Navigating M&A Complexities

Apr 01, 2012
By Pharmaceutical Executive Editors

Jim Bedford
Mergers and acquisitions have been prevalent in the pharmaceutical industry as companies seek to grow and fill pipeline gaps. In our business as compliance and quality advisors to the industry, we are seeing an upswing in carve-outs, where a parent company spins off a subsidiary or drug. More carve-outs reflect investors' desire for proven products with less regulatory risk and investment needs than with developing new drugs. For sellers, carve-outs esentially offer the opportunity to bring in cash from non-strategic assets.

Whether it's M&A activity or a carve-out, there are a number of regulatory and technical issues routinely left on the back burner until the deal is closed and the transition begins. A common scenario involves the new buyer acquiring an established international drug product with expectations of ongoing revenue streams, oftentimes without conducting thorough regulatory and technical due diligence. After the deal closes, the buyer's regulatory team learns that they need to re-register the facility, conduct drug listing activities, and make mandatory product labeling changes. Some countries can require a complete re-approval process. These activities take time and money, and often the buyer's regulatory team lacks the bandwidth to handle these simultaneous tasks. As a result, revenues are delayed, budgets are exceeded, and the deal loses its luster.

The Solution

We argue that the better path is to fully quantify the post-deal regulatory/technical activities and their associated costs as part of the due diligence process. This requires deep involvement from subject matter experts or experienced technical consultants in the early stages of the deal. When both buyer and seller have a full understanding of the scope and costs, these aspects can be factored into the deal price or negotiated into the transition services agreements (TSAs). Additionally, a solid understanding of this subject may provide capitalization, escrow, or other financial advantages.

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