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Big Drug Mergers: So They’re OK, Right?

Several people sent along this article from McKinsey Consulting, on “Why pharma megamergers work”. They’re looking (as you would expect) at shareholder value, shareholder value, and shareholder value as the main measurements of whether a deal “worked” or not. But John LaMattina, who lived through the Pfizer megamerger era and had a ringside seat, would like to differ with their analysis:

The disruption that the integration process causes is immeasurable. Winners and losers are created as a result of the leader selection process. Scars form as different research teams battle over which projects are superior to others. The angst even extends to one’s home life as people worry if their site will be closed and that they’ll be unemployed or, at best, be asked to uproot their families halfway across the country to a new research location. In such a situation, rumors are rife and speculation rampant. Focus that should be on science inevitably get diverted to one’s personal situation. This isn’t something that lasts just a few weeks. Often the integration process can take as much as a year.
The impact of these changes are not immediate. Rather, they take some years to become apparent. The Pfizer pipeline of experimental medicines, as published on its website, is about 60% of its peak about a decade ago, despite these acquisitions. Clearly, a company’s success isn’t assured by numbers, but one’s chances are enhanced by more R&D opportunities. I would argue these mergers have taken a toll on the R&D organization that wasn’t anticipated a decade ago.

Well, there have been naysayers along the way. “I think the Pfizer-Wyeth merger is a bad idea which will do bad things”. “I’m deeply skeptical” is a comment from 2002. And here’s 2008: “Pfizer is going to be having a rough time of it for years to come”.
But here’s where McKinsey’s worldview comes in. Look at that last statement of mine, from 2008. If you just look at the stock since that date, well, I’ve been full of crap, haven’t I? PFE has definitely outperformed the S&P 500 since the summer of 2008, and especially since mid-2011. There’s your shareholder value right there, and what else is there in this life? But what might they have done, and what might the companies that they bought and pillaged have done, over the years? We’ll never know. Things that don’t happen, drugs that don’t get discovered – they make no sound at all.

37 comments on “Big Drug Mergers: So They’re OK, Right?”

  1. Fat Old Man says:

    I thought the same thing when I saw the McKinsey repot, they didn’t think Pfizer/Wyeth was worth it but the stock has gone up so what are they complaining about? I was on the inside having survived the acquisition but being a victim of the Lipitor layoff. Of course they called it something else (engine for sustainable innovation, how’s that?). I think LaMattina is 100%right but I’m still happy my options are higher. My question is: if shareholders win when companies merge; and they win win companies split up (like Pfizer might do) then when do shareholders lose?

  2. David Formerly Known as a Chemist says:

    A big part of PFE’s stock rise since late 2011 is explained by their enormous share repurchase program. Going into 2011 they had about 8 billion shares outstanding, but now have only about 6.48 billion shares outstanding, a decrease of almost 20%. If they hadn’t taken shares out of the market would they still be beating the S&P? Doubt it. During that same period they also cut their dividend: in 2008 it was $1.28/share, it was cut to $0.64/share in 2009, and only creeped back up to $0.96/share by 2013.

  3. Ksbosley says:

    As a practical matter, the time period in question (2008-today) included a massive recession through which drug stocks generally held up better than other industries. Which doesn’t say you’re wrong (ie, would Pfizer have done worse in that period had they not merged?) but comparing to S&P in that time period may be a little like playing a game where the opposing team didn’t show up. However, data are data – can’t deny them. Perhaps the overarching point is that pharma stock prices typical include little to no value for pipeline; therefore a megamerger can both be rewarded in share price and still create all the stresses and negative consequences described by John LaMattina…

  4. tg says:

    The Aventis-Sanofi takeover certainly didn’t help my stock options. I’ve options at $80 from 2005, and the stock is trading at $51.51 today. And may I point out that the McKinsey authors did not mention this merger in their report.

  5. noddy says:

    Is the Pfizer market cap today greater or less than the combined Pfizer+Wyeth market caps before the merger (adjusted for inflation)? Was value created overall, or partially destroyed and partially renamed?

  6. Chemjobber says:

    Just to clarify, in what sense is LaMattina commenting on his own decisions? (or the decisions of his immediate bosses?) I assume that the head of R&D has a relatively small voice in these sorts of mergers?

  7. milkshake says:

    as someone who witnessed a Pfizer merger from the Pharmacia side (and lost job as a result) my impression was: these dudes were not even evil – just totally oblivious! If you are going to close sites, lay off lots of people people and transfer projects, prepare a plan and do it in one swoop, do not drag it out in over a 10 month period. Their idea perhaps was that the projects could be transferred from closed sites to the surviving ones in gradual fashion, and that some key people might want to transfer also, but it did not work well – it was like a zombie apocalypse watched in slow motion. It really wore everyone down, and burnished very unflattering picture of Pfizer

  8. Anonymous says:

    From 2008 Pfizer tracks with Merck and Roche. Except Merck has increased their dividend by 13% while Pfizer has lowered theirs 19% which gets factored into the share price.
    McKinsey is in in the business of making $ off of these mergers, so they will always tell you it’s a good idea. Didn’t they also put out an article about STEM shortage?
    If I was an investor my ears would stand up as soon as I heard the company needs to manipulate its finances like this to keep up with the Jones.

  9. Anonymous says:

    I am a very long term investor. I bought some of my PFE stock around the time they split 3 for 1 in 2000. After the split, a share was $46+. It has not seen that share price since despite all the value creating mergers in the past 15 years.
    McKinsey can make any management strategy look great if they start their analysis at a general market low and write their glowing reports in a general market high. For me I am still waiting for all that M&A value creation BS to kick in on the stock I bought in 2000. As of now I am sitting on a capital loss on that PFE I purchased in 2000 plus a lot of medchem friends of mine are unemployed as a result of all those mergers.

  10. CMCguy says:

    LaMattina’s post also makes a good comment about the long-term vision typically needed in pharma which is another reason the McKinsey view has limited value. While the MBA math may be apparent, combining organization allows short-term savings through “elimination of redundancies” and often driven by marketable product to increase sales, the consequences to any future joint product pipeline is probably immeasurable as LaMattina suggests, partly because basic R&D productivity is difficult to quantify even in non-merged entity (and probably low enough any success gets obscured by marketing factors). Stock value is such a fickle thing anyway attempting to correlate something meaningful to it is like forecasting weather over the next 12 months based on what happened over the last week.

  11. Ted says:

    All this happened, more or less.
    It took them almost a year to update the main signs in Portage to read “Pharmacia and Upjohn.” We had a pool going over how long it was going to take.
    I met a visiting Econ. Prof. out at Madison back in ’97. He was writing about the inefficiencies created by large multinational mergers. He was quite interested in hearing my take on the Pharmacia/Upjohn merger. He felt it was an emblematic case study. Talk about skating to where the puck is… that guy had no idea how many ‘case studies’ were coming his way!
    Being in the comm. process group at the time, we were dismayed to find that the Swedish candidates coming to us were even more hopeless than the stuff coming out of Kalamazoo. We suspected that the merger (technically a ‘pooling of assets’) was driven by the hope that the partner had a real pipeline. I was given a process for “optimization.” It featured an 80°C toluene/silica chromatography to remove residual Pd from the API. The pdt solidified as an amorpheous solid on cooling. It was already in phase I as an anti-inflammatory. We thought that the best bet would be to formulate it directly as a breakfast cereal, given the pk profile. We knew it was just the dog projects that got shipped to the other sites, but still…
    Years later, they got things on track and Pharmacia finally started to make progress. Then they got Pfizered.
    I was told they laid off most of the pilot plant staff, then turned around and asked the commercial support staff to start making kilo scale batches. The hypothesis was that Pfizer accidentally fired unit 1510 when they wanted to fire unit 1500…
    So it goes.

  12. annon too says:

    If mergers are so good for investors, they should look at the stock of GSK after the merger between GW & SB. After a high of about 60, the stock went down, and down, and down, never yet to see that level again.

  13. Bernard Munos says:

    The McKinsey study is flawed in at least 2 ways.
    First, the authors compare each company’s post-merger stock market performance with the industry index. This is an inappropriate metric. Most companies in their sample engaged in big M&A. If M&A destroys value, the value destruction is “embedded” in the performance of the index. Comparing a company’s performance to the index simply means that it destroyed more of less value than the industry average. It does not mean that it created any.
    The other problem is the starting point. The authors choose 1995. Why 1995 when the big M&A movement really started in 1999 (with the Warner-Lambert acquisition)? It turns out that the results are quite different if one starts in 1999. Starting earlier hides most of the value destruction caused by M&A.
    Sadly, not a great piece of scholarship.

  14. Anonymous says:

    They started their analysis in 1995 because Syntex, BW, Amcy (Lederle), Rore, MMD, DuPont-Merck, Sterling, Sandoz and? evaporated around that time.

  15. Anonymous says:

    What a rubbish, second rate, self-serving analysis based on cherry-picked data by McKinsey! They could teach a few nasty politicians a thing or two about how to twist statistics to fit their own agenda.
    It makes me ashamed to have ever worked there (on pharma M&A projects, I might add). Glad I left McKinsey after only 2 years because they put themselves before their clients’ best interests, thus contributing to pharma’s current problems.

  16. Nick K says:

    #9,13,15: Agreed. The McKinsey analysis is mendacious in the extreme. The PFE stock is today where it was back in 1998. That’s sixteen years ago!

  17. Rock says:

    @16 Nick K
    Actually as some others have pointed out, the stock peaked almost exactly 16 years ago at about $49.8 right before Viagra was launched. So even after three mega mergers and many other smaller deals, the stock is still down 40%.

  18. Nick K says:

    #17 Rick: Apologies, I neglected to read the chart correctly. As you point out, PFE has performed even worse than I said. How dare McKinsey claim this as a “success”?!

  19. Calvin says:

    #13. Yup. As you say, a totally flawed analysis. I don’t want to be too disparaging on the authors, but take a peek at their backgrounds. High flying academic background and then straight into McK. Absolutely no experience/expertise of the business at all. Zip. Claim chowder all round.

  20. dichotomous says:

    @ #3/#10 – according to Wall Street (and some analysis I’ve done backs this), pipeline value is 10-20% of the market cap of most large-cap pharma stocks. That’s meaningful for a mega-merger because the ability to sustain and grow pipeline productivity will drive value in the long term after the P&L benefits of removing excess capacity are felt in the short term (and make up for the price premium). Where I question LaMattina and others is the assumption that, by default, R&D organizations cannot remain productive after large reorganizations / M&A. The industry has failed at this due to slow decision making and bad management, but that doesn’t mean it can’t work.

  21. petros says:

    Pipelines are often cited as one of the key benefits of a merger and on its formation GSK extolled its wonderful late stage pipeline. Hardly any of this reached the market and those that did were hardly raging successes.
    Does McKinsey even consider the impact of culture clashes between companies in such events? There must have been many instances of infighting over the years, over products or therapeutic areas, that have had a negative impact. I even heard a story of how one site head effectively draw up a drawbridge around his site

  22. petros says:

    This footnote is illuminating with respect to the authors’ knowledge
    Exhibit 1 was updated on February 21, 2014, to include Roche in the list of top 20 pharmaceutical companies by market capitalization in 1995. A previous version had omitted it and included Hoechst.”

  23. zDNA says:

    ” Things that don’t happen, drugs that don’t get discovered – they make no sound at all.”
    Wow, Derek, it sounds like you’re channeling Henry Hazlitt. Read his incomparable “Economics in One Lesson” if you haven’t already. You can get a .pdf copy for free at

  24. DCRogers says:

    @20: “drive value in the long term after the P&L benefits of removing excess capacity”
    I’m hoping you’re mentally cut-and-pasting this from the report, because if you naturally think phrases like this, you’re not going to be a lot of fun at parties.

  25. AJ says:

    Clearly a flawed and self-serving analysis done by McKinsey. One of the biggest problems with Big Pharma CEOs/Management teams are their relentless dependence on management consultants to provide “strategic direction”.
    That’s why we have had numerous companies follow a herd mentality over the years:
    – diversify
    – no, I meant focus and divest non-core
    – let’s go back to diversification
    – M&A
    – emerging markets
    – orphan drugs
    – move to Boston
    – re-organize & restructure R&D (numerous times)
    – re-organize & restructure the salesforce (numerous times)
    – hire reps, then fire reps
    – oncology is the place to be
    The list is endless….

  26. Anon says:

    And ironically companies such as Gilead have completely ignored these fancy trends and delivered true shareholder value. Why exactly is management at these companies so highly compensated? A blind monkey can do an equivalent job.

  27. Chemist Turned Banker says:

    Hard to know where to start with this analysis, save to agree with most of the comments on its shortfalls. The 2 year excess returns period looks particularly dubious- it captures the immediate cost savings, but ignores any impact on R&D productivity (which tends to drop off after a couple of years post-merger). The only deals that have worked have been transformative ones where there was obvious sub-scale- Ciba/Sandoz, Glaxo/Wellcome (but most definitely not GW/SkB) and that’s all I can think of.
    But the most telling observation is that I have not met a single healthcare investor in the last decade that likes pharma megamergers…

  28. idiotraptor says:

    This past December my wife sold Pfizer stock she had held for over 15 years. We sold it at a loss.

  29. Anon says:

    Should authors disclose whether McKinsey was retained as advisory on the deals they include in the analysis?
    Probably not a major conflict of interest going forward, but with all that is disclosed by authors these days, it seems reasonable.

  30. Bernard Munos says:

    You are spot on, and this omission is troubling, and it does not enhance the credibility of the study. It suggests that McKinsey is either unaware of standard ethical rules or choose to ignore them. Perhaps they might care to comment.

  31. dichotomous says:

    @Bernard Munos – they would argue that breaching client confidentiality by naming clients would break another set of ethical rules. A possible in-between would be to list the number served without naming specifics.
    @27 – I think it’s great for the sector, because it removes excess capacity, but often bad for companies in the transaction. But is that because mega-mergers are inherently bad, or because of a combination of poor post-merger management and the “winner’s curse” of overpaying for deals?

  32. Bernard Munos says:

    @31, 32, 33 dichotomous
    They would not need to disclose clients’ names. They could just say “McKinsey was an advisor to X companies involved in the mergers analyzed in this study, at the time those mergers took place”. This would give readers the context they need to gauge the potential for conflict of interest. This is no different from the conflict of interest statements that Nature, Science, and other leading journals demand from their authors.

  33. Anon #29 says:

    I didn’t consider the confidentiality concern, but would make me feel better. Although I suspect X may be close to 100% of companies in the survey if not directly linked to a specific transaction.

  34. Joe Coll says:

    I too believe that Mega-Mergers don’t truly work but unfortunately accept that they are a necessary evil of today’s business. Consider all the ghost pharma companies that have become the behemoth Pfizer (Warner Lambert, Pharmacia, Upjohn, American Home Products, Lederle, Wyeth. etc.). I wonder if some of these companies would have been better served if they had fought harder to remain independent i.e. Wyeth would have been one of the top companies and their shareholder return been secure based on the success of Lipitor alone? In the end they may have indeed have created more long term value for the shareholders then the short term bump from the Pfizer offer. When Pfizer acquired Wyeth I happened to be with the ex-CEO and Board member of the one of the top Pharmas and asked him why these mega mergers continue? He candidly stated that I should not judge the company’s executives too harshly as he supported such as move when his company had virtually nothing else left in their tool box to bolster shareholder return (an anemic pipeline, a few rounds of un-sustainable stock buy backs and cost cutting measures, etc. ). So in order to focus on “supposed growth” run a big merger, of course supported by McKinsey positively spun data, and cut costs to drive efficiency (although it did come across as more like ignore the man behind the curtain or eat or be eaten), hope the acquired companies pipeline contains a blockbuster and at the end of the day leave the problem to the next generation of management (while taking you bonus and pay out package while riding into the sunset) which will of course need to propose the next merger !

  35. Hap says:

    If the company had nothing in their pipeline, though, then why did Pfizer buy them? Pfizer’s shareholders probably weren’t interested in helping other companies, and if the other company doesn’t have much in the way of a pipeline, then Pfizer probably should have paid so much to get them – they can be counted by the products they have and the likelihood that they will make money in the future. There are consolidation/monopoly benefits, but those don’t seem as big in pharma as with cable, or telephone/cellular, for example.
    It also seems like a waste of shareholders’ money to have people who don’t believe the company can succeed in charge. If their perception is accurate, then the company ought to be liquidated (or sold, which I guess it was); if it’s not, someone else probably needs to be in charge.

  36. Emeritus Executive says:

    I’d add one further point. McKinsey did the integration work for a number of the 1995-20002 mergers (one of which I was a part of). I later found out that they dispensed almost exactly the same advice–up to and including a lot of the same slides–to pretty much every company they “helped.” What did the tell their clients to do? Focus on megabrands (remember those?) and the biggest sales force you could muster. This at precisely the time we started to see the emergence of the multi-tier pharmacy benefit designs that would up destroying most of the chronic disease categories from which those very megabrands came.
    The companies that drank the most deeply of that particular Kool Aid were the ones that subsequently got into the most trouble and had to cut the most people in the name of “synergies”
    I’ve often said, it is a great pity the industry couldn’t collectively sue McKinsey for malpractice because the firms involved all got very bad advice. I subsequently have also said to folks that if you do the precise opposite of what any McKinsey executive advises you to do, you’ll probably come out in the right place.

  37. BT says:

    I did my time at McK. I would really not read too much into some article in the Quarterly. Am very underwhelmed by the quality of the analysis in there. They do a better job on studies (when they have time, when not too wedded to the “day one hypothesis” which bears a strange resemblance to something the CEO is trying to get done).

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