The life sciences industries are running rampant with transactional activity. Reports of new ownership of products, portfolios, or companies by acquisition, merger, or planned merger or acquisition make headlines on almost a daily basis. From the outside looking in, M&A activity is becoming “business as usual.” As with other aspects of the daily grind, however, the inside perspective tells a far different story: these mergers and acquisitions are fraught with a number of surprises—not the least of which is “what devil is (or how many devils are) in the details.”
It is not always possible to be prepared for what may reveal itself during due diligence, and occasionally even the most highly skilled teams overlook critical components of a deal that create less-than-optimal scenarios for acquiring companies. In order to minimize the risk, cost, distraction, and delays of a good deal gone bad, a carefully constructed M&A process may be the best bet in striking a successful agreement that stands the test of time. Developing a due diligence plan that places emphasis on compliance before the kickoff of an acquisition can create efficiencies, facilitate faster and more complete identification of potential concerns, and help actually reach a closing date that satisfies both companies and their shareholders.
The Art of Due Diligence
Conceptually, due diligence is a fairly simple idea that involves the careful review of its target. This provides an acquirer the opportunity to identify and assess key risks that a target—be it a product, product line, company, joint venture, or even co-promotional effort—may pose to the purchasing organization, as well as to surmise its overall compatibility with the company. Advance review of a target’s features, risks, benefits, and commercial potential is where companies tend to learn whether a deal will sink or swim, if their due diligence teams are really doing their homework.
A typical scenario involves some combination of comprehensive checklists, document review and analysis, review of public records, interviews of key personnel, and the occasional deeper inquiry into matters that may complicate a transaction. This process is often shepherded by the Legal department in close coordination with outside counsel. Within the life sciences industries, it generally focuses on highly visible functional areas such as commercial viability, clinical efficacy, regulatory obligations, potential profitability, and goodness-of-fit with a company’s existing business objectives. Knowledge of the business risks among these areas is critical to a sound acquisition, but the integration of compliance is unquestionably important.
The Role of the CCO
With the recent uptick in regulatory scrutiny and enforcement, the cost of non-compliance is so great that companies cannot afford to overlook compliance when evaluating targets. It’s not all fear mongering, though; that participation has a meaningful benefit, too. Compliance has a uniquely “independent” function within the company that tends to transcend nearly all functional areas of the corporation in some form, and identification of risks and development of strategies to manage those risks are inherent to the compliance function. Effective management of a compliance program is borne of routine corporate communication, inquiry and investigation, complete and accurate reporting, and adaptability. In an acquisition and integration environment, these habituations easily pivot to thorough evaluation of a target’s core therapeutic and strategic interests and inherent risks. Best practice leaders incorporate the CCO in the deal review committee, working lockstep with business development, legal, tax, and commercial functions to ensure that potential deal-breakers are identified early. If this does not sound familiar, fear not: many Compliance departments find themselves receiving due diligence checklists alongside a publicly issued press release indicating the outset of a transaction. In either case, preparedness rules the day.
Time constraints are always present in due diligence, and advance reconnaissance is not always—seldom, actually—practical. Compounded by the inherent complexity of the heavily regulated and inordinately complex life sciences industries, an effective due diligence process that is built ahead of M&A activity can significantly impact the success of a transaction before an agreement is reached between the buyer and seller. This is especially true in scenarios where the lead time to begin due diligence is minimal to nonexistent.
In conceiving a due diligence plan, the CCO should assess the company’s existing compliance considerations and the department’s current resource base in terms of skills, placement, and time commitments. From here, mapping the systems, technologies, policies, procedures, and personnel that support each function can accelerate integration activities on the closing end of a transaction, such that affected areas and their relationships to each of the company’s major support systems are identified in advance. Serious consideration should be given to available capacity among existing personnel resources, as a fair assessment of this potential limitation is crucial to success of both due diligence and existing operations.
Companies often underestimate the amount of distraction M&A activity can render on day-to-day business. One large biopharma reports that its Compliance staff assigned to M&A diligence and integration support these activities with a time commitment of approximately 30 percent. This is a significant, but necessary, resource allocation that is not always practical—especially at small- to-mid-sized companies. In a fast-tempo environment, creating a small team that routinely performs this work can help to minimize variability in workflow and maximize efficiencies across transactions, particularly with respect to internal process development and improvement.
If, however, due diligence is less of a routine then cultivating a relationship with a trusted business partner, supporting this function may prove a useful augmentation of existing resources. That partner should understand the company’s product portfolio, compliance processes, unique risks, and market position. Developing an M&A plan of attack together provides a level of insurance to ease the predicament that resource and timing constraints (or both) can create by impeding effective and efficient due diligence. When leveraging a partner’s expertise, skilled resources can be inserted to perform most of the heavy lifting in a predictable manner so that day-to-day business continues to run smoothly and, later on, integration mapping and execution can occur in a seamless transition that is minimally disruptive to ongoing operations.
As a company evaluates its target, it should strive to answer several critical questions: What are the unique risks to this acquisition? What mitigating practices are in place to address these risks? How does this fit (or not fit) with our existing compliance program? What else needs to be implemented before Company (or Product) X is a part of this business? This includes a review of policies, procedures, processes, systems, training, and personnel that support the business activities of a given target. Using a combination of checklists, program and systems evaluations, document reviews, and interviews, the end state of due diligence will typically yield a report of findings together with a solid integration plan that identifies method and timing needed to effectuate compliance program changes that support old and new interests alike. Communication regarding changes in operations will need to be delivered to all affected stakeholders—not only those employees and customers who may be impacted, but also those who have a keen interest in the company’s activities, such as government monitors assigned to either the target, acquirer, or both. Multi-stakeholder communication is second nature to the compliance role. This is such a critical feature of successful diligence that, done well, communication to those affected throughout the organization from the CCO will make evident the value Compliance plays in the due diligence process as a trusted and valued business partner.
Last but not least, refinement is crucial to maximizing the investment in advance M&A planning. A company in growth mode may undertake several acquisitions in rapid succession, and this is where development and refinement of a due diligence and integration process can really pay dividends. By implementing a strict discipline of team debriefing at the conclusion of each diligence and integration period, a team can highlight successes, identify lessons learned, and improve the company’s existing process ahead of the next transaction. While this often happens informally, implementing a formal “closeout” meeting to single out what did and did not work in each merger or acquisition provides valuable insights.
The path of any transaction will inevitably present twists and turns, but navigating through difficult terrain is more manageable when equipped with a reliable map. Taking the time to create a well-thought compliance due diligence plan will provide an efficient manner to evaluate a target against existing infrastructure, thus determining whether a good fit really exists and, if so, how best to integrate a new product or company into the existing architecture. Is the company equipped to assume the risks of the combined entities? What modifications need to be made? What synergies can be leveraged? What timing is feasible? Getting to these answers quickly is critical. With forethought and discipline, a CCO can expect stellar results from the Compliance team that in turn will benefit the (newly combined) company, its shareholders, and its customers.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.