Happily ever after: Why scientific due diligence is key to a successful M&A marriage

When companies choose to enter into merger, acquisition or, indeed, any type of deal, it’s not unlike a marriage. And like a marriage, its success will depend on how well informed and prepared both parties are before the alliance, and that both the buyer and seller are committed to working together proactively throughout, including after the deal has closed. For life sciences companies, the process of assessing the potential for a partnership or licensing agreement is best understood as scientific due diligence.

Simply put, due diligence is making sure you get what you expect. But the process involved in achieving that goal is anything but simple and requires establishing an efficient process through careful preparation and consideration from both parties.

A bumper year for M&A marriage?

Partnering is important to both parties. For small companies, the experience of larger pharmaceutical companies is seen as invaluable in the marketing application and commercialization process. And while more small biotechnology companies are choosing to launch their first product on their own, many do face issues when it comes to product uptake and launch value, a McKinsey report found.

Companies seeking to sell their products are also often motivated by the need for funding and the desire to streamline their product or therapeutic mix or disposing of under-performing brands.

For larger companies that are considering buying companies or products, M&A is important for several reasons: patent expiries are resulting in less robust pipelines, while a competitive R&D environment means companies must look for new ways to innovate. Some are also looking to optimize their sales and marketing strategies and expand their sales base.

Some analysts have predicted that 2022 will see a significant increase in M&A activity. PwC expects life sciences M&A investments to reach between US$350 billion and $400 billion with continued biotech acquisitions in the $5 billion to $15 billion range as well as large deals as companies look to diversify their business. PwC analysts base this prediction on their assessment that there is a large amount of capital allocation available for such deals.

Start early, be open

With increased potential for deals, companies need to prepare early to ensure that the fit is right, that they are well prepared, and that the process is transparent with potential issues discussed and mitigation strategies outlined.

Buyers need to have clear objectives. They should start by preparing their corporate materials and strategy as it relates to M&As, partnerships and product licensing, then define and identify targets and conduct a thorough internal review of those prospective targets.

Sellers need to start the process of assembling their product data and documentation early, agree the target terms and partner profile with careful consideration for protecting and adding value to their product or technology, and, with those criteria in mind, identify target partners.

A successful, lasting marriage

Once the initial screening and evaluation has taken place and a potential partner has been identified, there are several important steps both seller and buyer should follow for a happy relationship outcome. These steps include:

• Establishing a due diligence team with well-defined roles and responsibilities and clear lines of communication
• Ensuring the data is reviewed by different functions, including nonclinical, clinical, regulatory, pharmacovigilance, manufacturing, business/commercial, legal and intellectual property
• Conducting on-site visits not only to review findings and potential solutions but also to test the cultural fit of teams
• Preparing formal due diligence reports comprising an assessment of the data, potential solutions raised and questions that still need to be addressed
• Presenting key findings to management for further discussion and decision making, with clear recommendations on how to proceed

There is a saying in Germany, “die katze im sack kaufen”, which translates literally to “to buy a cat in a sack”, in other words you are buying something without first inspecting it so you know what you are getting.

Without good scientific due diligence, there is a risk that what you acquire will be far removed from what you thought you were buying. Equally, as the seller, you want to make sure you get the best deal possible for your product or technology while ensuring a trusted relationship with the buyer. The goal should always be for a happy marriage with both parties getting what they want from the relationship. Scientific due diligence is the best opportunity to achieve a happily ever after M&A outcome.