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by EOS Intelligence EOS Intelligence No Comments

Commentary: Flavors and Fragrance Industry Rivalry Intensifies as DSM and Firmenich Join Forces

Over the years, DSM, a Dutch-based petrochemicals and commodity chemicals company, has strategically been shifting its focus to evolve into a fully integrated health, nutrition, and biosciences company. This transformation has been driven by several key factors, including increasing consumer demand for healthy and natural products, growing opportunities in the health and nutrition market, and DSM’s claimed commitment to sustainability.

Since 2003, DSM has actively pursued strategic acquisitions, consistently strengthening its product portfolio in human and animal health nutrition while divesting its chemical businesses. In 2022, the company sold the last of its traditional chemicals business to fully focus on its health and nutrition endeavor. In the same year, DSM made a notable move by announcing its plans to merge with Firmenich, a prominent player in the flavors and fragrances industry. The merger was completed in May 2023, and the combined entity is now renamed as DSM-Firmenich. While DSM has a history of acquiring businesses, the industry was taken aback by DSM’s recent acquisition of one of the world’s largest flavor and fragrance companies, leaving peers intrigued about the potential implications of this merger.

How does the deal impact the industry?

The flavors and fragrance industry is highly concentrated, with four major players – International Flavors & Fragrances (IFF) (22%), Givaudan (18%), Symrise (12%), and Firmenich (11%) – controlling more than 60% of the market in 2022. Changing consumer preferences for natural, exotic, and functional ingredients have prompted companies in this sector to explore growth opportunities beyond traditional flavor and fragrance products.

Over the last few years, these companies have been actively expanding their presence by acquiring or investing in businesses specializing in functional and natural ingredients. For instance, in 2021, IFF acquired DuPont Nutrition and Biosciences, a well-established player in value-added ingredients; in 2020, Givaudan acquired Ungerer, a leading US-based company specializing in flavor and fragrance specialty ingredients; and in 2021, Symrise acquired Canada-based company called Giraffe Foods, which develops custom flavors. The merger of DSM’s health and nutrition business with Firmenich’s Perfumery and Taste business has positioned the combined entity alongside these industry leaders.

Hence, in a broader context, all these major players look quite similar and are moving in a similar direction, except Symrise. Though Symrise has made some acquisitions, many of them are related to pet food, unlike the others who have been actively broadening their product portfolio in food, beverage, and nutrition.

Consequently, the DSM-Firmenich merger heightens competition, particularly among DSM-Firmenich, IFF, and Givaudan, as they strive to enhance their product offerings in flavors and nutrition and secure a larger market share. Furthermore, this recent merger consolidates the market, making it challenging for smaller players to compete in this highly competitive flavors and fragrances space. That being said, there are still numerous opportunities for innovation in flavors and functional ingredients among startups, mid-sized, and smaller companies.

How could DSM and Firmenich benefit from the deal?

The combined entity operates in four distinct business segments: Perfumery and Beauty (encompassing perfumery, fragrance, and personal care ingredients), Animal Nutrition and Health (offering products and solutions for animal nutrition), Health, Nutrition and Care (covering dietary supplements, early life nutrition, health and wellness products, etc.), and Taste, Texture, and Health (encompassing flavors, food, and beverage ingredients). Through the merger, the companies could capitalize on each other’s core strengths and benefit from synergies.

It is anticipated that 60% of the DSM-Firmenich revenue synergies will be derived from the Taste, Texture, and Health segment, signaling the likelihood of a substantial transformation in the combined entity’s food and beverage product portfolio. DSM is expected to capitalize on Firmenich’s expertise in enhancing taste using natural flavors, particularly in areas such as plant-based protein alternatives for meat and fish, and dairy alternatives. DSM is also expected to leverage Firmenich’s other strengths, such as salt and sugar reduction, bitterness locking, masking unpleasant taste, and texturizing, to further enhance its food and beverage offerings.

In the Health, Nutrition, and Care segment, DSM is likely to focus on developing next-generation supplements that promote health enriched with Firmenich’s taste offerings. Additionally, DSM may also expand its product portfolio in areas like gut health, brain health, women’s health, and postbiotics, incorporating Firmenich’s unique flavors to enhance product appeal.

In the Perfumery and Beauty segment, Firmenich might have some potential to expand its presence in the beauty and personal care market. Currently, specializing primarily in nutritional flavors and fragrances, Firmenich is likely to consider incorporating DSM’s aroma chemicals into its portfolio, enhancing its personal care capabilities. Furthermore, there’s the possibility of exploring the integration of DSM’s functional ingredients to cater to the growing demand for functional beauty products. However, relative to perfumery, DSM lacks the complementary or core strengths necessary to significantly enhance Firmenich’s already robust perfumery offerings. Hence, it is anticipated that the combined entity would have little to benefit from the merger on the perfumery side.

Additionally, the combination of DSM and Firmenich would provide opportunities to leverage each other’s proprietary technologies, especially in fermentation and extraction. DSM-Firmenich would benefit from extending its presence into local and regional markets worldwide.

How does the deal impact customers?

The extensive worldwide presence of both DSM and Firmenich would be advantageous for customers, enabling them to gain deeper insights into regional consumer preferences and tailor their products accordingly. Additionally, customers could take advantage of the expanded product range provided by both companies, which simplifies access to all necessary ingredients through a single source. The integrated solutions also enhance control and coordination throughout the product development process, ensuring a stable and secure supply chain.

EOS Perspective

The DSM-Firmenich merger is likely to result in higher innovation and growth opportunities in the flavors and ingredients space. However, both DSM and Firmenich are major players with diverse product portfolios, which could pose integration challenges. Speedy integration is crucial as CPG companies look to make products to meet the growing demand swiftly. Therefore, the success of the merger depends heavily on the speed of integration and how well the product offerings align with customer needs and target markets.

It is anticipated that the DSM-Firmenich merger will take some time to fully materialize and make a significant impact on the market. If the integration challenges are well-managed, DSM-Firmenich has the potential to capture a significant market share from its competitors. Ultimately, the success of this merger depends upon how effectively DSM incorporates Firmenich’s ingredients into its products and builds on new opportunities with these resources.

by EOS Intelligence EOS Intelligence No Comments

Commentary: CVS Moves to Home-based Care with Acquisition of Signify Health

Retail health companies increasingly invest in primary care, particularly home-based care, with patients demanding low-cost and convenient care delivery. The recent acquisition of home healthcare company Signify Health by retail health giant CVS Health highlights the industry’s growing interest in home-based care.

There is an increased demand for at-home healthcare services and health assessments, especially after the COVID-19 pandemic changed customer preferences towards access to convenient at-home services.

At-home care can bring down expenses by reducing hospital visits and detecting health problems in advance. A study published by the US Agency for Healthcare Research and Quality in April 2021 indicated that at-home patient care could reduce hospital expenses by 32% and hospital readmission rate (within six months after discharge) by 52%. The study claimed that patients receiving at-home care were less exposed to other illnesses, and this kind of care provided consistent attention, which resulted in better management of chronic diseases and prevention of health problems, reducing hospital readmissions. Apart from lowering the overall cost of care, healthcare providers are also incentivized to lower readmission rates under Medicare incentive programs, and hence, many healthcare companies have realized the potential of investing in at-home services.

One example of this was CVS Health’s acquisition of home health company Signify Health, completed in March 2023, for a total value of US$8 billion. Signify’s network of 10,000 clinicians, nationwide healthcare providers, and proprietary analytics and technology platforms is expected to help CVS extend its at-home health business. Adding Signify’s capabilities, such as at-home healthcare services, health assessments, patient data analytics, Accountable Care Organization (ACO) management, and provider enablement solutions, is likely to strengthen CVS’s abilities to offer better accessibility to services, improved patient-provider connectivity, better coordination of services, and improved quality of services.

CVS increases focus on the Medicare population with at-home health offerings

Looking at the recent acquisitions in the healthcare industry, it can be seen that major players in the retail health space, such as CVS Health, Amazon, Walgreens, Walmart, Dollar General, and Best Buy, are acquiring companies to strengthen their capabilities in offering primary care. These retail health companies are trying to tap into the growing demand for consumer-centric care. In particular, there is an increased focus on senior citizens and patients with chronic diseases.

Almost 19% of the US population is covered under Medicare plans, making it one of the most lucrative segments. In 2022, McKinsey estimated that, by 2025, up to US$265 billion worth of healthcare services provided to traditional Medicare and Medicare Advantage beneficiaries by traditional primary care facilities could potentially navigate to at-home healthcare providers offering at-home health services and virtual primary care services. Retail health companies view primary care services offered at home, traditionally dominated by independent clinics, as an opportunity to enter the healthcare delivery segment. CVS is also heading in the same direction.

CVS Health began expanding beyond its pharmacy services by acquiring health insurance company Aetna in 2018. Aetna is the fourth-largest Medicare Advantage plan, with 3.3 million enrollees in 2023.

In recent years, CVS Health has made significant efforts in building value-based care capabilities. Apart from acquiring Signify Health, which also includes Signify’s Caravan ACO business, the company acquired Medicare-focused primary care provider Oak Street Health in May 2023. These acquisitions indicate CVS’s increasing focus on enhancing healthcare services for the Medicare population.


Read our related Perspective:
Retail Health Clinics Eye a Larger Piece of the US Primary Care Market 

Signify’s acquisition brings CVS closer to its aim to become a full-service health provider

With the acquisition of Signify Health, CVS should be able to enter the at-home healthcare space in addition to its existing 9,900 retail drugstores and 1,100 MinuteClinics. CVS now has the capabilities to fulfill patient needs across the entire care spectrum, operating as a payer, a pharmacy benefit manager, an ACO manager, a chain of medical clinics, a network of primary care centers, and a home-based care provider, becoming a full-service healthcare provider.

This means CVS can make it simpler for patients and providers to navigate the complex healthcare system by centralizing services, as all these healthcare activities are performed under the same company. For instance, CVS can offer Medicare Advantage programs to patients, provide home visits, prescribe medicines, which can be delivered by CVS pharmacy, and track patients’ medication intake, which helps in making pharmacy reconciliations and offering follow-up care by primary care centers if needed. CVS can be able to access accurate and real-time data updates from all patient activities, which would improve care coordination and navigation of healthcare services for patients with real-time data sharing with providers.

CVS-Signify synergies can amplify companies’ growth and capabilities

CVS is enhancing digital capabilities to improve interoperability of electronic health records (EHRs) and enable remote patient monitoring. The company has already developed digital capabilities such as automated messaging on prescriptions, appointments, and vaccinations. CVS can integrate these digital capabilities into Signify’s systems to streamline communication between providers and patients.

CVS is expected to make use of Signify’s home care services to introduce at-home health assessments, which is a highly-demanded service by customers. Signify provided over 2.3 million unique at-home health assessments in 2022 and has witnessed a 16% year-on-year increase in the number of at-home assessments in Q2 2023. Using CVS’s nationwide primary care capabilities, Signify Health is likely to be able to expand its reach in the at-home health assessment space.

Signify’s technological capabilities are likely to strengthen CVS’s position in the market as customers appreciate increased convenience, such as remote patient monitoring, data-driven health predictions, and better navigation through the health systems. CVS can also benefit from Signify’s technological capabilities, such as provider enablement tools that would help manage population health, turnkey analytics, and practice improvement solutions to help providers transition to a value-based reimbursement model and improve the quality of care.

Furthermore, CVS also offers payer-agnostic solutions such as virtual primary care and pharmacy benefits management (CVS Caremark). CVS Caremark has the largest market share in the US pharmacy benefits manager market, with a 33% share in 2022. Signify’s client network of 50 health plan clients, including government, other payers, and private employers, can help CVS expand its payer-agnostic solutions to a diverse set of health plan and employer clients.

EOS Perspective

CVS outbid its rivals, such as Amazon, UnitedHealth Group, and Option Care Health to acquire Signify. Having acquired one of the most sought-after home healthcare companies, CVS has strengthened its position in terms of its expanded capabilities, such as primary care, home health, at-home health assessments, and provider enablement solutions. The company has the benefit of a large customer base, being the largest pharmacy chain in the US in 2022, which will help it expand its primary care and at-home services quickly. It will be interesting to see how CVS would be able to direct 8 million senior citizens who walk into CVS pharmacy stores annually to Oak Street clinics for a wellness visit or encourage them to schedule a home visit via Signify.

However, the competitors, especially the Medicare Advantage competitors, are not lagging behind. The largest Medicare Advantage Plan, UnitedHealth Group, boasting 8.9 million Medicare Advantage enrollees in 2023, announced the acquisition of two home health companies, LHC Group and Amedisys, this year. Humana, the second largest Medicare Advantage Plan with 5.5 million enrollees in 2023, acquired a stake in Kindred at Home in 2021.

Similar to CVS, UnitedHealth Group and Humana also own pharmacy and provider capabilities (including clinic-based, at-home, and telehealth). All three companies are on the task of deriving synergies among the different businesses they own with the aim to improve patient outcomes and reduce overall costs. To outperform the strong competition, the winning company needs to keep focusing on improving healthcare accessibility and patient experience, as well as catering to the evolving consumer needs.

by EOS Intelligence EOS Intelligence No Comments

Commentary: Microsoft-Activision Blizzard Deal – A Potential Game-changer in the Gaming Industry

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Gaming industry is booming, with a significant surge in growth occurring during the 2020-2021 pandemic, when millions of people turned to games during lockdowns. The industry is currently worth US$184 billion and is expected to reach over US$200 billion by 2025.

The market is very competitive, with a need for considerable investment and time for publishers to create successful games and for companies to develop consoles that offer advanced features and an attractive catalog of games. This is pushing players towards increased consolidation to achieve economies of scale and lower risks and to strengthen their position in the market. More than 650 gaming M&A or investment deals were announced or closed in the first six months of 2022.

Out of the numerous M&As that have recently occurred in the industry, Microsoft’s acquisition of Activision Blizzard, the maker of the world’s most popular games such as Call of Duty, Warcraft, and Candy Crush, is anticipated to make a substantial impact on the market. Microsoft announced its intent to acquire Activision for US$68.7 billion in January 2022, which was going to be the largest acquisition in the gaming industry to date. The consolidation of two strong players in the industry – Microsoft being the manufacturer of the Xbox gaming console and Activision being the publisher of many popular games – could offer users a large catalog of games and improve gaming experience and cloud-gaming services. However, it has also raised a concern that this could suppress the competition in the market of consoles, gaming subscriptions, and cloud-gaming. Many regulators across the world have blocked the deal, including the US Federal Trade Commission (FTC) and the UK’s Competition and Markets Authority (CMA). Microsoft is currently trying to get approval from the regulators.

How does the deal benefit Microsoft?

If the deal gets approved, it will turn Microsoft into one of the top three video game publishers, right behind its rival Sony. This would enhance Microsoft’s games catalog with Activision’s games, making Xbox’s choice more attractive than Sony’s PlayStation. Microsoft would also be able to enter the mobile gaming market with Activision’s mobile games, such as Candy Crush and King. This opens a large market segment, previously unaddressed by Microsoft, a segment that accounts for 50% of the total gaming market. Microsoft is planning to open Xbox’s mobile game store to compete with Apple and Google game stores.

As users increasingly prefer gaming subscriptions and cloud gaming services over physical DVDs, it gives an added advantage for Microsoft to own some of the most popular gaming titles and offer attractive subscriptions on its platform. Currently, Microsoft holds 60-70% of the global cloud gaming services market and could further squeeze into the shares of other companies, such as Google, to dominate the market.

The company would also be able to venture into metaverse and Non-Fungible Token (NFT) games using technological and newly acquired game development capabilities.

What does this deal mean for gamers? 

The Xbox Game Pass subscribers would benefit from the added list of Activision Blizzard games, which would be incorporated into the existing catalog. However, it is unclear whether Microsoft could make future games developed by Activision unavailable on other consoles, such as Sony PlayStation and Nintendo Switch. There is also a possibility for Microsoft to increase the subscription prices if gamers are highly reliant on Xbox-exclusive games.

Cloud gaming technologies are likely to improve in the future to overcome high latency and lost frames issues faced currently. However, if Microsoft dominates the cloud gaming space, it may reduce the gaming choices for gamers.

What are the concerns over the deal?

The major concern put forth by the regulators is whether the deal could negatively impact the competitive landscape of the market. For example, Sony currently owns 21 in-house game studios, and Microsoft owns 23. If Microsoft manages to get the deal, the company will have 30 in-house game studios, making Microsoft’s Xbox a much better choice and also giving the power to decide where these games are to be played. If Microsoft makes Activision’s future games exclusive on its platforms, it will dominate the console, mobile, and cloud platforms, killing the competition. This can discourage competitors from developing high-quality games. It can also enable Microsoft to decide to reduce the quality of its games or increase the prices when it dominates the market. Even if the company makes these games available on other platforms, competitors fear that the company may offer low-quality versions or remove their marketing rights or support for other console features.

The biggest concern is over one particular game – Activision’s Call of Duty, the most-played video game in the world. Microsoft has already agreed to offer a 10-year licensing deal to console manufacturer Nintendo, however, Sony has refused to accept the offer. When Microsoft purchased Bethesda game studio in 2021, the company made its highly anticipated sci-fi game Starfield into an X-box and PC exclusive. This is one of the reasons why regulators are concerned about Microsoft’s promises to make its games available on other platforms.

The regulators also raised concerns about how the company could completely sabotage the cloud-gaming market by withholding Activision’s games from rival cloud-gaming services.

Status of the lawsuits

Microsoft is yet to receive approval from the US FTC and UK CMA. The company attempted to convince the CMA by entering into agreements with cloud gaming competitors to provide access to Xbox games. CMA remains unconvinced, which appears to be a major block for this deal. However, the company’s agreements with Nintendo and NVIDIA on providing a 10-year licensing deal for the Call of Duty game have convinced the EU regulators, and the company has won the EU antitrust approval. Regulators in Saudi Arabia, Brazil, Chile, Serbia, Japan, and South Africa have also approved the deal.

The case filed by FTC is still in the document discovery stage, and an evidentiary hearing is scheduled for August 2023. Even though the company has won FTC lawsuits before, it is to be seen if it can win the approval for this massive acquisition deal.

EOS Perspective

Considering how Nintendo managed to acquire a 30% market share in the video gaming console industry by owning just 2 studios compared to Microsoft’s 25% share with 23 owned studios, it might not be very concerning that Microsoft owning 7 more studios through the Activision deal could sabotage the competition in the market. The deal can make the rivals more competitive to develop better console generations and games.

However, it can be anticipated that Sony might lose some of its market share to Microsoft right after the deal. It can also affect Sony’s profit if the company has to take paid licenses of games owned by Microsoft. However, on the other hand, if Microsoft goes against its promises and makes the games exclusive on its platforms or does not support the other platforms’ gaming experience, it could seriously damage the competitors’ businesses. Looking at the brighter side, the marriage between two superpowers in the gaming industry could significantly transform the gaming experience for the users, open new possibilities such as Xbox mobile-game subscriptions or metaverse games, or improve cloud-gaming services.

 

by EOS Intelligence EOS Intelligence No Comments

Shire-Baxalta Deal – Post Merger Opportunities

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In January 2016, Shire Plc., an Irish specialty biopharmaceutical company, announced that it will combine with Baxalta Inc., a biopharmaceutical company that was formed as a result of spun off biopharmaceutical division of Baxter International, to become one of the global leaders in the rare diseases segment. The US$32 billion merger deal closed in June the same year and the merged company will be known as Shire. Benefitting from Ireland’s relatively low corporate tax rate, the new company aims at becoming a global leader in rare diseases and expects to deliver robust compound annual growth with over US$20 billion in annual revenues by 2020. While prior to the acquisition, Shire Plc. used to get 45% of its revenue from rare disease treatments, with the Baxalta deal, Shire expects its rare disease portfolio revenue to rise to 65% in the combined entity, clearly indicating the key focus of the newly formed company.

Shire Plc. M&A activity over the past three years helped the company fortify presence in the rare disease specialty, leading way to future synergies achieved through the Baxalta deal. In 2014, Shire Plc. acquired US-based Lumena Pharmaceuticals in a US$260 million plus deal. With this acquisition, Shire Plc. added late stage development compounds for the treatment of rare hepatic diseases and treatment of non-alcoholic steatohepatitis (NASH). In 2015, the company forged another big takeover, a US$5.2 billion deal with NPS Pharmaceuticals, a rare-disease drug specialist. Via this transaction, Shire Plc. gained ownership of lifesaving drugs named Gattex and Natpara expanding its rare disease product portfolio in the gastrointestinal (GI) segment.

While adding new products to its product list, Shire Plc. growth strategy focused on building a portfolio predominantly in rare conditions. Another addition to the list was Cinryze, a medicine for hereditary angioedema (HAE) condition, which came with the buyout of ViroPharma, a US-based biotechnology company, for about US$4.2 billion in 2014. This was followed by acquiring US-based Dyax Corporation in 2015 for nearly US$6.5 billion adding DX-2930, an injectable to lower the rate of HAE attacks, to the list of rare disease drugs. Shire Plc. deals, which consistently focused on inorganic growth in the rare disease market, were complemented by organic development of a robust pipeline also within the rare disease scope.

Rare diseases drugs, often named as orphan drugs, have been among the key focus areas for many pharmaceutical companies over the past two decades, as such products bring in high profit margins and regulatory benefits coming from their development. The new company created through the Shire-Baxalta deal is therefore likely to benefit from the new combined rare disease drugs range. With the acquisition of Baxalta, Shire has a diversified portfolio with a combined rare disease platform in the fields of immunology, oncology, hematology, neuroscience, ophthalmic, GI, as well as LSDs and HAE. Baxalta brings a particularly valuable portfolio of treatments to the table, as even during the talks with Shire Plc. on the planned merger, in January 2016, it inked a deal of US$1.6 billion with Symphogen, a Danish biotechnology company. Through this agreement, for an upfront payment of US$175 million paid to Symphogen, Baxalta acquired exclusive rights to six cancer immunotherapies, focusing on growing area of cancer research called immuno-oncology. The Shire-Baxalta deal gives the newly formed Shire the opportunity to take these therapies through later-stage trials to the market.

1-Takeover Performance

Shire also plans to take advantage of Baxalta’s new manufacturing facilities. The new entity announced it would increase its research activity in the Baxalta’s R&D site in Cambridge, Massachusetts research campus, one of the hubs for biotech research that opened in December 2015. It would add another 100 to 200 jobs to the existing research team of 400 people at the center.

2-Ambition “20 X 20”

EOS Perspective

Shire, thanks to the synergies and elements brought in to the deal by both companies, has a promising starting point due to two key factors:

  • Strong financial tax profile: Despite the fact that Shire focuses in its operations on the US market, the company expects to lower its effective tax rate to between 16% and 17% by 2017. This can be achieved as the rare disease business is based in Ireland where tax policies are simpler and more accommodating.

  • Robust rare disease product portfolio: Shire has more than 50 clinical programs in different stages of development focusing on rare diseases. With more innovative products under its umbrella, Shire is likely to have a huge share in the orphan drug product market globally.

3-Catalysts & Road blocks

At present, only assumptions can be made about the future shape of the combined entity. With clear directions laid down of what the company management would like to achieve, it would be interesting to see whether Shire is able to accomplish the set mark of becoming world leader in rare diseases.

by EOS Intelligence EOS Intelligence No Comments

Government Trumps Pfizer Deal

Termination of business contract or partnership

Since its announcement last year, a US$160 billion Pfizer-Allergan merger has been under an ongoing discussion, with great synergies and tax savings expected if the deal was to be finalized, (we wrote about it in our ‘Pfizer-Allergan Deal – What’s in Store for Allergan’ article in February 2016).

However, discussions came to an abrupt end, when the merger was called off on April 6th, 2016 in the wake of changes in tax rules by the US government to check inversions. New rules disregard last three years’ (at the time of deal) acquisitions by a foreign company in the USA in determining its market value. It is a general feeling that the three-year rule was introduced primarily to stop Pfizer-Allergan deal. Since its announcement, the deal was a talking point in political debates with some presidential hopefuls taking an open stance against it.

To secure maximum tax benefits of inversion deal, Pfizer shareholders were required to own 50-60% of the merged entity. Allergan’s market capitalization stood at US$120 billion (against Pfizer’s US$200), owing to three deals, i.e. Allergan-Actavis merger (US$66 billion), Forest Laboratories acquisition (US$25 billion) and Warner Chilcott purchase (US$5 billion), struck in last three years, thereby giving Pfizer shareholders more than 50% of the combined entity. However, this will not be the case now due to drastic reduction in Allergan’s market value as a result of three-year window provision. This also means that both the companies will have to go back to the drawing board.

For Pfizer, this means the need for an increased focus on management of its vast portfolio of drugs (a mix of patent and off-patent products) with an intent to further improve profitability. While Pfizer’s patented drugs command higher prices, the off-patent ones are subject to price decline thereby impacting the company’s profitability. After the announcement of Pfizer-Allergan deal, there were speculations about sale/spin-off of Pfizer’s off-patented portfolio. However, with revenue loss due to the broken deal, the plan (if still any) to sell off-patented business is likely to be put in freezer for some time to come. This could also mean more efforts on research and development front, and being inherently a research driven company, Pfizer has some potentially lucrative drugs in pipeline (including cholesterol lowering and cancer drugs).

For Allergan, the broken deal means looking for alternative ways to strengthen its position outside the USA. The company can take inorganic route to achieve this. No headway was made towards operations restructuring of the merged entity. Therefore, in all likelihood, the research and development assets of Allergan will remain intact, one positive outcome for the company out of the broken deal, as it has some good candidates in the field of ophthalmology, urology, and women’s health. With sale of its generic business to Israeli rival Teva Pharmaceuticals in July 2015, Allergan showed the intent to focus on patented products, therefore the company will have to look for means to raise its R&D budget.

The broken Pfizer-Allergan deal will remain in discussion in coming days from the point of view of missed opportunities for both Pfizer and Allergan, as well as for the political angle involved. Even if the decision was politically motivated, it may have put moratorium on inversion as a strategy for the time being, and it would be interesting to track moves not only in the pharmaceutical space but in other industries as well, following the new regulatory regime.

by EOS Intelligence EOS Intelligence No Comments

Succeeding in Myanmar’s Fragmented Grocery Retail Industry

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In recent years, several reports have talked about how the rapid economic growth, expanding middle class, and consumer spending have fueled growth in Myanmar’s retail industry. Although the growth potential is very lucrative, retailers should also look closely at the industry challenges that currently exist. These challenges must be carefully assessed and addressed in order to capture the growth opportunities and succeed in Myanmar.

Myanmar’s rapidly improving growth indicators and demographics have attracted the attention of several investors as well as business consulting firms globally. The country’s growing urbanization, middle class population, and rising disposable income point towards tremendous retail opportunities for players looking for new growth markets.

Slide1 - What’s Attracting Retailers to Myanmar

In the past three years, companies such as Coca-Cola, Carlsberg, PepsiCo, KFC, etc., have already entered and started their business operations in Myanmar, while several others are looking at ways to enter the nation’s lucrative retail market, and to be the part of its growth story. Many industry experts remain upbeat on the nation’s future economic growth prospects, and have projected the retail industry to grow at a strong pace in the future.

Slide2 - M&A, JV, and Investment Deals

Slide3 - Store Expansion

Slide4 - Challenges

Slide5 - Challenges 2

Slide6 - Hurdles

EOS Perspective

Rapid economic growth, urbanization, and growing purchasing power, along with consumerization of IT are bringing bigger exposure to international brands for Myanmar’s rising middle class. This is expected to boost the demand for fast moving consumer goods. In addition, the evolving buying preferences of young and aspiring middle-class population, who are looking to spend their rising incomes on bigger and better brands are set to trigger improvements in the range and quality of retail products and services.

Recent FDI reforms and the influx of foreign capital are likely to dramatically change Myanmar’s retail industry landscape in the coming years. International retailers are expected to spur industry growth by creating more jobs, improving supply chain networks and infrastructure, bringing cutting-edge technologies, processes, and management best practices. Furthermore, the increased competition between local and foreign retailers is likely to promote market efficiency, which might also result in better portfolio of grocery products and services on offer.

For foreign players, Myanmar’s retail industry still remains relatively unknown. As the market remains highly fragmented with lack of structured data on consumer preferences and market segmentation, companies need to spend time to study the market.

The best strategy for foreign retailers should be to form a joint-venture with the right local partner, who has comprehensive understanding of the market and its consumers’ buying behavior. Joint ventures remain the preferred strategy for many multinational retailers to enter Myanmar’s retail industry. With the help of trade fairs and road-shows, companies can identify and engage with potential partners. This will help them conduct due diligence, at the same time gain better understanding of the industry as well as first hand market insights. Many companies from Japan and Singapore have successfully reaped the benefits of this approach.

Proven as very challenging, retailing in rural Myanmar remains untapped. There are plenty of growth opportunities for grocery retailers as consumer and market dynamics are expected to continuously improve in the long run. By offering value added services such as bill payments, mobile recharge and top-up cards, and postal services, retailers can truly create a competitive advantage. Retailers can start investing in partnerships with wholesalers and independent retailers to grow their current network. Once the opportunities become ripe, retailers can scale up their operations by acquiring these partners, and thus expand their footprint in new geographies.

Slide7 - Opportunity

In order to succeed in Myanmar’s grocery retailing, foreign and local players will have to form strategic alliances and create a win-win relationship through exchanging technologies and global best practices with sales network and market intelligence. Furthermore, retailers must be agile, flexible, and adaptable enough to seize market opportunities in Myanmar’s fragmented retail sector. Succeeding in Myanmar’s grocery retailing requires unique solutions tailored to meet the evolving demands of various consumer segments.

by EOS Intelligence EOS Intelligence No Comments

Pfizer-Allergan Deal – What’s in Store for Allergan

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In November 2015, Pfizer and Allergan announced a US$160 billion merger deal. Once finalized, the Pfizer-Allergan deal would follow three large mergers/acquisitions concluded by Pfizer in the last 15 years. Though relocation to Ireland to save higher corporate tax in USA is apparently the main purpose of this merger, it is expected to create a pharmaceutical powerhouse with more than US$60 billion in annual revenue. In the light of competitive advantage this deal is anticipated to yield, it becomes imperative to look at Pfizer’s evolution since its first mega deal in 2000.

Pfizer acquired US-based Warner-Lambert in a US$110 billion deal in 2000. With this acquisition, Pfizer gained ownership of blockbuster anti-cholesterol drug Lipitor, besides some popular consumer health brands, such as Listerine. Lambert deal was shortly followed by US$60 billion purchase of US-based Pharmacia in 2003. The deal, while catapulting Pfizer’s revenue by more than US$12 billion, allowed it to gain control of successful brands, such as Celebrex (inflammation) and Xalatan (glaucoma), along with R&D pipeline of cancer drugs and a specialist-focused sales force of Pharmacia.

Pfizer waited six years for its next acquisition, and bought US-based Wyeth for US$68 billion in 2009. This deal came amid imminent expiry of Pfizer’s 14 patents through 2014, including its best-selling drug Lipitor in 2011. Pfizer looked to benefit from Wyeth’s leadership position in vaccines, nutritionals, and biologics, including Prevnar, the first pneumococcal vaccine for infants. Wyeth’s portfolio potential had indeed been locked, as evident in the net 30%-90% increase in sales of its key brands between 2009 and 2014, post-acquisition.

These three deals helped Pfizer in becoming a US$50 billion company with a diverse product portfolio. However, it came with a challenge of ensuring operational efficiency and leveraging synergies with acquired companies. This was achieved through a range of adjustments, including lay-offs to eliminate overlaps and to consolidate various functions. Pfizer deals were severe on the employees of acquired companies, with more than 90,000 jobs eliminated (which may have included those lost to attrition) between 2000 and 2014. At the time of each deal, there were apprehensions regarding the future of research and development in Pfizer. Though the company managed to maintain its R&D budget at about 16% of revenues, several sites (including six from Wyeth and two from Pharmacia) were closed post acquisitions. It was soon reflected in the company’s product pipe line, with only 17 applications filed for new product approval between 2007 and 2014, in contrast to 43 during 2000-2006.

To sum up Pfizer’s strategy, the company acquired rivals with blockbuster brands to boost its topline, and to benefit from pooling of resources. The strategy worked on most counts, except for Celebrex where the sales failed to take off partially due to pull-out (from market) of a rival drug (Merck’s Vioxx) in 2004 owing to safety reasons. Notwithstanding the criticism for massive lay-offs, Pfizer managed to create a lean organization, thereby improving its revenue per employee.

Pfizer Performance Timeline (2000-2014)

Pfizer’s next acquisition target, Allergan, came in to existence following Ireland-based Actavis’ acquisition of USA-based Allergan Inc. in March 2015, post which the combined entity was renamed Allergan. Allergan then sold its generic drugs business to Israeli rival Teva Pharmaceuticals in July 2015.

As Pfizer’s deal with Allergan looks in sight, there are speculations regarding future shape of the combined entity in terms of employee strength, sales focus, and future product pipeline (i.e. R&D).

Pfizer-Allergan deal involves trimming of sales and administration expenses by more than US$1.0 billion. This is likely to be achieved (mostly) in North America where Allergan operations are concentrated.

Cuts worth more than US$600 million are expected in R&D. With Teva deal, Allergan showed intent to focus on branded proprietary drugs, and Pfizer is also a predominantly green-field research organization. Therefore it is not clear yet, which product programs will face the ax due to little overlap in research focus of two companies.

Research Focus of Allergan and Pfizer

As Allergan declared end to lay-offs in June 2015, it was expected that most of the Actavis acquisition-related restructuring activity was over by the time Pfizer-Allergan deal was announced. This means the cost savings linked with Pfizer-Allergan merger will result from the existing operations (as of November 2015) of the two companies.

EOS Perspective

Based on precedence of Pfizer takeovers, there is a likelihood that Allergan might bear most of the brunt of cost cutting measures. However, at the outset, a simple merger is not likely to impact either efficiency or earnings (from R&D perspective) of the combined entity due to nearly identical revenue per employee (as of 2014) for both the companies, and Allergan’s significantly lower R&D expenditure (8% of its revenue vs. Pfizer’s 16%).

Cost cutting is likely to be undertaken with an eye on revenue and profitability in mid to long term. From Allergan’s perspective, we anticipate this to be achieved through the following:

  • Focus on products in the pipeline with good growth prospects: Allergan’s Rapastinel (anti-depressant) and Vraylar (schizophrenia) are in this category; another option for Pfizer-Allergan is to focus on drugs that are in advanced stages of trials i.e. Phase III and IV

  • Focus on high revenue earning products: While most Pfizer products (including those off-patented in recent years) generate revenues in the range of US$200 million to US$5 billion, Allergan’s portfolio is still underdeveloped (due to limited global exposure) except for few products from central nervous system (CNS), gastroenterology, and women’s health segments

Possible Restructuring Approach for Pfizer-Allergan

At present, only mere speculations can be offered regarding the future shape of the combined entity, as no concrete steps have been announced. It will be interesting to track the decisions taken by Pfizer-Allergan in the coming months to achieve targeted cost savings.

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