THE WALL STREET JOURNAL.

CFO Journal.

Updating the Life Sciences M&A Playbook: Deepening the Bench for a “Value Game”

Sports fans of all kinds know that sometimes to become a championship team, coaches need to take a step back, look at the overall value of the team, and focus in on certain areas to deepen strengths and capabilities. The same could be said for a new trend that appears to be happening in the pharma industry. In recent weeks, the front page news for health care has featured headlines of a wide range of M&A deals that have been announced or proposed. The question now is whether this is the start of a new wave of M&A action. And more importantly, could it have a positive—and potentially game-changing—impact not just on the life sciences sector, but also on the transformation of the health care system from one based on volume to one based on value?

In the last round of heavy M&A activity in the early 2000s, pharma companies were generally merging into large, diversified enterprises. But, these recent deals are different: companies are refining the focus of their business as they scale up within particular areas of specialization and exit others. Instead of trying to compete in several games at once, pharma companies are deepening their benches in key areas to help add strength and the ability to play at an elite level in areas where they believe they can excel.

They’re going about this in various ways; some are acquiring or merging with whole companies while others are buying, selling or trading certain business units. But, the aim is the same: they’re concentrating on becoming superstars in their fields, redirecting investments and resources to build on their strengths and letting go of areas that may hold them back.

Why Is This Happening?

In the U.S. and globally, health care reforms and market forces are accelerating the transformation from a volume-based to a value-based marketplace. Stakeholders are pressing not only for lower prices, but also for clearer evidence of the value from the health care products they buy. Many providers and consumers want innovation to march forward and deliver new products that offer improved clinical outcomes, safety profiles and cost effectiveness. These customers are looking forward to the day when a complete line of pharmaceutical products is available to address the full spectrum of diagnostic and therapeutic stages in every major disease category.

Striving to meet these market demands – while sustaining a viable return on investment – requires tremendous resources and balance between research and development (R&D), production and commercialization capabilities. The recent M&A activity suggests that some companies are betting it may be easier to strike a profitable balance with a more targeted, specialized business strategy. Focusing on a select set of areas may bring operating synergies, new economies of scale, and cost- and knowledge-sharing across similar projects, all of which may contribute to a more substantial product portfolio, better financial profile and a stronger competitive position.

More importantly: Is this a potential “win-win” for the entire health care system?

The efficiencies that pharma companies could achieve if they put a greater focus on their strengths may have some significant and lasting benefits for payers and product users. Manufacturers may be able to pass some of these cost efficiencies through to customers in the form of lower prices and greater flexibility in contracting, while continuing to invest in R&D efforts to expand product portfolios and extend product lines.

But, the real game-changing play could come from a new capacity to provide deeper expertise regarding expected treatment costs and outcomes for particular patient populations and a better understanding about which products might work best for particular patients: population health at a personalized level. As pharma companies develop deeper expertise around a fuller set of diagnostic and therapeutic approaches for a particular disease category, they are likely to be in a better position to collaborate with providers, health plans and government programs looking for better ways to measure and manage the health care needs of particular patient populations. And, as a result, we could see more partnerships emerge as pharma companies work with health care providers and health plans to exchange access to patient population data.

Additional investment in specific therapeutic areas could give pharma companies the opportunity to get more involved in population health and disease management initiatives. Could we be looking at a future when pharma companies offer access to a portfolio of products for a fixed price that would then be used at the discretion of the purchaser? Purchasers, especially accountable care organizations, might find this arrangement appealing―what is currently a variable cost would become fixed in some sense. Careful consideration would need to go into how financial risk would be shared and how treatment incentives would be affected, but this collaborative effort could move everyone closer to offering truly patient-centric care by focusing on identifying the best medicine for a particular patient from a medicine cabinet stocked with products that deliver high value.

As pharma companies take a look at their playbooks and update their game strategies, we’ll have to see how many choose to deepen their benches and specialize in targeted areas. At this moment, all signs are pointing to some exciting moves that may enhance our position around access, quality, and cost and bring us closer to achieving the ultimate goal of improving patient outcomes for a healthier population.

—Produced by Terry Hisey, vice chairman and U.S. Life Sciences leader, Deloitte LLP

May 12, 2014, 12:01am