Content
Executive Summary
1: What Drives Mergers and Acquisitions?
2: What Drives M&A in the Pharmaceutical Industry?
Concentration within the industry
Liquidity
A changing environment
Other drivers
R&D-driven mergers and acquisitions
Sales and marketing-driven mergers
Production facilities
Interest payments
3: Factors Impacting on the Industry
Technological changes
New drug discovery technologies
Information technology
Societal changes
Environmental and ethical degradation
Emerging economies and resurging disease
Bacterial resistance
Genetic advances
The development of niche markets
Societal changes - summary
Wellness
'Cosmeceuticals'
Functional foods
4: The Resegmentation of the Industry
Facts and reflections
'Big' Pharma
Generics
Potential problems in the generics market biotech companies
Technology providers
The future of OTC Medicines
The future of Diagnostics
The future of Functional Foods
Academia
5: Understanding M&A in the Industry
'Success' as perceived by pharmaceutical companies
How to 'grow' a company
The contribution of M&A
Effect of an acquisition on a company's performance
Net sales
Cost of goods (COG)
Sales and marketing cost
Royalties received
Research and development
Interest payments
Taxesv
Other
Conclusion
6: Types of Mergers and Acquisitions
Horizontal acquisitions
Vertical acquisitions
Non-pharmaceutical companies
Pharmaceutical companies
Concentric acquisitions
Acquisitions by conglomerates
7: The Mechanics of M&A - A Survival Kit
Strategy: Do you know where you are heading?
Target: Which one and at what approximate price?
Does and don'ts in searching for an acquisition candidate
When to use Consultants
Merchant bankers, commercial banks or M&A boutiques
Solicitors
8: Due Diligence: What - How - When?
Introduction
How to carry out a process of due diligence
Risk reduction
Assembling the due diligence team
Developing a plan
Data collection
Before the data room inspection
Public and internal sources
Information derived from the target
Information obtained from third parties
From the data room
Preparation of the report
Use of Due Diligence information to calculate the price
Calculations
Obtaining consensus
Example 1
Outcome
Example 2
Conclusion on procedure used
Possible errors
Complicating factors
Company-related complications
Conflicting information
Making assumptions
Conclusion
9: Mathematics: The Logical Part
Evaluating the target company
The preliminary screen
In-depth evaluation of an acquisition candidate
Use of scenarios
Calculating the value
Choice of methodologies
Choice of parameters
Earnings
Growth rate
Dividends versus free cash flows to equity
Stability of leverage
Using the discounted cash flow
Value of the variables
Cash flow to equity
Cost of equity and ß-factor
Cost of debt
Cash flow to the company (CFc)
Growth rate (gn)
From historical data
From fundamentals
Effects of restructuring
Calculating the value with discounted cash flow (DCF) methods
Equity value/dividend discount
Stable growth model
Two-stage model
Three-stage model
Discounting the cash flows to the company (CFc)
Calculation based on CFc
Stable growth company
Multiple stage calculation
Using relative valuation
Using fundamentals
Using comparables
Using contingent claim valuation
Options and equity
The Black-Scholes method for pricing options
Options
Volatility
Asset price probabilities
The mathematics
The Weiner process
The generalised Weiner process
The Ito-Process
Taylor series development for the derivative of V
The 'dX' problem and the Black-Scholes solution
Solution to the Black-Scholes equation
Application of the Black-Scholes equation
Practical procedure
Which valuation model to use?
A quoted company with positive cash flow
A quoted loss-making company
Unquoted companies with positive cash flow
Unquoted companies with losses
Conclusion
10: The Negotiation - The Tricky Part
Things to consider
Planning for the negotiation
The negotiation
How will payment be made?
The contract - The document itself
The role of the legal department
Use of warranties
Use of disclaimers
11: Integration: The Real Issue
Things to consider
Types of integration
How to go about it
12: The Alternatives
Is M&A the right solution?
The benefits
Some theoretical considerations
Different viewpoints
Is mergers and acquisitions activity beneficial for the short- to medium-term investor?
Are mergers and acquisitions the right way to go to increase productivity of R&D in the pharmaceutical world?
How much to spend on R&D
Europe as a special case
License-in - if you can
Intense activity
Valuation
Alliances and Joint Ventures
Refocusing
Invest in people: Alternative medicine?
Addendum 1: Healthcare Since The Second World War
Addendum 2: Quick Evaluation
Quick check
Company name, location and ownership
Description of the business
Reason for the acquisition (strategic fit, new strategy, growth, etc.)
Intended acquisition (assets, shares, products, production, etc.)
Market description (size, growth, competitors, etc.)
Competitive analysis of the market
Financial highlights
Main products and pipeline
SWOT
Goals (synergies, additional products, sales increase, etc.)
Quantitative evaluation (scenarios of NPV of free cash flows, cost of capital = discount rate = 12%)
Major risks and risk assessment
Open issues
Status of the project
Recommendation (yes/no, price)
Next steps
Addendum 3: Non-Binding Offer
Addendum 4: Due Diligence Checklist
Name and basis data
General issues
Divisions: product portfolio, marketing and sales strategy
Personnel
Functional areas
Financial situation (see 'Quantitative evaluation')
Joint ventures and similar collaborations
Legal aspects (see framework 'Contract evaluation')
Addendum 5: Confidentiality Agreement
Addendum 6: Set Of Warranties
Order / Information Request Form
List of Tables
Table 2.1: Rank of European pharmaceutical companies amongst all European industries
Table 2.2: Rank of US pharmaceutical companies amongst all US industries
Table 2.3: Rank of Japanese pharmaceutical companies amongst all Japanese industries
Table 2.4: Very strong balance sheet of global sector
Table 3.1: Drug technologies
Table 4.1: Sales by largest pharmaceutical companies
Table 4.2: NCEs launched in Europe, 1997
Table 4.3: Selected new drugs, first approved in the US, 1998
Table 4.4: Patent expiry dates
Table 4.5: Companies showing a clear commitment to the generics market
Table 4.6: Biotech industry versus established pharma
Table 4.7:
Table 4.8: Major players in OTC
Table 8.1: Scenario 1 – share price rises to US$50 in 4 years
Table 8.2: Scenario 2 – share price rises to US$25 in 4 years
Table 8.3: Scenario 3 – share price rises to US$10 in 4 years
Table 8.4: Probable outcome
Table 8.5: Scenario 1 – the base sales case (Euro '000s)
Table 8.6: Scenario 2 – disappointing sales (Euro '000s)
Table 8.7: Scenario 3 – sales are 50% higher than anticipated (Euro000s)
Table 8.8:
Table 8.9: Scenario 5 - product sales become comparable to those of the market leader (Euro000s)
Table 8.10 The probability of the different scenarios occurring and their associated valuations
Table 9.1: Firm characteristics and DCF model choice
Table 9.2: Return by investment category
Table 11.1: Key problems from past mergers
Table 11.2: Easy-to-follow integration guidelines
Table 12.1: Substantial scope for cost savings, revaluation 21-35%
Table 12.2: Assumptions about attrition rates at each R&D stage
Table 12.3: Rates according to the R&D stage
List of Figures
Figure 2.1: Financial ratios of some US pharmaceutical companies
Figure 2.2: Predicted spending power in the year 2000
Figure 3.1: Genomics and new bioactives help to explain the relationship between food and health
Figure 4.1: Period of exclusivity for breakthrough
Figure 4.2: Prescription rate of generics today and in 2004*
Figure 4.3: Biotechnology-based pharmaceutical companies as a function of lifecycle
Figure 4.4: 1996 sales of the main biotech products
Figure 4.5: Total number of strategic alliances
Figure 4.6: Dollar volume of pharmaceutical alliances - total biotech results
Figure 4.7: Corporate investment in biotech
Figure 4.8: Biotech M&A activity and IPOs in the US. Biotech deals greater than US$15m
Figure 4.9: New technologies for drug discovery and development
Figure 5.1: Options for the management of a pharmaceutical company
Figure 5.2: Pharmaceutical industry shareholder returns 1994-98
Figure 9.1: Calculation of ß and RF
Figure 9.2: Probability distribution for future share prices of companies A and B
Figure 9.3: Black-Scholes Analysis
Figure 10.1 Typical objectives of a transaction negotiation
Figure 12.1: Black-Scholes Analysis
Figure 12.2: Black-Scholes Analysis
Figure 12.3: What to spend on R&D
Figure 12.4: Black-Scholes analysis
Figure 12.5: Factors driving virtualisation of pharmaceutical R&D
Figure 12.6: R&D alliances 1993-97 (number of deals)
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