How will recent pharma M&As impact packaging departments?

The recent wave of mergers and acquisitions among U.S. pharmaceutical companies (Abbvie and Horizon Pharmaceuticals, for example) present implications beyond a more friendly tax structure due to the companies’ new U.K.-based headquarters.

Pharmaceutical packaging expert Tim Marsh, managing director of Marsh Consulting Ltd., sees opportunity and misfortune for packaging departments. Marsh brings more than 22 years of diverse experience in the healthcare sector spanning medical devices, biopharmaceuticals and consumer healthcare. Marsh has held engineering and management positions for Pfizer, B.Braun Medical, Becton Dickinson and St. Gobain.

Packaging Digest asked him: What do you think the implications of this might be for pharmaceutical packaging? Might these companies rethink the packaging suppliers they are using? Or is this simply a change that looks good on paper (the books) with no real impact on packaging decisions?

His reply:

Tim Marsh: I’ve been through several mergers of large pharma while I worked at Pfizer. I came in right after the Warner-Lambert acquisition. Later, I was knee deep in packaging for the Pharmacia and Wyeth acquisitions. The Pharmacia and Wyeth deals were not tax advantage strategies like we’re seeing today. Rather they were about riding the loss-of-exclusivity-cliff to come of some of Pfizer’s blockbusters.

I’ve seen sometimes significant impacts to packaging strategy during M&A and post-integration that presents both misfortune and opportunity. I’ll speak to this from the perspective of someone leading the package and engineering function of the acquiring company. In my opinion, the interesting thing is that, on paper, the tax advantage is just that—largely a financial exercise.

It’s the change in leadership and location of HQ that will impact both companies and, of course, the packaging materials and equipment strategies.

First, there is almost certainly the question of redundancy during the initial planning on acquisition and then throughout the integration, if the deal goes through. Part of the justification for deals of this nature is to scale back on redundant resources. These are typically plants, people and equipment—it all becomes part of excess capacity in the integrated company’s manufacturing network. And the pressure is on to eliminate that excess as strategically as possible—without negative impact to the firm’s core competencies or differentiators in the market.

How does this impact packaging and equipment? It can put on hold or eliminate major programs at both companies for investments in packaging equipment, site and facility upgrades, as well as hiring for open positions. I’ve seen some “not so happy” sales representatives of my suppliers when they were just informed that the spend had been indefinitely been put on hold. Unfortunate for them.

There is an upside for them and their competitors, though. Suppliers know this activity can often force a rethink on strategies for packaging at both companies. They will use this as a means to engage with the merging companies and see if they can become part of the rethink in strategy. For incumbents, it’s time to sharpen their pencils and get creative on demonstrating the value to the merged pharma not to deviate from using them as the supplier.

What usually remains unaffected are launch plans for new drugs and therapies. This packaging investment in equipment, materials, suppliers and related infrastructure generally remain unchanged. No one typically wants to place at risk the launch of a new medicine or therapy. It is after all what pharma is all about and how they are measured by their shareholders. But this is probably a small percentage of the overall manufacturing network that is impacted. Almost all decisions on excess capacity are taken in light of never risking supply to the markets.

The procurement organization will be reviewing the acquired company’s packaging equipment and supply footprint, annual spends and capital allocations. They will be looking for opportunity to leverage any advantages uncovered, and to rationalize or sunset any obvious waste.

From the packaging materials perspective there is always a chance this will necessitate a change in suppliers for direct and indirect materials. Initially, the priority is on secondary packaging supply of cartons, labels, shippers and such. These are more easily moved from one supplier to another than that of primary packaging materials, such as bottles, closures, blister foils and pouches.

Secondary packaging often must go through artwork redesigns to update trade dress, logos and Manufacturer Authorization Holder status. As best they can, the packaging departments, working with their commercial and regulatory colleagues, will go about this as efficiently as possible. For example if they are aware the carton supplier for a given plant will be changing due to the acquisition, the packaging, artwork and procurement departments of the plant will try and coordinate the trade dress and other changes in step with the move from old supplier to new.

This is never easy by the way. And it follows as to why the acquiring company is not typically aggressive initially at reducing headcounts. There is a lot of work to be done and colleagues with knowledge of how to get it done are valuable.

The packaging organization will also focus longer term on harmonizing primary packaging, as the cost advantages can be much more rewarding. Consolidating from five foil suppliers down to two globally, for example, might save on overhead of managing multiple suppliers and pool volumes to generate a higher discount on annual spend. Equipment and locations will also be closely reviewed and have their strategies adjusted to fit a more efficient future state without excess capacity.

One example I can give you is from the Wyeth acquisition in 2009/2010 and how it affected packaging suppliers. With the acquisition came the reinforcement that my role and department “owned” the decisions on anti-counterfeiting and brand protection technologies. There was one program for brand protection just about to kick off for one of the major nutritional products being launched. That program we quickly analyzed and decided to let it proceed so as not to risk launch timing.

I also did a global assessment of technologies, suppliers and spend for the Wyeth products. From that, I noted advantages and innovations that Wyeth’s approach had over Pfizer’s. This then re-shaped some of the purchasing decisions for technologies and suppliers going forward. We sunset some of the Wyeth technologies that were not in line with cost and value from a Pfizer perspective. We also adopted some of the Wyeth approaches we felt were optimal and applied those to new products being launched that required brand protection technology. It was a win for Pfizer, the patients and shareholders, but there were incumbent suppliers to Wyeth who lost out due to this exercise.