis], we really did not merge. The culture remained an American culture, a French culture, and a German culture, with very little interaction operationally, humanly, synergistically. It was not really an integration. It ended up being two entities that happened to be “working together,” and it ended up not surviving very long.
X: How about an underestimated factor beyond culture?
FN: We need to be mindful of the role consultants play. Consultants usually suggest doing the ‘best practice.’ Well, that is fine, but the best practice at times ignores the inherent strengths of each of the two companies within their contexts. So if one company is strong in one segment, and the other in another segment, putting the two together might not work. So the notion of best practice versus core competencies are two very different concepts that are very often, unfortunately mixed up. I went through three successive mergers where the consultants brought in the same template—literally—because we used the same consultants. And each of those situations was extremely different. Every integration is different—totally different—and they each have to be thought through in a very, very thoughtful way.
X: Which strategy works better: a full integration or leaving the target an independent operating subsidiary?
FN: It’s very much integration-dependent, but pick one and stick to it. If the merger calls for an integration, let’s do it. If the integration calls for maintaining the two entities for good reasons, let’s do it. The problem is we don’t often make this decision by design, and we let it go. I heard way too long, way too often, “Don’t be concerned, things will remain as is.” So, no worries. Nine times out of 10, that’s not what’s going to happen. Unfortunately, I saw a couple of situations where they had a plan, and then communicated something entirely different. And unfortunately they lost a bunch of employees because people woke up two years later or 18 months later saying, “Hold on guys, this is not what you told me. And this is not what I signed up for, or I stayed for.”
X: How should the change in company identity be handled?
FN: When you put two companies together, you actually create a new one. And that’s very important. By creating a new one, you have to really redefine the vision, mission, values, culture, portfolio, in this order. In other words, what is this new company all about? Unfortunately more often than not, we take care of the logo, we take care of the name more or less, and then we take care of the portfolio—and we tend to forget everything in between. A new company is indeed that.
X: The job cuts then immediately follow. Where do they usually come from?
FN: Usually you lose two types of employees: your top 10 percent and your bottom 10 percent. What I mean by that is, the low 10 percent know that someone will do the analysis, draw the line, and they will be below the line, and therefore they will probably be let go. And the top 10 percent, you will lose a number of them because they will not have the same leadership position they had pre-merger, or they don’t like the new culture, or they are snatched [up] by someone else. The biggest risk, actually, and what hurts mergers the most, is losing your A players, who go, “I don’t want to go through this.” And then you’re left with not much. You’re left with your B players.
X: So how do you keep your A players?
FN: You have to put in place a very solid retention plan, you have to communicate in a very credible way. It’s all a matter of credibility. People do not stay for their paycheck. People stay because they’re excited about their job, they’re excited about the company they work for, and they’re excited about who they work for. So the credibility, communication, vision, mission, these all have to be in place besides the retention package.
X: When one pharma buys another, what happens to the little biotech with a partnership in place?
FN: The key question is, is this biotech product still of strategic interest to the company? Would it get enough attention? And if not, how can the small biotech exit? And this is something that is easier said than done, because the small biotech has to sit down and really take this very, very seriously. The future of their product is very much contingent on the attention the product will get within the new company. The worst-case scenario would be that Big Pharma keeps the product and doesn’t do anything with it.
X: How should a biotech handle a situation like that?
FN: You have to very quickly talk to the new individuals and be as involved as one could in the portfolio assessment planning, and the portfolio assessment decision-making. That’s absolutely key. Because you want to know as quickly as possible where your product ranks on this 1-to-100 list, if you will. Are you number 98, or are you number eight? There is a huge difference in between, as you can very well imagine. I think there is also an interpersonal connection that has to be established, because new relationships have to be built. And you have to re-pitch in many instances. I’ve seen it with a different company recently, where they [had] to re-pitch because the new owners, frankly, did not have any idea about the product. So the biotech had to go back in and re-present the product, re-present the market potential, and do their analysis, because the new folks out of ignorance did not know.
X: What are the contingencies in case a biotech is that unfortunate number 98?
FN: The small biotech has to put in place a plan really quickly for the ‘what if’ scenario. What if this new company would not be interested in our product? What are our options? And management and the board have to sit down with consultants, with bankers, and really think through what the outcome of the company and the product would be if the new company says, “You know something, this is not one of our priorities. Thank you very much, we’re returning it to you.”
X: When a biotech company’s product doesn’t make the cut, though, it usually gets crushed by Wall Street. How do you avoid that?
FN: I think at NPS we did an excellent job—and I’m using the word [excellent] on purpose—explaining why we took back our product. Unfortunately in most cases, the minute Big Pharma returns a product to biotech, there is a stigma that the product might not be good enough, otherwise they would’ve kept it. People don’t know that somewhere there is a line [beyond which] Big Pharma cannot manage all the products they have. At times it represents a serious opportunity for a company like NPS, because we could snatch products that are excellent but below this line that Big Pharma draws somewhere. It might have to do with market potential, competing products within the portfolio, or whatever the reason. But a small biotech has to be very, very careful how this is communicated to avoid the stigma.