Managing partner at Numerof & Associates.

Michael Abrams, Numerof & Associates

In some industries, mergers and acquisitions (M&A) are relatively infrequent, single events. Not so in the pharmaceutical world, however. The relationship between Big Pharma and the smaller companies that populate the pharma ecosystem is synergistic. With the pace of technological development increasing and the need for new products a constant driver of investment, M&A in the sector is a routine and essential part of the business.

Smaller pharma companies have an outsized impact on drug development, reportedly accounting for 63% of all new prescription drug approvals over the past five years. These nimbler companies bring and shape the seminal concept and conduct early-stage R&D, but lack the resources to take their products further in the drug development/regulatory process. Typically, these organizations partner with Big Pharma companies that benefit from de-risked technologies, and which have the deep pockets and global presence to effectively market the end product.

Still, many ventures are unsuccessful, and a lot of money, resources, and potential health benefits are on the line. It’s critical that buyers take a disciplined approach to M&A integration that sets the stage for maximizing the value of every acquisition.

Ahead, we will discuss the key elements of successful M&As.

For a deal to be done well, buyers need to understand the value of the asset in question and have a broad vision of how the asset integrates into their operation. Once the transaction is completed, buyers must build out the larger, market-based vision of why they are making the purchase, how the new operation will fit into the current organization, and what that will mean for other parts of the business. This vision should include not only the financial or operational benefits, but also how the acquisition will strategically position the company in the market, enhance its product portfolio, and address unmet customer needs.

Once senior management has aligned on what the vision is, they need to put to paper the elements of their plan for integration by communicating both the vision and the plan to the organization in a way that creates excitement and enthusiasm. What’s critical here is building a value narrative and having key leaders talk about the acquisition transparently—a subject that, up to the signing of the deal, was off-limits. Targeted communications to different levels of the organization can help ensure everyone is on the same page. Clear communication should also extend to external stakeholders, including customers, partners, investors, and regulators, who may need reassurance about the cost and value of the acquisition.

Identifying best-in-class leadership and process

Along with articulating and disseminating the narrative behind the acquisition and the plan for bringing that vision to life, a key element for success involves identifying best-in-class individuals and processes that were part of the acquired organization. While most acquiring companies make an effort to identify people in the acquired organization that are key to realizing the new asset’s potential, it’s rare that a determined effort to identify individuals who really are standouts in their area of responsibility takes place—and it’s even more unusual for acquirers to evaluate key processes evolved by the acquired organization. Too often, the assumption is made that “big is better,” which short circuits any idea of finding individuals and practices that could offer competitive advantage. But if maximum value is to be realized from an acquisition, this step should be part of your plan.

Making changes in structure and reporting relationships

In bringing together two separate companies, M&A usually results in a changed organizational structure. This can involve merging departments, eliminating redundancies, moving teams and restructuring manager/employee relationships. Leadership must decide how value and efficiency can be maximized. Here, too, forthright communication is key. This helps avoid confusion, maintains productivity, and ensures everyone knows who they report to, who their new team consists of, and how decisions will be made moving forward.

Aligning the processes and ways of working between the two companies is essential to minimize friction in operations. This involves assessing existing workflows, identifying overlaps or inefficiencies, and establishing new processes that incorporate the strengths of both organizations. Teams may need to adopt new methods of decision-making, internal processing, collaboration methods, or project management approaches. This often includes integrating technical systems, such as internal communication tools, tracking software, data platforms, etc. Ongoing communication and support strategies that reinforce new procedures help make these changes stick.

Cultural alignment is an essential and challenging part of M&A. Merging companies often have different approaches to communication, decision-making, process, and a myriad of other things. Leaders must articulate the desired culture, model it themselves, and put in place mechanisms that integrate the new culture at all levels. This might involve taking the best of what worked at both companies to create something new or transitioning the new acquisition into the culture of the purchasing company.

The size of an acquisition often determines how challenging its integration will be and what strategies a company should employ. A smaller acquisition might be absorbed easily, without significant restructuring. A larger deal, on the other hand, may require months of careful planning and significant changes to processes, protocols, and organizational structures. Larger acquisitions tend to involve more people, making alignment across teams more of a challenge and maintaining consistent communication even more critical to success. Whatever the size of an M&A deal, having a clear strategy and staying flexible in execution are key to ensuring long-term value and a smooth transition.

M&As are essential components of the pharmaceutical market. Long-term success as a business in this sector often means effectively navigating these changes. Successful M&A operations depend on strong leadership, disciplined planning, and clear communication. By aligning vision, culture, and processes across both organizations, companies can maximize their acquisitions, bringing value to company personnel, shareholders, and ultimately, customers. 

Michael Abrams is a managing partner at Numerof & Associates.

Articles

How can buyers maximize the value of their acquisitions?

Key Elements for Success in Pharma M&A Integration

Do you live in a pharmacy desert? It’s got nothing to do with climate change, unless you mean the economic climate. A pharmacy desert is a geographic area—a neighborhood, town, or county where some or even all of the pharmacies have closed, leaving residents to travel long distances to fill a prescription or get advice on use of medicines and other health-related issues.

There was a time when chain pharmacies bragged about the number of stores they were opening, and pharmacy deserts were a problem in a few rural areas. That has changed. More than 7,000 US pharmacies have closed since 2019;

 on average, one pharmacy closes every day across the country.

Urban areas, rural areas—even whole counties—are seeing pharmacies disappear. And with them goes access to drugs, vaccines, health advice, and more. More than 40% of all US counties are considered pharmacy deserts, per research from drug marketplace GoodRx.

Lack of access to a pharmacy means that people who take maintenance medications for complex conditions are more likely to stop taking them. That costs the US healthcare system a lot of money—an estimated 16% of total US healthcare spend.

 Lower adherence to medication regimens leads to a higher incidence of acute care episodes (i.e., diabetic ketoacidosis) and ultimately a higher incidence of complications from chronic conditions, resulting in higher healthcare costs. Since the contributing economic factors are typically worse in poor urban and rural areas, these closures impact poor communities disproportionately.

The list of factors driving the wave of pharmacy closures is a long one. Many are related to the economy. These include:

Labor cost inflation for pharmacists and physician assistants.

Economic pressure on consumers and their subsequent pullback.

Competition for non-pharmacy items from big box/online stores.

Theft, partly in response to economic conditions.

But by far, the biggest factor has been relentless pressure by pharmacy benefit managers (PBMs) to lower reimbursement for prescription drugs. PBMs select which pharmacies will be in-network for insurers. The three largest PBMs—ExpressScripts, owned by Cigna; CVS Caremark, owned by CVS Health; and OptumRx, owned by the same company as UnitedHealthcare—control a majority of the market. Patients pay less when they buy their medicines at in-network pharmacies. PBMs also set the reimbursement pharmacies get for dispensing a prescription. As PBMs have consolidated, they’ve used their market power to lower reimbursements to the point that 80% of the time reimbursement to the pharmacy is less than it paid to stock the medicine.

Adding the financial stress of the above economic factors to PBM-imposed hardships is what has driven a wave of pharmacy closures across the country, creating pharmacy deserts in the process.

One of the most obvious fixes for this problem would be for the FTC and DOJ to take action against PBMs for using their market power to deny pharmacies, particularly out-of-network pharmacies, reasonable reimbursement for the medicines they sell.

In addition, PBMs should be required to be transparent in reporting the rebates and other payments they receive from drug manufacturers in exchange for placing their products on formularies, and to explain where those rebates go.

The bottom line is that if nothing is done to stop PBM policies from driving pharmacies out of business, even you could find yourself living in a pharmacy desert. 

1. Murphy, T.; Pananjady, K. As Pharmacies Shutter, Some Western States, Black and Latino communities are Left Behind. 

https://apnews.com/article/pharmacy-closure-drugstore-cvs-walgreens-rite-aid-91967f18c0c059415b98fcf67ad0f84e

2. Le Coz, E. High Drug Prices and Pharmacy Deserts: Protesters Blame Drug Middlemen, Demand Regulation. 

https://www.usatoday.com/story/news/investigations/2024/05/17/pbm-practices-spark-outrage-and-protests-outside-express-scripts/73732395007/

3. Pisikian, K. How Pharmacy Deserts Impact Communities. March 30, 2022. GoodRx Health. 

https://www.goodrx.com/hcp-articles/providers/pharmacy-deserts

4. Watanabe, J.H.; McInnis, T.; Hirsch, J.D. Cost of Prescription Drug-Related Morbidity and Mortality. 

https://pubmed.ncbi.nlm.nih.gov/29577766/

5. Knox, R.P.; Gagneja, D.; Kraschel, K.L. Independent Pharmacies Gain Unanimous Victory in Recent US Supreme Court Case. 

https://jamanetwork.com/journals/jama-health-forum/fullarticle/2777061

A lack of access could shut out patients in need of maintenance drugs for complex conditions.

Pharmacy Deserts are Becoming a National Problem

		Successful companies, even entire industries, have a life cycle. All of them eventually reach the point where their current business model is no longer viable. Companies that recognize the shift early on and take action to reinvent and execute a successor model effectively become leaders as the next stage emerges.

		Inherent limitations of the current pharma business model are driving the emergence of a fundamentally new approach for the industry. A market-driven model rests on the assumption that successful companies of the future will determine what therapeutic areas they will “own,” which in turn will drive investments. Unlike the current approach, which is really product-centric, the new model will be patient-centric and take a continuum of care approach versus an episodic care approach. What this will mean is a core focus on prevention, diagnosis and treatment of the range of conditions within a therapeutic area, taking into account the needs of specific markets around the globe.

		The central imperative of the new model is delivering real value to all stakeholders—payers, regulators, physicians, providers and patients&mdash;and understanding whose voice matters in terms of relative weight is of critical importance.

		The power of payers is growing globally as product acceptance and purchase decision-making moves further and further from the physician. Payers and hospitals are clamping down on healthcare costs by saying “No” to new products, line extensions and, of course, price increases. Reacting to the prospect of exponentially increasing liabilities, payers of all types are demanding hard comparative clinical and economic data to justify any change with bottom-line impact.

		This represents a significant change for many companies. Those tasked with product marketing face internal resistance in trying to address market access considerations—specifically, the need for comparative effectiveness research and the identification of new ways of obtaining appropriate evidence. They are increasingly seeking help translating these messages internally and implementing sustainable changes within their companies.

		Regulators also remain a critical constituency. FDA has created new regulatory programs in an attempt to expedite the approval process in order to get much-needed drugs more quickly to patients requiring them. One of these, the Breakthrough Therapy designation, has had a successful start since its creation in 2012. In its first year, the regulatory agency granted the designation a total of 31 times, compared to initial estimates that only three or four drugs per year would earn the designation. Even with these expedited programs, manufacturers will still need to ensure that the right evidence is being collected to gain approval in the accelerated time frame.

		Companies need to change their go-to-market models, redefining the value delivered to physicians, payers and patients, while lowering costs. While the numbers have declined since their peak, there is still heavy reliance on physician detailing. This practice is inconsistent with cost constraints and the need for more tailored and responsive dialogue. The role of personal promotion to physicians hasn’t disappeared, but it requires greater sophistication, clinical knowledge and business acumen than typical sales reps possess today. Companies will need to define new approaches and develop new competencies to deliver value in ways that are cost-effective and tailored to meet individual needs. In addition, opportunities to develop relationships with patients/consumers need to be part of the equation.

		The new world of patient-centricity means changing the way in which manufacturers engage with patients, acknowledging them as legitimate healthcare decision-makers, essentially “patients as partners.” This means identifying the types of evidence (e.g., patient-reported outcomes) that will best resonate with patients, and incorporating patient perspectives into trial design. Just as manufacturers must leverage comparative effectiveness research (CER) and real-world evidence (RWE) to gain favorable positioning with payers, they need to collect data and demonstrate outcomes that matter in a way that makes patients listen.

*excerpted from Bringing Value to Healthcare: Practical Steps for Getting to a Market-Based Model, R. Numerof and M. Abrams, CRC Press, available at 

Rita Numerof, PhD, is president of Numerof & Associates (St. Louis, MO), a firm that helps businesses across the healthcare sector define and implement strategies for winning in dynamic markets. Her bachelor’s degree is from Syracuse University, and her PhD is from Bryn Mawr College.

Michael Abrams, MA, is co-founder and managing partner of Numerof & Associates. In addition to his consulting work, he has been an adjunct professor at Washington University in St. Louis and other schools. His MA is from George Washington University, Washington, DC.

A new, market-driven model of drug development and commercialization is appearing*