Pharma Strategy Consulting AG

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Pharma Strategy Consulting AG

• MegaMergers
• Merging Your Way into Trouble
• PBIRG Memphis 2001

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Merging Your Way into Trouble

• The rationale Why MegaMergers?
• The realities 1 1 1.5?
• Anatomy of failure Up close personal
• MegaMerger prognosis Mission impossible
• The future

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The Rationale Why MegaMerge?

• Market technology drivers
• Voodoo economics
• Simplistic logic

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Toughening Market Environment

• Muscle marketing from Big Pharma
• Fast, flexible national Mittelstand competitors
• Real market growth 5 pa
• Lack of NCEs / 50-70 me toos in pipelines
• Declining commercial half life of old technology
• Declining market exclusivity

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Technology Challenges

• Explosion in life science e-technologies
• NCE costs 600 million
• Most pioneering now outside Big Pharma
• Declining RD productivity
• End to automatic innovative Fix
• From blockbusters to customized drugs

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Voodoo Economics I
35 20 5
40
New Products (NCE)
Research Costs ( Bill.)
13 9 5
1960s 1970s 1980s 1990s 2000
10
4
3
1lt
1lt
Market Growth ()
Product Exclusivity (Years)
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Voodoo Economics II
Buyer pressure to cut price
Complexity of buying process
Organization costs
high
high
high
Time
2010
Time
2010
Time
2010
Promotional constraints
Market growth
Margins
high
high
high
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Time
2010
Time
2010
Time
2010
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Simplistic (1 1 3) Logic for Size Building
MAs
Vast array of expensive new technology Need for
greater RD productivity
RD
Big Budgets
Bigger Operations


Global rollout Competitive SOV DTC advertising
Marketing
Big is good ... Bigger is better
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Realities 1 1 1.5?

• Margins return on assets largely size
  independent
• RD and marketing synergies difficult to capture
• Quantity quality
• Disingenuities of market share
• No company has been able to maintain leadership
  over time
• Lost market share impacts shareholder value
• ...Confusion scale with size is an expensive way
  to do business

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Pharma Size Profitability
Medium
Large
Small
100 80 60 40 20 0
100 80 60 40 20 0
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Gross Margins ()
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2
3
4
5
1
10
15
5
Sales ( Billions)
Sales ( Billions)
Sales ( Billions)
Note Figures reflect pharmaceutical sales and
gross margins for the top 65 drug firms
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Impact on RD Productivity
20 15 10 5 0
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Independent Consolidated
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Average Major Product Portfolio Sales
Forecast (1996-2002, Billions)
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0
500
1000
1500
Average Annual Pharmaceutical RD Spending
(1989-1997, Millions)
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Quantity Quality
Novartis
Aventis
Amgen
Aredia Diovan Lamisil Lescol Lotensin Sandostatin
Sandimmune Voltaren Zelmac
Alegra Celexane Taxotere
Epogen Neupogen Aranesp
Brands over 500 mil. in 2002
Sales in 2002 (billion) RD (1992 -
2002) Portfolio Age (years)
2.8 18.8 10.3
6.6 20.3 13.4
4.2 6.5 9.7



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Market Share Argument
World-wide Share
Key TC Share
MERCK NOV BMS AVENTIS JJ AMHO LILLY
4.5
18.4
4.0
7.4
4.0
11.9
3.9
5.6
11.4
3.8
6.6
3.0
15.8
2.9
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Size does not result in long term success in the
pharmaceutical market Changes in world-wide
company ranking based on sales volume 1970-2000
1970
1980
1990
2000
Pfizer / WLPD GSK Merck Co AstraZeneca BMS Novar
tis JJ Aventis AMHO Pharmacia/Searle Abbott/BASF
Roche Lilly Schering Plough Bayer
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Roche Merck Co Hoechst Ciba-Geigy AMHO Lilly Ste
rling Pfizer WLPD Sandoz UpJohn Abbott Squibb Baye
r Bristol
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1970
1980
1990
2000
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Cumulative Impact of Lost Market Share
Billions
Pharmacia Upjohn RP Fisons AMHO
Lederle Ciba-Geigy Sandoz Glaxo Wellcome HR
MMD
1996 - 1999 1995 - 1999 1997 - 2000 1995 -
2000 1995 - 1999 1994 - 1999
2.3
4.2
4.3
4.8
6.4
11.7
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Anatomy of Failure Up close and personal

• Kojack school of management
• The revolving door
• The king has no clothes
• Brand malnutrition
• Isolated knowledge silos
• ... Morale, Attitudes Behaviour

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Anatomy of Failure Up close and personal

• Lack of ownership
• Conflicting visions
• Complexity and size
• Continuity and informal networks
• Rewards for institutionalizing conservatism
• ... Its all about people, stupid!

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Anatomy of Failure Out of focus
MA
Activity
Effort
Value
Focus
Cost reduction Asset leverage
Short term tactical
Efficiency
80
20
Customer focus Enhanced products
Mid term strategic
Effectiveness
20
80
19
Anatomy of Failure The Bottom Line

• Two lame ducks do not make one soaring eagle.
• Suppositions that size matters in RD, marketing
  sales remain to be proven.

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MegaMerger Prognosis Mission Impossible

• Pharma Facts-of-Life
• Market capitalizations Size of small countries
• Financial expectations 10 TL 15 BL growth
• Generic exposure 2000 - 2005 25 / 2.5 bn
• Average peak annual sales 300 mn/13
• Country brand roll out average 50/7
• Big brand launch costs 1 - 2 bn / 3 years

21
Pharma MA Issues

• In-built diseconomies Scale is a moving target
• Loss of intellectual capital
• Demands lots of big new products
• Inflexible, loss of agility
• Highly addictive
• Running out of meaningful targets
• Voodoo math

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Voodoo Math I
2005
2006
2001
2002
2003
2004
32.2 2.9 1.45 1.45 9.7 1 2 8-9 8

• Revenues (Billion)
• Incremental Sales
• In Line
• NCEs
• Implications
• No. NCEs Required
• Conflict
• NCE Output PA
• NCE Sales/Mktg Capacity PA
• RD Shortfall (NCE)
• Marketing Shortfall (NCE)

20.0
22.0 2.0 1.0 1.0 6.7 1 2 5-6 4-5
24.2 2.2 1.1 1.1 7.3 1 2 5-6 4-5
26.6 2.4 1.2 1.2 8.1 1 2 7-8 7
29.3 2.7 1.35 1.35 8.9 1 2 8-9 9
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Voodoo Math II
2001 Bill.
2006 Bill.
Growth PA
100 16.5 35.0 13.2 8.0 27.3
20.00 3.30 7.00 2.64 1.60 5.48
10 15
32.21 10.98
Revenues RD Sales Marketing Cost of
Sales GA Margin

• Net Costs
• Old Structure
• New Structure
• Reduction

72.7 65.9 (6.8)
New Margin 34.1
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The Future

• People first, strategy second
• Creation of customer-driven value-for-money
  business
• De-emphasize size scale in favour of focus
• Destruct fully-integrated pharma business model
• Create fast, flexible, efficient business based
  around core capabilities buying-in skills
  services as needed
• Ability to construct maintain creative win-win
  alliances and partnerships

25

• Like Lemmings, we are all racing faster and
  faster into the sea, each of us trying to outrun
  and outspend the other in a mad sprint towards
  the mirage of the next blockbuster.

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• Like Lemmings, we are all racing faster and
  faster into the sea, each of us trying to outrun
  and outspend the other in a mad sprint towards
  the mirage of the next blockbuster.
• Jerry Katzenberg
• Past Chairman, Walt Disney