The Merger that Formed Aventis
It was the merger of Hoescht Marion Roussel, a German chemical and pharmaceutical giant that ranked 13th in worldwide pharmaceutical sales, and of Rhone-Poulenc Rorer, a French pharmaceutical, chemical and agro-chemical company that ranked 17th in the same list that hence formed Aventis in 1999. It was a time when mergers of companies were taking place in the pharmaceutical industry because it proved to be a wise decision to make. Four reasons were cited in the case, to wit: 1) the reduction of drug prices was becoming the foremost goal and focus of governments and private health insurers; 2) the research and development costs pertaining to each new successfully launched drug is increasing; 3) generic drugs have already penetrated the markets and are competing with their brand names; and, 4) parallel trading across Europe has been used by traders and wholesalers to maximize their profits to the detriment of the manufacturing pharmaceutical companies. (Margolis & Knoop, 2004).
In the light of these setbacks, Aventis was seen to take advantages of synergies that would come out of the merger of the two companies. Something as positive as this had to happen in the favor of the merged companies both to provide morale boost to the everybody in the newly formed company and to somehow give the financial community reasons for looking favorably at the merger as a wise and merit-bringing move for both companies. These they had to achieve despite the reasons behind the skepticism of the financial analysts which included moderate synergies between the two companies, and the fact that both companies were battling huge debts, weak margins, high development costs and limited product pipelines. (Margolis & Knoop, 2004).
With the newly formed company, one of the decisions that had to be made was regarding the location of the company’s US commercial headquarters. With both sides lobbying for their respective former sites in US, the management in the end announced that the commercial headquarters would be located in Bridgewater, New Jersey where Hoechst Marion Roussel’s Discovery Research facility is located. Such new location was the choice since it was also deemed ideal being close to a major airport – such proximity would, therefore, enable executives to fly to where they are needed by operations. This option served to establish that Aventis, indeed, is a new company and that it’s people, hence, form an irrefutably brand new team.
Combating the Strategic Issues and Challenges
The skepticism that confronted the merged company came from all sources – financial analysts, officers and employees of the company, shareholders, labor unions, national authorities of Germany, France and America, and the administrators of the European Union. This was quite a lot to handle and the management had to put together sound strategies to bring forth satisfactory operating results in the coming months after the merger.
Aventis was to focus and to work on succeeding in the US market. The management have discussed that the way to survive – the China and India threats notwithstanding – is to tap a good share of the US market. Profitability in terms of better percentages and bigger amounts would as well be targeted. While the previously independent companies were before simply barely earning, Aventis was projected to a company that will reap better profits from its operations. This can be made possible by having at the onset a unified and clear vision and strategy for the company, and then having everybody in it involved in steering the company toward the same direction.
One way to improve the company’s profit figures is to improve its sales. One factor that dampens sales, though, is the long winter in the US which causes the sales of Allegra, their leading brand for allergies, to drop. Another factor is the “legal challenges regarding the production of a generic replica of Allegra and the award of over-the-counter status for its major competing product.” (Margolis & Knoop, 2004). Aventis, thus, has to come up with new products, but it is not easy to accomplish this. With its decreasing sales levels during the winter months, a product that is saleable during those very months would well counter the dilemma.
Building a strong late stage pipeline also would boost the company’s chances of coming up with a “hit” product, which is a goal that it ought to attain on a more regular basis. For the same goal, the company would have to come up with means to effectively combat the postponement of major drug approval that should be issued by the US FDA. It would be wise to study the procedures and systems of the company for this segment of the R&D, compare how they are faring against other pharmaceutical companies and accordingly devise ways to counter this setback.
Indeed, news of a new “hit” product in the market would surely brighten up the way the company is sized up, valued and classified in the stock market – this would as well solve the threat of the decreased market value of the company, as based on the performance of its stocks in the bourses.
Furthermore, there might be no reversal of the ongoing trend of governments and health institutions working for the lowering of medical expenses in their constituents – this means that so long as quality is not compromised, generic brands will ultimately be preferred in the market. This should be considered as an important development when the management decides on matters pertaining to the length of validity of the patents attached to each new product that the company has discovered and manufactured.
Sales can also be improved through forging alliances with the right marketing partners. This involves knowing the company’s strengths and weaknesses and then looking for a partner that would complement such. The right partners will bring in increased sales and will expand the company’s reach in a faster and easier way. Complementation should be achieved between Aventis and its prospective partner company. In areas where Aventis has strong marketing capabilities, Aventis should partner with an entity that can help increase its strong products – whether by manufacturing a new one in partnership with Aventis or by allowing Aventis to market and sell its strong products for attractive returns.
It has been noted that the very strong earnings growth in the pharmaceutical industry was driven by strong new-product flow. The specific major therapeutic categories in the year 1998 were related to the cardiovascular, metabolic and central nervous systems. (Margolis & Knoop, 2004) This market trend should be among the factors influencing the general direction that the management would take in relation to the specific products to push for and prioritize. The main thrusts of their R&D, manufacturing and marketing departments should, therefore, synchronize with these leading product segments.
With the increase in sales not being an easy target, another way to increase profit would be by lowering the company’s incurred costs and expenses. Aventis can further cut down the number of its manufacturing sites and retain only the ones that prove to be real strategic and beneficial to the overall bid to generate more sales. By doing this, a big slice of the total costs and expenses of the company can be cut off.
There are benefits of the merger that ought to be maximized/ The economies of scale would naturally give Aventis more leverage in dealing with the falling prices of pharmaceutical products in the market and the rising costs to manufacture the same. The same economies of scale and the synergies of the two companies, as well, should improve the depth and breadth covered by Aventis in terms of sales and R&D. Likewise, the synergy of three cultures and combined resources of the two companies should boost the degree of the new company’s efficiency in manufacturing, marketing, sales and distribution.
Three specific challenges were named in the case: productivity, integration of new technologies in the existing systems, balancing late and early stage investment, and the quick development of very good, late stage pipelines. (Margolis & Knoop, 2004)
Productivity requires making decisions that will continue to pay off long-term into the future. It includes designing the operational procedures and systems to achieve lowered costs without adversely affecting the quality of the company’s products. To help make productivity doable and easier to accomplish, the integration of new technologies should be carried out to shorten the working hours and lessen the processing stages required in the manufacture of the company’s products.
On the investment and finance side, management would have to learn to strike a better balance between investing in the early and then in the late stages of the R&D procedures that lead to discovering a new breakthrough product. Spending on each attempt is a natural part of the scheme, but there would be more prudent ways to budget the total investment for each product in the making so the financial soundness of the company will be maintained. And without a doubt, the company’s investment in each new product would all turn out to be profitable investments if the company’s R&D would come upon a valuable means to develop very good products that would, in such short duration of time, reach the late stages in the pipeline.
Combating the Organizational Issues and Challenges
One glaring issue that was to be resolved is the existence of cultural differences among the people in the newly formed company. Even the management team members represent such diverse cultural origins – Germans, French and American. These three nationalities have their distinct way of thinking and seeing things, of making their decisions and moves, even of solving problems. These differences, once not understood by the people concerned can easily lead them to lose respect for or patience with each other – each one would think the others are wrong, slow, too impulsive or simply incompetent. One of the goals of the management team is the successful integration of the people of varying culture and nationalities within the company. Each one would have to understand how he is compared to how others are. An orientation on the general traits and ways of thinking of the others, given their cultural backgrounds, would help each one to appreciate the differences that prevail between himself and the rest. Indeed, the case states that as early as the year 2000, national differences among the German, French and American executives of the company tended to show. (Margolis & Knoop, 2004) Being aware of such differences, on the other hand, can be a mighty tool that can help come up with the best synergies among the people brought together by the merger.
Through all the differences there were amongst them, the management team had to put their heads together and agree on crucial matters and this they did. Thus, it was decided that a two-tiered governance board – like those of German companies consisting of a supervisory board that is the equivalent of the board of directors and a management board that is the equivalent of the management people appointed by the board of directors – was established. Between the CEOs of the two companies, one was elected as CEO of the merged entity. Furthermore, the manner in which the rest of the staffing and management slots were filled was finalized through a compromise. Through all these, the management team representing three cultures weighed and argued and came to decisions that were deemed best for the overall welfare of the newly formed company. “The next challenge was how to bring the differing perspectives into a shared view.” (Margolis & Knoop, 2004)
On top of the strategic and organizational designs that the management team would opt to go for in their bid to make Aventis a much bigger and stronger company, it is recommended that they tap the needed expertise and critical talents of people in the industry to catch up with the more profitable and successful pharmaceutical giants. With the variety of expertise, talents and strengths represented by the current management team, there is still some specialization and adept skills that Aventis ought to acquire. These holes in the menu of talents already tapped by the company should be filled in. The right addition to the management team should be hired as soon as they are identified and singled out.
By continually divesting from under-performing brands and product types, Aventis can zero in on products and activities that yield the highest returns. This step also should mean beefing up on the portfolio portion representing the profitable products of the company.
Margolis, J. and Knoop, C. (2004). Aventis SA (A): Planning for a Merger. Boston, MA: Harvard Business School Publishing.
Margolis, J. and Knoop, C. (2004). Aventis SA (B): A Company is Born. Boston, MA: Harvard Business School Publishing.