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Darwin's Medicine blog

Professor Brian D Smith is an authority on the pharmaceutical industry and works at SDA Bocconi University and Hertfordshire Business School.

Blood will out

Think carefully about the DNA you’re acquiring

Hotel image

If you haven’t heard of Kurt Lewin, look him up. He’s one of the founding fathers of organisational psychology and, 70 years after his death, his writing is still insightful and useful. Among other things, he’s famous for the observation that ‘There is nothing so practical as a good theory’. It was that quote that was in the back of my mind as I read an interesting report this week about the consolidation of the life sciences industry. As ever, please tolerate a little diversion into the theory and then I’ll come back to the practical.

Hit and miss

The report, by FiercePharma, looked at the 15 most notable failures of biopharma M&A in the last few years. For every spectacular success, such as Gilead’s Pharmasset deal, there were several embarrassing flops, like Teva’s purchase of Allergan’s generic assets.

The report concluded that each case seemed to have its own causes, such as legal issues or failed launches, but that these various problems all occurred despite lots of due diligence. These mistakes, highly visible in hindsight, seem to be invisible to foresight, which implies that our current methods of evaluating mergers and acquisitions are inadequate, at least on their own.

Enter Lewin

It was a discussion of failed merger and acquisition activity, with the board of a mid- sized pharma, that brought to mind Kurt Lewin. The group’s leader asked what practical help management science could offer here, with a sceptical emphasis on the word ‘practical’.

My mind immediately jumped to an unusual but relevant metaphor. The night before, I’d stayed in a hotel that was not one of my usual choices. It hadn’t been a good decision. Despite four stars and an expensive rate, the experience hadn’t been a good one: surly service, a cold room and a breakfast buffet that was more like a battlefield.

As I described it, my sceptical interlocutor agreed that my choice of hotel and making a bad acquisition had something in common: despite due diligence, neither of us got what we thought we were buying.

I took the metaphor further. When I chose the hotel, I was nominally buying something tangible that could be assessed in rating stars – a room, with bathroom, gym, restaurant, etc. But in fact I was buying a lot of stuff that wasn’t counted in my TripAdvisor-based due diligence: the attitude of the staff, a functioning thermostat, a well-staffed breakfast restaurant, etc.

Cautiously, the group accepted that what they bought in an acquisition also had tangible elements (the pipeline and balance sheet) and intangible elements (culture, behaviours and other ‘soft’ aspects of the company being acquired).

Blood will out

Once the board had accepted in principle that their due diligence could be improved by considering intangible factors, their questions became more focused. What could we assess? What management science is relevant here?

This led me to roll out my Lewin quote and then, you won’t be surprised to hear, introduce a Darwinian perspective. The relevant theory, I explained, was Generalised Darwinism, a term popularised and perhaps invented by my colleague and inspiration Professor Geoff Hodgson.

I described how, from that perspective, what is bought in an acquisition (the tangibles) is the company’s phenotype, such as its pipeline, assets, strategy, etc.

But those tangibles are created by the intangible equivalent of the company’s genotype, by which we mean the microfoundations and routines that enable its capabilities and create what we can see. To use an old phrase, ‘blood will out’, so if you really want to know what you’re buying, you need to consider the firm’s routines and microfoundations.

Brass tacks

At this point, I started to lose my audience. They were practical people and although they could grasp the ideas of microfoundations and routines, they demanded examples and recommendations for practical action.

Which brings me back to where I promised, dear reader. In addition to the evaluation of tangibles, I told them to consider what capabilities were critical to the success of the company to be purchased. Was it, for example, brand building or achieving market access?

Then, which routines (sustained patterns of behaviour) were responsible for those capabilities? Was it insight creation or proposition design, for example? Then consider which microfoundations enabled those routines. Was it abductive reasoning skills or payer relationships, perhaps?

Finally, when you know which routines and microfoundations are central to the success of the firm being acquired, do all you can to both retain them and spread them throughout the combined organisation. This, my Darwinian reasoning told them, was what made acquisitions work.

Easier said than done

Of course, the practical application of this advice is difficult. But that, after all, is what my clients get paid for. They now have, I hope, a practical approach to improving their acquisitions. And, as Lewin predicted, it comes from a good theory.

Professor Brian D Smith works at SDA Bocconi and the University of Hertfordshire. He is a world-recognised authority on the evolution of the life sciences industry and welcomes questions at

22nd January 2020

From: Research


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