By Dana Cooper
Fueled in large measure by big pharma’s efforts to replenish product pipelines by acquiring biotechs and to reduce operating costs through divestiture of production capacity, the volume of merger, acquisition, and divestiture activity in the life sciences industry is expected to increase in the coming decade. In fact, enterprise-level outsourcing of core business functions to CMOs and biosimilar firms — such as the recent production facility divestitures to CMOs by both Eli Lilly and Merck — is believed by industry analysts to reflect a significant, long-term restructuring of operating strategies and business dynamics.
As this industry reconfiguration continues, life sciences companies face a daunting management challenge: Avoid the historically high failure rate of mergers, acquisitions, and divestitures experienced by other industries. Various academic studies have shown that, across all industries, as many as 65% of all M&A-related projects fail to deliver on time or on budget or to achieve the anticipated strategic benefits.
Unfortunately, there’s little reason to believe life sciences companies will outperform other industries in M&A return on investment. Some observers even suggest they’re at a disadvantage — given the low number of transactions and related experience relative to high-turnover industries such as financial services and retail services.
Firsthand M&A experience notwithstanding, there are a number of enduring “realities” essential to the success of enterprise-level transactions and relevant to all industries that can provide senior managers of life sciences companies with valuable insight into what is likely to occur, as well as practical guidance on how to avoid the most common pitfalls. The four “realities” we have found most helpful, based on our experience in pre- and post-transaction integration both within and outside of life sciences, are presented here.
Reality #1: Most Companies Are Unprepared To Manage Disruptive Transactions
Regardless of its industry or size, the typical company is largely unprepared to effectively manage a large-scale, disruptive transaction — whether they are divesting or acquiring a business unit. This reality should not be viewed as a shortcoming, however, as management of these complex and emotionally charged projects is not a part of the normal course of business.
Senior managers at companies that handle disruptive transactions most effectively will take this reality into account and create a hybrid project management team consisting of their best internal staff members, external partners with solid credentials in change management, as well as subject matter experts who may be called in for “one shot / one kill” solutions for specific challenges.
For a complex mission-critical integration project at a global pharma company, a dedicated transaction team was assembled — led by a group of highly respected senior managers and supported by internal process experts, external partners, and select external subject matter experts. The thoughtful initial composition and ongoing restructuring of this project team proved to be instrumental to the success of the undertaking. This enlightened pharma company understood that assigning too few internal or too few senior participants conveys a message that the project isn’t a high priority, and that assigning too few or misaligned external experts sets the stage for less than stellar execution and a degradation of the underlying value proposition.
As in this case, best practices for effective transaction management required internal senior managers to clear the way and set the tone for a relatively short but aggressive initiative. Internal process experts ensured that institutional knowledge would be efficiently integrated into the new environment, external partners provided transaction knowledge and supplemental skills for a short period of “heavy lifting,” and a small number of subject matter experts focused on narrow critical path items, where knowledge lead time could not easily be addressed with internal staff or outside advisors.
For this pharma company, establishing, maintaining and tweaking the project team throughout the project lifecycle was a difficult but essential requirement for delivery of the full business value of the transaction.
Reality #2: Conflicting Agendas Are A Normal Part Of The Game
Despite the best intentions of senior management or the assurances from legal, finance, and investment banking professionals regarding the strategic benefits of the transaction, conflicting agendas always exist and must be accepted simply as one of the project management hurdles to be overcome.
Excluding the intricate web of personal and career-related agendas, a major conflict commonly exists between the seller — whose motivation is to complete the transaction as quickly and as inexpensively as possible — and the buyer, whose primary concern is to transfer the asset properly, without compromising its value and disrupting attention from existing core business.
Internally, within both the seller’s and buyer’s operations, significant and ongoing conflict typically exists between senior managers who are responsible for the successful outcome of the transaction and the “boots on the ground” staff members who must address the hundreds of operational, technical, and personnel-related complexities required to achieve success.
While supporting the acquisition and integration of a large API manufacturing plant, coupled with a long-term supply agreement, the privately owned buyer wanted to cautiously assimilate operations over a reasonable transition period. The publicly owned seller, though dependent on the operation as a key source of product, was more interested in accelerating the transition in an aggressive fashion to satisfy corporate financial targets. A delicate balance between these competing priorities was required to ensure that both entities realized the full value of the transaction and to avoid disrupting product flow.
This situation not only demanded proper selection of transition teams on both sides of the transaction; it also required an ability to diplomatically identify and differentiate mission-critical from mission-important tasks and from those tasks that could be postponed or eliminated. To avoid the minefield of conflicting agendas, best practices required up-front acknowledgement of their existence, as well as honest, transparent negotiation of how those differences would be addressed.
Reality #3: Decision Making Will Be Significantly Compressed
Because both sides of any transaction are pressed to seek closure and near-term results, the speed of decision making is always compressed. The implications of this transaction reality are significant, as internal team members are constantly pressed for quick decisions on issues and problems they have never faced before or have never had such high visibility or long-term implications.
For corporate managers who are unaccustomed to or uncomfortable with a “ready-shoot-aim” decision-making style, the speed required for effective change management can sometimes lead to decision gridlock, which inevitably puts the entire project at risk.
A recent life sciences acquisition integration engagement with an aggressive delivery schedule called for rapid decision making and issue resolution. The best practices tools and methods applied by that company to meet their ambitious timetable generally fell into one of three categories:
Reality #4: Project Management Is Always A Full-Contact Sport
If change management was a popular sport, it would not be a gentlemanly game driven by rules and manners, such as golf or tennis. Instead, it would be similar to the game of rugby, characterized by a general set of rules, resulting in blood, sweat, and tears inflicted by full body blows taken with no equipment. Transaction management at times requires finesse, but most often is a full-contact sport that demands teamwork, endurance, and a tough skin.
As part of the “final phase” merger integration involving two large pharma companies, a small related offshore manufacturing facility faced an operational nightmare: to continuously supply critical product for downstream operations supporting a new product launch, while simultaneously going live with a new corporatewide ERP (enterprise resource planning) system. Lack of corporate planning best practices notwithstanding, the offshore facility was directed to address both demands without interruption or compromise.
Faced with the task of supporting top-line revenue demands as well as a new corporate productivity initiative, the facility rolled up its sleeves and got to work. By retasking team resources, by acknowledging that chaos would be a constant factor, and by communicating a “let’s make it happen” attitude consistently throughout the entire organization, the production facility accomplished both tasks admirably. Even with great planning and strong teams, integration projects typically involve unexpected surprises and unrealistic demands, and best practices demand flexibility, creativity, persistence, and a “can-do” attitude.
In spite of the challenges and disruptions involved or perhaps because their senior managers cannot fully appreciate at the outset the time, cost, complexity, and risks related to acquisition and divestitures, life science companies will likely continue to initiate these strategic, enterprise-level transactions over the coming decade, as analysts predict.
Over time, however, the industry’s ability to reduce operating costs or gain competitive advantage as a result of these transactions may have little to do with complex change management theory and everything to do with the understanding and acceptance of human behavior and preparing in advance for those realities.
About The Author
Dana Cooper is managing partner of consulting firm Makefield Group. He has more than 25 years of experience managing global organizations and leading complex, high-risk projects within the pharma/life sciences industry. At Bristol Myers-Squibb, he directed global materials management as well as systems integration and global business services.