Why did you decide to go after Organon BioSciences?
Chemical and pharmaceutical cultures are different — and that is where there were opportunities. Akzo Nobel is in the chemical business, and I knew they had certain challenges owning a pharma company like Organon. In 2003 I got to know the then relatively new CEO at Akzo Nobel, Hans Wijers, and became even more aware that the company leaders viewed pharmaceuticals as more risky than their chemicals and coatings business. After that I kept in touch with Akzo Nobel and waited for the right time.
What do you consider when looking at an acquisition?
I look for three things:
- Does it fit with the strategy? You have to think from the inside out — what your company needs in the next stage and whether the acquisition fits that profile.
- Does it fit from a science point of view? Many big mergers in our business bring some short-term increase in earnings. But if you cannot develop the R&D engine and make it better, you're just buying volume that you cannot support downstream.
- The numbers: These have to be satisfactory. You cannot pay too much or it will be dilutive for too long. Shareholders will not accept that.
Based on these three criteria, Organon was a good fit. So we kept an eye on the whole situation. Our team was very aware that this could become our opportunity.
How did it happen?
After his arrival as CEO of Akzo Nobel, Mr. Wijers let it be known that he was flexible on pharma and that he preferred the coatings business as a central and reliable business. Then in November 2006, Pfizer decided to exit its alliance with Organon on an advanced-state R&D compound for schizophrenia, asenapine. The reasons for Pfizer exiting the compound were not entirely clear to us. This exit created a strategic opening as Pfizer had had a change of control option on asenapine — which had served as a deterrent to anyone wishing to acquire Organon.
Not long after that, and not totally unexpectedly, Akzo Nobel looked at its strategic options and decided to spin off Organon as a separate company through an initial public offering. We watched the IPO with interest. The advantage we had here was that we could see what they were doing; we saw in news analyses that they would be entering the IPO market with an implied market cap of about 9 billion euros (about $11.7 billion). We looked at that and then did our own numbers. Using 9 billion euros as a benchmark, we had a one-time opportunity to make a bid.
Where this thing worked for us was that the implied pricing for the IPO turned out to be good window. We thought the market was pricing it on what it knew about the operational cash flow but was not taking in the full value of the pipeline in an integrated pharma context. We thought Organon had more value under a pharmaceutical umbrella with a pharma corporate team at the helm. With that in mind, we needed to come up with a number that was high enough to get Akzo's interest, and low enough to be interesting to us.
How did you come up with the 11 billion euro figure?
The quality of the numbers, remember, is directly related to the quality of the assumptions. In this case, an extremely compressed timetable also played a part. You have to have a sense of what is possible; then you can give input and have people crunch the data. This sense of the possible has to come from senior management. In this case, there was a critical team of five: the CFO, the head of R&D, the head of commercial, the head of animal health and me as their "orchestra leader." We talked about all aspects of the business, including existing products, the R&D pipeline, finances, and risks. Because we were such a tightly knit team, with so much experience, we could look at the thing as a whole and make good reasoned judgments.
What we saw was that Organon had a good position in franchises such as women's health and animal health, where, we believed, the underlying cash flow was strong and not subject to sudden and massive declines. We estimated an underlying value based on cash flow to be roughly in the same range or somewhat lower than the expected IPO market value. But then we took into account its value as part of a pharmaceutical company. We were confident we could do more with it than a chemical company could, something that might not have been widely appreciated because Akzo was typically followed by analysts who specialized in the chemical industry. We took into account two late-stage R&D projects that we thought could be very valuable and which may not have been well identified by the chemical analysts following Akzo Nobel. At 11 billion euros, we felt we were in a good zone.
We could have done all kinds of calculations, but that only would have created confusion at this very late stage. Also, we didn't have time. We didn't want to get lost in irrelevant details. We kept it simple.
So you decided you wanted to make a play for Organon. What came next?
We had a regular board meeting in late February 2007, about two weeks before the IPO process was scheduled to begin. The evening before, I had an informal discussion with the members of the board at the Four Seasons in New York. This was not a new subject for the board, as we had included Organon as part of our previous strategic discussions. I got clear signals from board colleagues that they would be willing to move if a case could be made in a formal manner. Overnight, we mobilized the team, as well as the investment bankers — we used Goldman Sachs — to present the case to the board.
How did the board react?
In a sense, the strategic homework had been done long before. We were progressing in our transformation plan; we had reached the end of our turnaround phase and launched the beginning of the so-called Build the Base phase in October 2006.
Along the way, we had kept the board updated about the strategy and informed them of our thinking regarding strategic transactions. So they were familiar with the strategic direction and the capabilities of our management team.
The board was thorough in its questioning, particularly about R&D prospects; they also wanted to know about financing, culture and execution. There was the concern about how an uninvited bid from a U.S. company would be received by a European business group that was dreaming to be independent. There was the concern about the cultures. These were quite different — not only because of the different nationalities, but also because the organizational structures and operating systems were different. There was also the political issue of Organon being the largest Dutch pharmaceutical company.
But the board knew we had been interested in Organon for years, so they were not that surprised; and when we demonstrated our commitment and assured them it was doable, they felt they could put their trust in the management team. We got the go ahead.
Right after the board meeting, I wrote a letter to Mr. Wijers. A personal courier presented the letter to him in the Netherlands.
What was the response?
Well, they didn't call back right away, which was not surprising. We knew that Mr. Wijers had to think about it and talk to his own board. We hoped he would not just dismiss it. But you never know. He could have thought, "No, we're too far along with the IPO; it's too late."
But then he did call. He asked if we were truly serious about this. I told him we were. Provided we could be flexible and expeditious with due diligence, and held firm on the number, he said he could possibly work with their board on something with us.
As we heard later, the Akzo Board was scheduled to meet shortly after we had sent the letter; this would be late February. They were preparing for the different steps they would have to take to separate the businesses in anticipation of the IPO. Then our letter came in, with a number that they could not ignore. A parallel discussion with us was agreed in principle, and in early March, I crossed the Atlantic to talk in person.
Did you have trouble finalizing the terms?
Not the price. We both knew what we wanted. But getting the deal negotiated in just a few days was more challenging, especially with the IPO looming.
I told Mr. Wijers that we were not going to go any higher than 11 billion euros, and he told me if we tried to go any lower, they would proceed with the IPO. That part was clear. So it came down to due diligence and terms and conditions.
A very small, senior group from Schering went to the Netherlands to talk with senior management about the major issues. For example, our head of R&D talked to their head of R&D. With that kind of knowledge base, and working at that level, we could make good judgments.
When doing due diligence, it's important to separate boulders from small stones. We did this with great care, but we concentrated on the boulders: R&D; where projects stood with the FDA; intellectual property; patents; litigation; compliance. These are the conversations we had, instead of a lot of details that don't make a big difference. Because of the compressed time and small number of people, the leaks and speculation were contained. Leaks occur when things go on for a long period. I crossed the Atlantic again to jointly announce the acquisition of Organon — the same week the IPO process would have been launched.
Why do you consider this acquisition a success?
It's not easy to look back and see too many large mergers where there has been a clear and early success. Generally, you have to wait at least three years to declare victory, particularly in the pharmaceutical industry, because growing combined R&D is always a challenge. Growing combined revenues can also be a challenge. This one, though, was validated almost immediately; the stock prices for both companies went up the day it was announced, which is unusual. Also, earnings were accretive in the first full quarter after the acquisition and became more accretive in the subsequent quarter. The R&D pipeline compounds we acquired proved valuable, specifically the schizophrenia drug asenapine, trade named Saphris.
The industry noted this success as well. Schering-Plough disappeared on November 3, 2009, when it merged with Merck to form the new Merck; even so, two weeks later it won Pharmaceutical Company of the Year in London in the annual Scrip Awards. One of the stated bases for this recognition was the successful integration of Organon.
Also, you have to remember that many people were generally not excited about Organon. There was a lot of skepticism about Saphris, which Pfizer had walked away from. The prevailing view was that Pfizer gave up on asenapine because they saw major problems with it either scientifically or commercially. Companies, Wall Street analysts, and even the press wondered aloud how we could succeed where Pfizer could not — and if eventually we would come to the same conclusion that Pfizer did.
But Saphris did get approved by the FDA in August, and subsequently launched. Organon's innovative anesthesia product, Bridion, also was approved in Europe and launched there. So this was something that we accomplished that was not previously clear to others.
Very few deals turn out as well as this one.
-As told to Cait Murphy
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