Planning for Post-Deal Integration

Jo Pisani and Cynthia Chan outline the key legal considerations for post-deal integration.

M&A and licensing remain the mainstay of strategy execution for pharmaceutical and life sciences companies.  Although the volume of deals activity in 2017 declined by 22% vs. 2016 we see an increase in the complexity of deals given the changing market dynamics. Pharmaceutical companies continue to focus their business models through divesting or swapping non-core business units; changing healthcare ecosystems and the need for new commercial propositions have led to new partnerships and acquisitions (new technologies, digital and opportunities to integrate further into the value chain through acquiring services closer to the patient/consumer).  In addition, US tax reform has shifted deals interest back to the US again. Traditional pharmaceutical models are now being challenged by new entrants with very different approaches to innovation and different value propositions. This has increased the competition for deals in high growth areas.

The increasing complexity of deals means that predicting and navigating legal issues has become as critical as ever.

When seeking to buy a pharmaceutical company or business, it is crucial to plan for its post-deal integration in advance of a transaction, in order to minimize any disruption to the acquiring business following completion. Below, we briefly touch on some of the key legal issues that may arise.

Plan for integration

An important aspect of the buyer’s legal due diligence of the target company should be to identify any areas where the target’s operating model may be incompatible with the buyer’s own model. For example, the structure of supply and distribution arrangements and the nature of the IT systems used by the target. Such systems are often particularly important to pharmaceutical companies in the context of managing their licensing and market authorization position.

From a commercial and tax perspective there is usually a degree of urgency to plan and implement the integration of the newly acquired entity after completion of the deal to ensure that the new structure is aligned within the same financial year and to realize early benefits of synergies. As such, early planning for legal integration is very important to other stakeholders.

Corporate memory

It is important to ensure that the target company retains its key personnel after the completion. This is critical for target’s employees with specialist knowledge or significant corporate history and experience with the company. The buyer’s legal counsel should consider the HR implications of potential changes to the group structure and to the target company, such as changes in employment location, jurisdiction and roles.

Depending on the local law of the target company’s operations and on whether the target or its subsidiaries have works councils, trade unions or collective bargaining agreements in place, additional consultation process may be required for changes in company structure and employment conditions. These processes will have a critical impact on the implementation timeline and can influence employee relations and retention prospects.

Governance and compliance

Changes in the governance structure and compliance processes include anything from public registry filings on change of company names, changes to letterheads and invoices, to modifications to the business licenses and market authorizations of the target company.

As licenses are generally attached to a legal entity, a transaction involving a share sale should not prejudice the licensing/market authorization position of the target but this should be confirmed in each case in view of any relevant jurisdiction: in certain jurisdictions, licenses are held by the parent company of the relevant entity that conducts the business. Where an entity changes its name and address after the completion, this will trigger a need to update its market authorizations.

In an asset sale situation (where the target is a business and not an entity), a transfer of market authorizations would be required. Market authorizations can take a long time to transfer (over a year), and therefore interim arrangements (licensing agreements) are often put in place to enable a buyer to obtain the benefit of the licenses before the legal transfer of those licenses is complete. Where territories require the owner of the business to hold the underlying licenses, it may be necessary to reach a specific agreement with the licence issuer as to the nature of the interim arrangements. It is therefore critical that any problem jurisdictions, from a licensing perspective, are identified at an early stage as part of the due diligence review.

Jo Pisani is Partner PwC Strategy& Consulting. Cynthia Chan is PwC Director, International Business Reorganisations and Head of China Business Group, Legal.