VALUE CREATION THROUG M&A : A CLINICAL STUDY ON BLOCKBUSTER DEAL EVIDENCE IN THE PHARMACEUTICAL INDUSTRY __________________________________________________ LES ETUDES DU CLUB N° 102 DECEMBRE 2013 VALUE CREATION THROUG M&A : A CLINICAL STUDY ON BLOCKBUSTER DEAL EVIDENCE IN THE PHARMACEUTICAL INDUSTRY __________________________________________________ LES ETUDES DU CLUB N° 102 DECEMBRE 2013 Etude réalisée par Mademoiselle Rose Le Moullac (MSc in International Finance 2013) sous la direction de Monsieur Nicolas Naillon Professeur Vacataire à HEC PARIS Table of Contents GENERAL INTRODUCTION ........................................................................................................... 4 PART I: OVERVIEW OF THEORY AND ACADEMIC LITERATURE ............................... 7 Chapter 1: Theoretical overview of value creation ................................................................................... 7 1. Definition ........................................................................................................................................................................ 7 2. Measurement .................................................................................................................................................................. 9 2.1 Measures for the specific assessment of value creation in the context of M&A ............................................ 10 2.1.1. Synergies ...................................................................................................................................................................... 10 2.1.2. Event studies ............................................................................................................................................................... 13 2.2 Assessment methods applicable to both standalone or merged firms: value creation indicators .............. 16 2.2.1. Financial indicators ................................................................................................................................................... 17 2.2.1.1. Net present value (NPV) ................................................................................................................................ 17 2.2.2. Accounting/financial indicators (hybrid measures) ....................................................................................... 18 2.2.2.1. ROCE – WACC ................................................................................................................................................ 18 2.2.2.2. Economic Value Added (EVA) ................................................................................................................... 18 2.2.3. Accounting indicators .............................................................................................................................................. 19 2.2.3.1. Profit measures: Net profit and EPS .......................................................................................................... 20 2.2.3.2. Profitability measures: ROE and ROCE .................................................................................................. 20 2.2.3.3. Summary of advantages and drawbacks ................................................................................................... 21 2.2.4. Market indicators ....................................................................................................................................................... 22 2.2.5. Value drivers/key performance indicators (KPIs) .......................................................................................... 24 Chapter 2: Review of existing literature on value creation ................................................................... 25 1. In general ..................................................................................................................................................................... 25 1.1. Event studies ......................................................................................................................................................................... 25 1.2. Accounting studies .............................................................................................................................................................. 28 1.3. Other studies ......................................................................................................................................................................... 31 2. In the pharmaceutical industry .............................................................................................................................. 31 2.1. Event studies ......................................................................................................................................................................... 31 2.2. Case study .............................................................................................................................................................................. 34 PART II: CASE STUDY .................................................................................................................... 38 Chapter 1: Case study presentation ........................................................................................................... 38 1. Sample selection ........................................................................................................................................................ 38 1.1. Case study sample ............................................................................................................................................................... 38 1.2. Benchmark sample .............................................................................................................................................................. 40 2. Background ................................................................................................................................................................. 41 2.1. Company descriptions ....................................................................................................................................................... 41 2.1.1. Pfizer .............................................................................................................................................................................. 41 2.1.2. Wyeth ............................................................................................................................................................................. 43 2.2. Industrial and economic context .................................................................................................................................... 44 2.2.1. General dynamics of the pharmaceutical industry .......................................................................................... 44 2.2.2. The pharmaceutical industry in the 2000s ......................................................................................................... 46 2.2.2.1. R&D cost and productivity challenges ..................................................................................................... 47 2.2.2.2. Impending patent cliffs ................................................................................................................................... 49 2.2.2.3. Price pressure ..................................................................................................................................................... 50 2.2.2.4. Pressure from capital markets ...................................................................................................................... 51 2.2.2.5. General economic context ............................................................................................................................. 51 2.2.2.6. Conclusion .......................................................................................................................................................... 51 2.3. Company specific concerns ............................................................................................................................................. 52 Chapter 2: Presentation and discussion of findings ................................................................................ 54 1. Transaction overview ............................................................................................................................................... 54 Rose Le Moullac 2 MIF Thesis 1.1. Transaction description ..................................................................................................................................................... 54 1.2. Transaction rationale .......................................................................................................................................................... 56 1.3. Expected synergies ............................................................................................................................................................. 58 2. Assessment of value creation ................................................................................................................................ 60 2.1. Qualitative assessment ....................................................................................................................................................... 60 2.1.1. Reactions ....................................................................................................................................................................