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Profile of a Power Acquisition
Active Screening: A Key Step in the Acquisition Process

In 2006, Merck acquired SIRNA. In one step, Merck became an independent power house player in RNA Interference, a new technology that has already changed pharmaceutical R&D and could ultimately provide new types of therapies to a starving industry. The industry saw the acquisition as a master stroke.

Emerging Tech Insights believes that any organization can effectively use M&A as a growth strategy IF it employs technology mapping and competitive technical intelligence (CTI) methods. But how? In this example, we illustrate how technology mapping and CTI methods could have foreseen the logic of a Merck-SIRNA acquisition.

      BACKGROUND

Whether it supports Open Innovation or internal innovation, M&A activities proceed generally along a path with several steps.

(1) Identification of strategic needs
(2) Searching for legitimate opportunities
(3) Identifications of synergies
     (a) Organizational synergies
     (b) Fit to the strategic needs of acquirer
(4) Planning for integration
(5) Execution of the agreements

If all goes well, new opportunities or products appear as the result of new skills or new channels in the combined organization.
Steps two and three in the M&A process are a technology screening process. Several main versions are in practice today.

Screening in many large organizations is passive. Likely candidates are expected to visit and offer technology for sale, a process that can easily miss the best opportunity.

Screening in some organizations is based experts who scour the globe for opportunities. Experts can be expensive and may carry their biases into the process.

An Active Screening Process based on technology mapping and competitive technical intelligence methods can be a highly effective and low-cost alternative to experts or passive processes.

      ACTIVE SCREENING DEFINED

Active Screening is a business process in which collections of patents are organized to reveal legitimate M&A or partnering opportunities and to reveal the extent of technology overlap between organizations.

In this example, we will use patents to actively screen for hypothetical acquisition candidates for Merck in RNAi. Patents are public records of R&D activity for an organization. By grouping patents into technology components, key processes and product features, the R&D investment strengths and weaknesses of companies, organizations, universities and individuals can be revealed with remarkable accuracy. When the resulting data is tabulated and color coded, the foundation for an active screening process has been laid.

By using assignees in patents, an exhaustive list of potential acquisition candidates, with expertise in the target area, can be assembled. Our experience shows that the list can be 10 or more times larger than the list typically included in marketing research reports.

From patterns of R&D investment, organizational technology investment focuses become apparent. By comparing patterns of activity, organizational synergies are revealed. Fairly simple metrics can dramatically accelerate the identification of likely licensing, partnering, merger or acquisition candidates. Once the active screening process is complete, business development experts can search more effectively and negotiate with more security.

      ACTIVE SCREENING STEPS

Active screening is a repeatable business process for finding potential partners, merger or acquisition candidates or to identify buyers of intellectual property. Below and in Fig.1, we outline the key steps in an active screening process.

acquisition analysis steps 1. The first step is to conduct a broad and comprehensive patent search. A result of this step is the creation of a database.

2. The second step is to associate patents with parent companies in order to better understand what is in a portfolio and what is not present.

3. The third step is to cast the technology information into market relevant groupings: markets, categories and segments.

a. Markets are typically defined by marketing research. For our purposes, markets are a collection of related categories.

b. Categories represent the technology stack. A technology stack includes ingredients, materials, processes and methods or features arranged in a manufacturing sequence.

c. Segments are sets of specific solutions that belong to a category. A segment is defined by a set of keywords or key phrases. As a result, a segment contains companies, organizations and individuals who are pursuing specific solutions for the problem of the segment.

4. The fourth step is to count the number of patents or applications in each segment for each company. From the counts an Active Screening Matrix can be formed (Fig. 2).
company matrix
5. To search for acquisition opportunities or partners, we need only seek situations where one company’s strengths match another company’s weaknesses. The searching process can be electronic and employ a model to find a good fit (see below) or visual when a person scans the color coded table.

6. Once viable candidates have been uncovered, a competitive situation analysis enables an assessment of the targets. Criteria may include some of the following considerations.

a. Will the target company’s patent portfolio strengthen the acquiring company?
    How much? Where?
b. Is there knowledge (segment) overlap to help with communication or integration?
c. Is there cash flow?
d. Is there a useful distribution channel?
e. Other criteria as needed.

7. Finally, with a list of potentially viable candidates in hand and a reason to talk with the target(s), a Business Development group can make calls and visits and begin the negotiation process.

      AN ACTIVE SCREENING EXAMPLE

To illustrate the process, we applied an active screening process to the Merck–SIRNA acquisition in 2006. Our goals were to see if we would have predicted Merck’s choice and if we should have expected it to live up to the excitement generated on Wall Street and in the industry. This is a "back test" study.

RNA Interference (RNAi) is a process in cells in which a specific small piece of RNA turns off production coded by a gene within a cell. It is hoped that RNAi could lead to treatment of cancer, hepatitis and a host of other diseases. RNAi has already revolutionized drug therapy R&D. The technology is being pursued worldwide. As of mid-2006 when the acquisition of SIRNA by Merck was announced, we counted 23,000+ patents and 33,000+ papers. Using the process outlined above, we identified

·  four markets,
·  28 categories, and
·  200+ segments.

We mapped all segments and categories into our collection of RNAi related patents through October 2006. Using these data, we built an Active Screening Matrix. On the matrix each unique inventor, university, organization or company is listed along the left. The number of patents or applications each company holds in each segments is listed and color coded in a row to the right. Fig. 1 shows a portion of the Active Screening Matrix in this study. The Screening Matrix enables an analyst to see the investment focuses of each company and to compare the investments of companies easily. The Screening Matrix also allows us to efficiently mine the data for companies that meet criteria for a good potential acquisition candidate.

In this example, we focused on finding acquisition candidates for Merck by building a model which suggested how much each target company might strengthen Merck&s portfolio in each segment. Then, we rated each increase on a 0-3 scale (Table 1).


Table 1
Rating Meaning of the rating
3 indicates a dramatic enhancement
2 indicates some enhancement
1 indicates a very small enhancement
0 indicates no enhancement

One market in RNAi is related to agricultural applications. Since this study was about Merck, a pharmaceutical company, we eliminated the agricultural segments from the model. The process eliminated mismatched companies such as Pioneer Hybrid from the Merck acquisition candidate search.

Finally, we summed the scores for each segment in each company to form a rating. Then, we sorted by the rating. A high rating indicates a company with a patent portfolio that would strengthen Merck&s original portfolio. The table below indicates the top 20 candidates based on the model (Table 2).


Table 2
Rating Acquisition Candidate List
1 University of California
2 SIRNA
3 Johns Hopkins
4 Massachusetts Institute of Technology
5 Wyeth
6 Chiron
7 University of Texas
8 ISIS Pharmaceuticals
9 US Government
10 University of Massachusetts
11 Columbia University
12 Exelixis
13 University of Pennsylvania
14 Five Prime Therapeutics
15 University of Michigan
16 Rigel Pharmaceutical
17 General Hospital
18 Harvard
19 EI DuPont
20 Amgen

      RESULTS

Based on the model rankings SIRNA was an obvious best fit for Merck to acquire.

But, if an alternative to SIRNA were needed, the list presents a challenge. Most of the top 20 are universities and a competitive analysis shows that several of them are aligned with Alnylam, the MIT spin-off in RNAi. As a result, they are competitors; not acquisition candidates. A few of the companies are fairly large competitors for Merck.

To replace SIRNA, Merck might have needed to do multiple acquisitions or alliances.

      CONCLUSIONS

Our back testing of the active screening process supports the market’s enthusiasm for Merck’s acquisition of SIRNA.

Our study also shows that an active screening process would have predicted the path Merck actually chose.

While we have chosen to back test the idea of an acquisition, the process works equally well for other purposes.

·  Identifying acquisition opportunities
·  Identifying potential partners
·  Identifying merger opportunities
·  Identifying candidates for the sale of IP
·  Others

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