How can procurement create value in Pharma M&A?

Procurement is an often-underestimated area of opportunity in pharma mergers, acquisitions, and carve-outs – yet it has the potential to make or break success following a deal.

Behind the scenes: mergers, acquisitions, and carve-outs in the Pharma Industry

There are three key drivers that are fuelling the growth of M&A activity in the pharma industry:

• The upcoming patent cliff – 190 drugs with combined global sales of $236 billion will face expiring patents by 2030, squeezing revenues across the pharma industry.¹ Acquiring biotech and smaller pharmaceutical companies with promising products at late stages of the clinical trials process is a critical route to feeding future drug pipelines.
• Declining public valuations – there is increased incentive for biotech firms to seek M&A exits due to sinking public valuations. The biotech sector is yet to recover from a decline in stock prices in 2021, resulting in only 22 IPOs in 2022, in contrast to more than 100 the previous year.²
• Divest to invest – challenging market conditions have encouraged carve-outs of non-core assets, freeing up capital for M&A activity.

M&A is becoming increasingly integral to support strategic growth within the pharma industry. For companies to remain ahead of the competition, initiating and managing transactions rapidly and effectively are essential, and procurement plays a key role in facilitating this.

How can procurement smooth out mergers and acquisitions?

Both the upcoming patent cliff and declining public valuations are encouraging an increase in mergers and acquisitions, in which large pharmaceutical corporations are expected to acquire and integrate smaller biotech targets. While this development poses immense opportunities for both sides, it puts additional challenges on procurement functions already constrained by the current crisis landscape of postpandemic supply chain restructuring, conflict, and declining international trade relationships.

Integrating a new entity presents a significant opportunity for value generation, provided synergy capture is effectively exploited. Key to this is maintaining a focus on how the procurement function can streamline operations to create efficiencies early on.

For an organisation considering a merger or acquisition, a key first step is a procurement due diligence exercise for the target business. At this early stage, the savings potential can be identified by analysing spend categories and the supplier base and then comparing it against relevant benchmark data. This step – involving quantifying the potential for profit/EBITDA uplift via procurement and uncovering and de-risking challenges ahead of a transaction – requires a specialist skillset.

Identifying savings opportunities does not mean they are automatically realised after a deal, however; often, poor procurement execution blocks synergies. A common challenge is the integration of the procurement functions of multiple businesses. The coming together of differing ways of working can seem to provide an opportunity to share and combine best practice – however, it often results in friction instead. Blending the two legacy teams requires a delicate approach that effectively navigates varying leadership styles and cultures, particularly if teams are in different parts of the world. The systems and processes of both businesses require careful analysis and harmonisation to achieve the best results.

Procurement’s role in delivering successful carve-outs

With interest rates rising globally and aggravated access to capital, pharmaceutical companies have started to carve-out and spin-off non-core elements of their business. While this is indeed an easy way for the “RemainCo” to gain flexibility for future acquisitions, it poses significant challenges for the “NewCo”. Often, these will vary depending on the level of integration with the current parent and whether it will operate as a standalone company or if it will be integrated into a new organisation moving forward.

As a first step, it is therefore paramount to understand the entire transition path from current to future operating model. A business unit without a dedicated procurement function, looking to be integrated into another large corporate without the need to build up inhouse capabilities, will have significantly different (and fewer) challenges, than a business unit with heavily intertwined procurement resources that will operate as a standalone organisation in the future.

As such, effective preparation is key to overcoming common challenges to a successful carve-out. Often a change in ownership can risk interruptions in supply, at a time when it’s critical that the supply chain continues supporting the business. A starting point should be a review of a central repository of procurement and contract data, although this is commonly fragmented or simply does not exist. Additionally, in some cases, teams, processes, systems, or the supply base cannot be carried over to the carved-out entity – these issues must be resolved upfront to prevent severe operational risk to the business.

How we can help

Due to the complex, multifaceted challenges that mergers, acquisitions, and carve-outs pose, involving an external partner can provide you with the expertise needed to drive success in procurement. At Efficio, our Pharma SMEs have the deep knowledge and expertise needed to accurately predict and execute transformative savings and synergies across the deal lifecycle. Our teams have access to proprietary benchmarks that can support with M&A value creation and provide independent facilitation to drive forward real change.

If you would like to find out more on how we can support your M&A strategy, please contact us by filling out the form on our Pharma & Healthcare service page and visit our M&A webpage.

Footnotes

¹ PharmaVoice

² BioPharma Dive