Mergers & Acquisitions in Pharmaceuticals

When and how

Publication Date February 2000
ISBN 186067464X
Pages 0
Tables n/a
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A step-by-step reference tool to all aspects of M&A Illustrating the changes from the early days of high margins and large-scale price premiums for innovative high tech acquisitions through to the increasing speed to acquire novel new drugs in the 21st century in a bid to reduce R&D and production costs.

The reality is that only 1% of marketed drugs reach the level of $800 million dollars and this will be aggravated by the rapid rate of discovery which we are presently witnessing and splintering of indication rates into smaller sub-sections.

Providing essential information, this report provides a step by step reference tool to all aspects of mergers and acquisitions.

Illustrating the changes from the early days of high margins and large-scale price premiums for innovative high tech acquisitions through to the increasing speed to acquire novel new drugs in the 21st century in a bid to reduce R&D and production costs.

Detailed examination of the key drivers:
  • Concentration of the industry

  • Information technology

  • New drug discovery technologies

  • Emerging economies and resurging diseases

  • Innovative R&D
Analysis of key issues:
  • The future of the OTC and Diagnostic sectors

  • The Biotechnology markets and players key targets

  • The re-segmentation of the industry

  • The rise in DTC advertising for innovative drugs

  • Acquisition targets and potential synergies to be gained

  • Important factors when considering horizontal, vertical & concentric acquisitions
Features include:
  • Tables highlighting the top ranked companies in Europe, the US and Japan

  • Step by step analysis of the key stages in acquisition procedures

  • In-depth evaluations on the procedures used to analyse potential acquisition candidates

  • Comprehensive coverage of the approaches used to calculate company value

  • The stages and procedures involved in due diligence

  • Tables highlighting selected new drugs approved in the US and NCEs launched in Europe
    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 ?-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 ? 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)