POST-ACQUISITION INTEGRATION OF SMALL BIOTECHNOLOGY FIRMS

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1 POST-ACQUISITION INTEGRATION OF SMALL BIOTECHNOLOGY FIRMS IN THE STRUCTURE OF LARGE PHARMACEUTICAL COMPANIES Inauguraldissertation zur Erlangung des Grades eines doctor rerum politicarum (Dr. rer. pol.) an der Fakultät Sozial- und Wirtschaftswissenschaften der Otto-Friedrich-Universität Bamberg vorgelegt von Lars Schweizer am 10. Oktober 2001

2 Gutachter: Erstgutachter: Zweitgutachter: Prof. Dr. Dodo zu Knyphausen-Aufseß Prof. Dr. Johann Engelhard Tag der Promotion: 21. Februar 2002 Bamberg: Universität, Diss., 2002

3 Table of contents page 1 Introduction and structure of the research Research methodology Research question and methodology Research design Case studies of organizational integration of biotechnology companies after the M&A deal Building industry context The pharmaceutical industry The biotechnology industry The inevitable need for M&A The case of Pharmacia Corp. - SUGEN, Inc Case description Within-case analysis The case of Merck KGaA - Lexigen Pharmaceuticals Corp Case description Within-case analysis The case of Novartis AG - SyStemix, Inc./Genetic Therapy, Inc Case description Within-case analysis The case of Bayer Diagnostics Corp. - Chiron Diagnostics Corp Case description Within-case analysis Cross-case analyses and building a set of tentative hypotheses Theoretical perspectives of the post-acquisition integration and collaboration process Confronting extant M&A theories with the case findings Confronting extant post-merger literature with the case findings Determination and concepts of the overall integration strategy Discussion of the different organizational integration topics...222

..42 3.1.3 The inevitable need for M&A...58 3.2 The case of Pharmacia Corp. - SUGEN, Inc....71 3.2.1 Case description...76 3.2.2 Within-case analysis...87 3.

4 Organizational collaboration after the acquisition Aspects of knowledge and competence transfer after the acquisition Cultural issues in the context of the post-acquisition integration strategy Human resources related issues of the post-acquisition integration process Discussion of the organization of the post-acquisition integration process Constructing a new approach and directions for further research Constructing a new approach Implications of core competencies and value chain Constructing a new approach: Framework for the post-acquisition integration of small high-technology companies in the structure of large corporations Revisiting the tentative hypotheses Implications and directions for further research References Summary in German Case study database... (separate volume)

....259 5 Constructing a new approach and directions for further research...267 5.1

5 List of figures page Figure 1: Performance of mergers... 2 Figure 2: Contributions of pharmaceutical discoveries... 5 Figure 3: Structure of the study Figure 4: Classification matrix for M&A activities in the pharmaceutical and biotechnology industry Figure 5: Research outline of the study about post-acquisition integration activities Figure 6: Research and development process for a new drug Figure 7: Development of research costs in the pharmaceutical industry Figure 8: Earnings pressure and M&A activities in the pharmaceutical industry Figure 9: Transformation process in the pharmaceutical industry Figure 10: Three generations of biotechnology Figure 11: Biotechnology value chain for human health care Figure 12: Potential developments of the interplay between biotechnology and pharmaceutical companies Figure 13: Valuations of mergers and acquisitions involving biotechnology companies Figure 14: M&A activities in the biotechnology and pharmaceutical industry Figure 15: New alliances between pharmaceutical and biotechnology companies Figure 16: Geographic distribution of pharmaceutical partners for biotechnology companies. 68 Figure 17: Gradual consolidation of the biotechnology industry through increased M&A activities Figure 18: The seamless product flow system of Pharmacia Figure 19: Merck s organizational structure Figure 20: History of Lexigen Figure 21: Bayer AG organization Figure 22: Industry-life-cycle-model Figure 23: Trautwein s theories of merger motives Figure 24: Post-merger integration tasks Figure 25: Framework for post-merger integration management Figure 26: Types of acquisition integration approaches Figure 27: Different types of subsidiary strategy Figure 28: Managing innovations in the transnational organization Figure 29: The most commonly used mechanisms of coordination Figure 30: Four generic types of international R&D and innovation Figure 31: Types of corporations and their dominant patterns of innovation Figure 32: Determinants of the rate and direction of firm level innovation Figure 33: Matrix of innovation, capabilities and preferred organizational forms Figure 34: The acquired firm s preferred adaptation process Figure 35: The acquiring firm s preferred adaptation process

.. 28 Figure 6: Research and development process for a new drug... 33 Figure 7: Development of research costs in the pharmaceutical industry.

6 Figure 36: Common planning model for the integration process Figure 37: Steps of the post-merger process Figure 38: Detailed steps of the post-merger integration process Figure 39: The generic value chain Figure 40: Post-acquisition integration framework

.. 262 Figure 38: Detailed steps of the post-merger integration process.

7 List of tables page Table 1: Sample of major M&A deals Table 2: M&A deals valued more than $100 million in Table 3: M&A deals valued more than $100 million in Table 4: M&A deals valued more than $100 million in Table 5: Classified summary of the tentative hypotheses

.. 64 Table 3: M&A deals valued more than $100 million in 1999.

8 List of acronyms ADR AG AIDS BCG BIO CA CEO CFO CHF Corp. CRO DBF Dipl.-Kfm. DNA e.g. EASDAQ ed. Ed. ELISCO EU FDA GTI HTTP i.e. Inc. IPO KGaA M&A M.B.A. MA MD NAD NASDAQ NBF NC NJ OECD OTA OTC R&D RDNA American depository receipt Aktiengesellschaft [corporation] Acquired Immune Deficiency Syndrome Boston Consulting Group Biotechnology Industry Organization California Chief Executive Officer Chief Financial Officer Swiss Franc Corporation Clinical Research Organization Dedicated Biotechnology Firm Diplom-Kaufmann [Master of Science in Business Administration] Deoxyribonucleic acid for example European association of securities dealers automated quotation Edition Editor Entrepreneurial life science company European Union Food and Drug Administration Genetic Therapy, Inc. Hypertext transport protocol That is Incorporated Initial public offering Kommanditgesellschaft auf Aktien [Limited partnership on shares] Mergers and Acquisitions Master of Business Administration Massachusetts Maryland Nucleic Acid Diagnostic National association of securities dealers automated quotation New Biotechnology Firm North Carolina New Jersey Organization for Economic Cooperation and Development Office of Technology Assessment Over-the-counter Research and Development Recombinant deoxyribonucleic acid

depository receipt Aktiengesellschaft [corporation] Acquired Immune Deficiency Syndrome Boston Consulting Group Biotechnology Industry Organization California Chief Executive Officer Chief Financial

9 S.A. SEC SIC U.K. U.S. VFA Vol. VP WWW Société Anonyme [corporation] Security and Exchange Commission Standard Industrial Classification United Kingdom United States Verband Forschender Arzneimittelhersteller e.v. Volume Vice President world wide web

Commission Standard Industrial Classification United Kingdom

POST-ACQUISITION INTEGRATION OF SMALL BIOTECHNOLOGY FIRMS

POST-ACQUISITION INTEGRATION OF SMALL BIOTECHNOLOGY FIRMS IN THE STRUCTURE OF LARGE PHARMACEUTICAL COMPANIES Inauguraldissertation zur Erlangung des Grades eines doctor rerum politicarum (Dr. rer. pol.)