Delivering Value Through Acquisition_moorhouse

A focus on the Pharmaceutical & Biotech industries

Moorhouse in partnership with

Deliveringvalue throughacquisition

Mergers, acquisitions and divestments activity is booming in the pharmaceutical and biotech industries; an estimated $221 billion worth of deals were closed in the first half of 2015 in comparison to $162 billion of deals in the entirety of 20141.

Although acquisitions can be complex, they are seen as one of the most effective ways of increasing market share, accessing new markets and acquiring new products and services while delivering tangible value to shareholders and investors. Despite this, our Barometer on Change research identified that only 29% of organisations undergoing M&A activity have seen the anticipated benefits realised.

With this in mind, Moorhouse,in partnership with leading lawfirm Morgan Lewis, broughttogether leaders from across thepharmaceutical industry to identifykey lessons that they believe wouldincrease the likelihood of deliveringvalue through acquisitions acrossthe industry.

1. http://www.mergermarket.com/info/2014/07/11/global-h1-2014-pharma-mecial-

biotech-ma-trend-report/

PURPOSE OF THIS PAPER

This paper summarises that discussion and focuses on the following three areas:

— Deal making: getting to a successful day one

— Integration execution: delivering the value the deal promised

— People & culture journey: accountability must lie with leaders.

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1 Purpose of this paper

2 Context

6 Deal making Getting to a successful day one

8 Integration execution Delivering the value the deal promised

10 People & culture journey Accountability must lie with leaders

12 Morgan Lewis perspective

13 Moorhouse summary

15 Further information

DEAL MAKING: GETTING TO A SUCCESSFUL DAY ONE

INTEGRATION EXECUTION: DELIVERING THE VALUE THE DEAL PROMISED

PEOPLE & CULTURE JOURNEY: ACCOUNTABILITY MUST LIE WITH LEADERS

Industry is facing unprecedented challenge and opportunity as global markets struggle to respond to four fundamental forces: emerging markets; ageing populations; accelerating flows of trade (including capital, people and data); and the rise of new technology2.

For the pharmaceutical and biotech industries this is manifesting itself in a number of specific pressures that are not only impacting the household names of ‘big pharma’, but also the biotech companies who, by their nature, find it easier to be more innovative and nimble.

Transaction activity has ranged from Pfizer’s acquisition of Allergan; in strategy-realigning ‘asset swaps’ (and joint ventures) as demonstrated by the $20bn three-part transaction between Novartis and GSK; through to increased venture capital investment in early stage drug development.

M&A activity will fluctuate, but is unlikely to go away. In fact, with reductions in R&D budgets in ‘big pharma’, deal making is seen as a means of harnessing innovation and buying into the successes that will help build and sustain the product pipeline. In short, it is increasingly seen as more of a ‘business as usual’ activity. Against this backdrop, the ability to effectively execute M&A and divestments, in a way that delivers value, is likely to become a key differentiator that will define the market leaders.

2. Dobbs, Manyika and Woetzel; No Ordinary Disruption; McKinsey and Company 2015

CONTEXT

INDUSTRY CONSOLIDATION

— Realigned business models— Boom in mergers and

acquisitions— Divestment in non-core

activities

BEYOND THE PILL

— Personalised medicine— Multi-channel

customer-centricity— Big data and data

transparency

R&D PRODUCTIVITY

— Patent expiries— Pipeline challenges — Innovations in biotech

MOVE AWAY FROM BLOCKBUSTER

— Blockbuster model not sustainable

— Building the pipeline through acquisition

— Evolution to more targeted therapies

PRESSURES FACING THE

PHARMACEUTICAL AND BIOTECH

INDUSTRIES

INCREASING PAYER DEMANDS

— Rising healthcare demand from ageing population

— Increased pricing constraints

— Increased regulation

FINANCIAL MARKETS

— Search for growth and shareholder value

— Increasing risk appetite— Low interest rates

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£/$

People & culture journey:Accountability must lie with leaders

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Integration execution:Delivering the value the deal promised

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Deal making:Getting to a successful day one

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Gain buy in from key stakeholders:It’s textbook, but imperative. Once the first two points are understood, agree the plan for integration with key stakeholders.

Acknowledge the huge amount of work required pre-deal to ensure success post-deal: Aligning the strategic purpose, anticipated benefits, ownership and a clear roadmap for delivery sounds simple - but they are often forgotten, or their importance downplayed, in the excitement of the deal itself.

Keep it clear, keep it simpleThe group agreed that keeping things clear and simple is fundamental. This includes the type of deal. As Elaine MacFarlane, VP at GSK, pointed out: “if it is an acquisition, say so - if it’s a merger, say so - and then plan accordingly” to avoid resentment further down the line. Keeping focused on the purpose of the deal and the expected benefits from the start was a recurring element of the discussion. There was a broad recognition of the need to plan to the end, and not simply to Day 1 or the first 90 Days.

Carefully select the deal teamThere was broad agreement from the group of the need to engage key individuals in the business who are closer to operations and the customer in pre-deal activity, rather than leave this solely to the deal team. Martin Chamberlin, VP at RBC Capital Markets, highlighted that “it is critical to bring someone from the business into the deal team early on so as not to lose sight of the customer”. The need (or sometimes perceived need) for confidentiality in advance of a deal often hinders this and can disconnect those focused with making the deal happen from those who will be responsible for delivering business after the deal.

The group highlighted the challenge around confidentiality, often resulting in a lack of communications in the pre-deal phase. Having an effective communications strategy is key in managing perception and in engaging staff early on. Even the most ‘change-embracing’ culture can be disempowered if left in the dark, and this combined with distracted, or a perceived weak, leadership can lead to paralysis. Hugo Gomes Da Silva, VP at GSK, noted that “people know when the winds are changing” and that it is at this point that leadership needs to be active and clear in order to ensure staff are motivated to take on the challenge ahead.

Strategic plans will be crucial to driving implementationReferencing the opening insights Roger Davies, Founder of RedPharma, stressed that “it is the clearly defined strategy that will be crucial to driving implementation”. Aligning leadership at all levels with the deal’s strategic drivers will create clarity and galvanise the business to continue to focus on delivery of BAU as well as to start to focus on the hard work post-deal. As Adrien Lemoine, ED at AZ, pointed out, “there is a sweet spot for the development of this implementation plan” that will collate input from advisors, senior managers and other key stakeholders.

Leaders at all levels in an organisation need to be better equipped to support their people in the lead up to, and in the immediate aftermath of, a deal. As Tom Cartwright summarised, “once the switch is flipped you will need to be able to move quickly”. Signing the deal with a strategy and plan linked to the benefits outlined in the original business case is of paramount importance; because (as Elaine MacFarlane noted) “closure is merely the end of the beginning”.

DEAL MAKING: GETTING TO A SUCCESSFUL DAY ONE

Tom Cartwright, Partner at Morgan Lewis, opened the discussion with his insights into specific pre-deal challenges gained from his firm’s involvement in countless deals.

Be clear why the deal is happening: Ask fundamental questions such as: “Why are we doing the deal?”, “What is being acquired?”, and “What is the expected benefit?”

Agree key roles: Understand who is formally making deal decisions and who is influencing the deal as it will be of paramount importance. If there is ambiguity around this, the deal can often be exploited or unpicked by multiple parties.

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“It is the clearly defined strategy that will be crucial to driving implementation.”Roger Davies Founder of RedPharma

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INTEGRATION EXECUTION:DELIVERING THE VALUE THE DEAL PROMISED

Richard Goold, Partner at Moorhouse, opened the discussion by sharing his perspectives of transaction integration activity across a variety of industries:

The business case is everythingThe robustness of the business case should be paramount. It was suggested by Stephen Walters, Partner at Morgan Lewis that “integrations can risk failure when organisations move outside of their comfort zone and do not fully understand the expected benefits”. Getting the right mix of people to assure the business case is also critical. Steve Lane, Director at Baxter Health, pointed out that ”organisational business models may look similar to deal teams but it is the operational teams who need to kick the tyres of the deal”.

Discipline is required to ensure the business case is aligned to the delivery plan throughout the integration. A dedicated integration team should manage this process and form part of the group that holds overall accountability for the integration’s success. The business case should be the golden thread to integration and organisations should be accountable throughout. Martin Walton, CEO of Excalibur Group, suggested that it is often easy for “board members to drift away from the original goals of a deal just to get the job done”.

Keep focused on your customers and key 3rd partiesNot losing sight of the customer both pre- and post-deal was discussed at length. Senior management, in particular, can become distracted and this must be mitigated either directly or through ensuring that customer-facing staff are brought in early.

Roger Davies, CEO of RedPharma, also flagged the importance of third parties, like key suppliers, that can impact on the ability to deliver the value promised. If relationships are neglected or not effectively managed it can result in transition time lines pushing out and/or a rapid erosion to the planned benefits.

Don’t lose the knowledge that the deal has generatedThe group also noted that advisors pick up a great deal of insights – both hard and soft information. As well as hard data, such as that captured through due diligence, there is also a wealth of softer information about the people, perceptions and drivers that could be very helpful in ensuring integration success. More often than not when the deal ends, the insights and perspectives gathered become ‘shelf-ware’ or are simply allowed to walk out the door.

In summary, it was recognised that too many organisations, particularly in mid-size or smaller transactions, put the majority of effort in pre-deal and then lose interest once the deal is done. There is often an unhealthy rush to BAU as the attention turns to the next big thing.

Steve LaneDirector at Baxter Health

Keeping focus on the customer is important: Organisations that have built trust, loyalty and goodwill with their customers will be able to move at speed, take customers with them, and, if it becomes necessary, rely on their forgiveness if they get things wrong.

Agility will be a differentiator: Organisations that are agile enough to focus on delivery and leverage the very best talent and capability will stand a stronger chance of success. The team’s ability to embrace technology and new ways of working will set solid foundations for delivery.

New skills and capabilities can be a differentiator: Large organisations are transforming their capability and capacity overnight through acquisitions. In a dynamic and fast-moving market, it is a real differentiator but only if it’s done well.

Delivering on the business case will realise the promise of the deal: Failing to establish this can lead to a lack of focus on the intended benefits and they are then unlikely to be achieved in full.

Creating clarity of purpose: Translating the business case into guiding principles can enable effective decision making. Having this baseline against which decisions are taken and delivery is measured is key.

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“Organisational business models may look similar to deal teams but it is the operational teams who need to kick the tyres of the deal.”

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Leaders need to be visible and accessibleTransparency was called out as a critical factor in ensuring a successful transition for people. The noise around integrations can prove a distraction from getting the essential day-to-day tasks completed. Leaders will need to set the agenda here. Indeed, the need to keep staff motivated throughout the integration journey should be a key focus of the leaders accountable for overseeing integration.

Leadership and line managers alike will need to establish themselves as role models when communicating messages to their teams. “The cascading of communications will only be as strong as the leadership delivering the message” and it is not acceptable for leaders to step back and default to a communications function to deliver this. Furthermore, if behaviours are visibly not aligned to the culture that is being promised it will undermine any integration however well planned and executed. The phrase “culture eats strategy for breakfast” was referenced.

Bobby Mulrooney, Founder of Ardiem Lifesciences, stressed the need for empathy when dealing with staff and the challenges that this presents. No matter how rich the content is, leaders are “rarely able to hit the emotional sweet-spot every time, in real-time”. This further reinforced the point that leaders need to be well supported and equipped in dealing with the change cycle, and that performance objectives for leaders should include staff engagement targets.

Ensure a regular drum beat of communicationsIt was noted that staff are more likely to believe external media. The negativity of this increases if there is a lack of structure and rhythm to internal communications. Stephen Vinall, Partner at Moorhouse, outlined that the confidentiality that often surrounds deal-making can lead to a dearth of communications – “if there is a void, people will fill it and it’s unlikely to be a positive spin”. When the structure for communications is consistent, timely, accessible and clear, it helps key messages land and gives time to let the required mind-set shift to take place. And, as Steve Lane, Director at Baxter Health, pointed out “once communications become boring, the message has normally landed”.

Supporting leaders is keyLeaders need to be better equipped than is often the case. Bringing staff in early and keeping them well-informed throughout will reduce the likelihood of value erosion. Furthermore, the appropriate support and capability needed post-deal must be planned for and factored in early.

There is no silver bullet to ensuring value is delivered from acquisitions, but there are numerous ways in which value can be eroded. Creating clarity of purpose and placing this at the centre of delivery and of regular communications will go some way to reducing the likelihood of value erosion.

PEOPLE & CULTURE JOURNEY: ACCOUNTABILITY MUST LIE WITH LEADERS

Elaine MacFarlane, VP at GSK, who led communications for the recent $20bn GSK and Novartis transaction, provided some insights on the people and culture aspects of integration:

“The cascading of communications will only be as strong as the leadership delivering the message.”

Account for human psychology on the journey: People want to feel they are delivering value-added work, and to maintain productivity it is key to engage them by shaping communications messages around this.

Be mindful of culture: Leaders will have a huge bearing on the ultimate culture that emerges within the new organisation – be mindful of this, equip them and help them shape this so they will be actively involved in embedding the change.

Don’t force it: The true end of the journey can be years down the line - it is important not to force a move to BAU too early.

Be clear and honest: It is important to provide clarity (and honesty) around the nature of the deal from the start - miscommunication may impact the motivations of the workforce.

Define clear communication principles: Publish these early so that people know what to expect – the absence of this can lead to paralysis, which will affect BAU activity.

Robust planning is essential: Sketch out what the communications journey will look like and deliver to the plan with military precision.

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Elaine MacfarlaneVice President at GSK

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MORGAN LEWISPERSPECTIVE

MOORHOUSESUMMARY

Tom Cartwright, Partner

Tom is an M&A and Private Equity partner in the London office of international law firm Morgan Lewis. Morgan Lewis, with one of the world’s largest life sciences practices, has been involved in a number of recent high profile M&A deals in the sector.

Stephen Vinall, Partner

Stephen is the lead partner for Moorhouse Pharmaceutical and Consumer Business sectors. He has delivered M&A and divestment programmes in the airline, pharmaceutical, telco and professional services industries.

A number of forces are driving global deal flow in the Pharmaceuticals and Biotech industries Principal amongst them is the pressure on publicly listed corporations to maximise shareholder value and secure dividend flow. In addition to global mega deals, diverging strategies between multinational pharmaceutical companies has led to a flood of mid-sized investments and bolt-on acquisitions.

Deals are increasingly complex and therefore the skilful execution and integration of acquisitions is critical to their success. These processes need not be exclusive. Participants agreed that if post-deal integration can be kept front of mind during the execution phase, the chances of achieving and maximising “value add” from acquisitions can be substantially increased.

Key elements of the M&A deal process that can be improved include:— Communicating to the deal team the perceived strengths and weaknesses

in the business at the outset ensuring resources are focused in the right areas during the due diligence process.

— Implementing a mechanism for feedback on areas of additional strength or value identified in the target business due diligence is often too focused on identifying weaknesses/risks.

— Harvesting information gleaned from due diligence and execution process ensuring it is communicated to the team that will operate the target business post close.

— Identify integration issues during the process allowing the acquirer to plan a seamless integration process.

— Engage advisors that understand the industry too often advisors do not understand the target’s business and this can lead to poor due diligence outputs, or loss of information, that may enhance integration.

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The volume of deals in the Pharmaceuticals and Biotech industries has dominated headlines. Although these volumes will rise and fall we have entered a new world where doing deals is an accepted way of sustaining strong product pipelines, for providing new services or for entering new markets. Organisations need to ensure that deals will deliver the anticipated value. This will only be achieved with a step change in value realisation that starts as the target is identified and only finishes when the benefits outlined in the business case have been delivered. Doing this well is, in itself, becoming a key market differentiator.

With this as our baseline the dinner discussion drew together a group of experienced individuals who between them have led, advised, and been involved in, multiple deals across the sector and beyond. Many of the participants have sat on different sides of deals at different times and many have been ‘done to’ as well as being in positions of driving or advising on transactions. Drawing on this experience, the following summary points from the evening capture perspectives that can act as a simple guide that we hope will enhance the chances of realising greater value from transactions in the future:

— Ensure clarity of purpose be clear why you are doing the deal and the type of deal it is. Outline the expected benefits and how they will be delivered.

— Have a clear business case that articulates the expected benefits and how they will be delivered.

— Develop an end-to-end plan use the baseline of the business case and plan to deliver it – this is not simply for the first 90 days, but through to the delivery of the benefits.

— Run the deal as a programme from end to end Day 1 is simply an early milestone on the way to benefits realisation – have appropriate senior executive sponsorship and a project team overseeing delivery from pre-deal through to benefits realisation – ensure they have appropriate programme skills and capabilities.

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— Keep focused on the business don’t lose sight of the customers and key third parties through the distraction of the deal - bring customer focused representatives into the team early.

— Make use of the knowledge and expertise that has been built up pre-deal ensure that the experience and knowledge built up through advisors (both hard and soft) is not lost the moment the deal is signed.

— Strong and visible leadership is critical this is not just from the top, but at all levels – ensure that leaders are brought in as early as possible as they will be key in reinforcing the regular communications as well as ensuring a continued focus on the day to day business.

— Equip leaders and managers to communicate effectively and to support people through the change journey this will itself help them deal with their own change journey.

— Communicate continuously and effectively remind staff of the purpose of the deal as well as updating them on progress. If there is nothing to communicate, tell people – if there is a void people will fill it, so ensure a regular engagement drum beat.

It is those organisations that focus on clarity of purpose and on developing robust approaches to delivery and communication that will effectively leverage M&A to deliver competitive edge.

“Unless integration is planned and executed with precision, the upfront investment involved in achieving the deal closure will have been wasted.”

Stephen VinallPartner at Moorhouse

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Moorhouse is a management consultancy that works with major corporate and government entities. We support our clients in turning their strategy into action, by providing ‘out of the ordinary’ delivery capability, and by establishing a culture of change.

Moorhouse regularly runs discussion dinners and breakfast seminars that seek to draw out perspectives and to identify lessons for broader benefit. Further events include a focus on New Product Launch and Operating Models of the Future.

Visit our website at www.moorhouseconsulting.com for more details and to download the 2015/16 Barometer on Change.

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Delivering value through acquisition