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Author's profile photo Susan Rafizadeh

Life Sciences: When innovation is not enough to grow quickly

This blog was written jointly by Chuck Pharris and me. I would like to express to Chuck my appreciation for his inputs, research, and contribution and thank him for his fantastic engagement!

The life sciences industry has long been associated with innovation. This innovation is not only the perceived heart of success in this industry, it is the life-blood of a vibrant economy creating jobs, increasing productivity and resulting standards of living.

Organic growth through innovation has not been the only key for success of life sciences companies. The industry also went through a period of high profile M&A activity in the 90s already with a resurgence in the last year and an especially high degree of activity in Q1 this year with 49 deals vs 35 in the same period of 2013. News catching headlines have included Pfizers record setting $119B bid for AstraZeneca, Valeants attempted hostile takeover of Botox maker Allergen, Novartis and GlaxoSmithKline asset swap, Mercks divestiture of its consumer care business to Bayer.

In spite of the skepticism of achieving success in these large megamergers given the challenges of large scale integration, McKinsey and Company report analyzed the success of the top 20 pharmaceutical companies by revenue in 1995 andtheir subsequently M&A history showing they created shareholder value, generated greater economic profit, and even changed long term performance expectations.

The challenges these former mega-mergers faced and the recent M&A activity all face success challenges more core to traditional business operations than new single drugs or technologies. In particular, some drivers of mergers this year have centered around:

  • Margin Improvement: Novartis established an internal business services unit targeting $6 billion worth of expenses it oversees. Teva is seeking to reduce half of its 75 manufacturing facilities it acquired through acquisitions.
  • Business Focus: Novartis is swapping assets with Glaxo Smith Kline in a series of transactions worth $25 billion to better focus their mutual core competencies. Novartis expects this to improve its core operating profit by 2.5%. The Harvard Business Review highlights a variant of this M&A frenzy in life sciences “David-Goliath partnerships” described as an alternative to the all or nothing disrupt or acquire view of startup competitors. Abbott spun off Abbvie and with it all of its big name drugs, including Tricor, Niaspan, and Humira, the blockbuster anti-inflammatory with greater than $10 billion in sales. Baxter plans to spin-off its biotech business in 2015 enabling it to focus on its core medical technology business.
  • Tax and Cash Incentives: Another growing trend is the pursuit of US companies of reverse acquisitions where a larger company buys a smaller foreign player and relinquishes the headquarters to this smaller company location seeking more favorable tax treatment or enabling them to utilize foreign cash reserves without repatriating the cash into the US tax structure.  Medtronics recent $42 billion takeover of Covidien, which is operated from Massachusetts but is incorporated in Ireland, is reported by Bloomberg as the “biggest yet to renounce its US tax citizenship”. Covidien gets the majority of its sales from the US where 19 of its 41 factories are located.  Its headquarters location originally shifted with its parent Tyco to Bermuda in 1997 and then spun off as a Bermuda company before switching to Ireland. This will also give Medtronic access to its $20.5 billion in cash held overseas without the 35% US corporate income tax it would have to pay if brought into the US.

The performance bar is growing given the maturity and market consolidation. The financial and operational challenges of these increasingly complex global enterprises grows on all aspects of finance, accounting, trade, R&D coordination, manufacturing and supply chain management, and overall ovation oriented collaboration. 

How can SAP help bring margin improvement, better research and collaboration to achieve greater business focus, and manage the complex financial and operational requirements of these global enterprises? Just a few illustrative examples:

  • Faster analytics for better strategic decision-making: Our solutions help getting the insights companies need to understand their performance as well as the root causes for it. The ability to run future scenarios quickly enables companies to make fact-based decisions ranging from decisions on M&A, product portfolios, global manufacturing plants, HR, customer-related questions, finance and tax – there are no limits.
  • Improved R&D processes: SAP HANA helps analyze genomic and proteomic data, and with solutions for R&D from SAP and our partners, companies can increase efficiency of Clinical Trial Supply Management and streamline project management.
  • Margin improvement through increased operational efficiencies: With an integrated solution that SAP offers, companies can standardize and consolidate operational processes globally across plants, such as Manufacturing, Supply Chain Management and Serialization, as well as Procurement and Management of CxOs. All this can be especially beneficial for achieving quick RoI after M&A.
  • Flawless post merger integration processes: Flexible and robust HR solutions by SAP allow companies to manage change, maximize employee loyalty, to identify and retain best talents, and to boost productivity.

To learn more about we can help you with your business challenges please have a look at the Life Sciences web pages on!

What do you think about the issues discussed here? Continue the conversation in the comments below and on Twitter at SAP Health Sciences!

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      Author's profile photo Susan Rafizadeh
      Susan Rafizadeh
      Blog Post Author

      Please also check out the related blog post from Chuck Pharris The Changing Structure of Life Sciences companies and the Role of Innovation!

      Author's profile photo Patrick Maroney
      Patrick Maroney

      Very thought provoking.  Your readers might also be interested in this panel discussion (video replay) with leaders from Cisco Systems, Pitney Bowes, LNS Research and SAP.  It discusses many of the topics you mention above and provides some interesting cross-industry examples that the Life Science Industry may find useful as well.

      Author's profile photo Susan Rafizadeh
      Susan Rafizadeh
      Blog Post Author

      Thank you very much for taking the time to comment on this, and for adding the link, which adds valuable insights. I can only recommend watching the video!