The trend to blend: M&A in pharma - Are you ready?
Paul Gershlick and Laura Barrell examine the recent surge in mergers and acquisitions, and look at what small to medium sized firms can do to make themselves more attractive to buyers.
Mergers and Acquisitions: Get it while it's hot
The subject of mergers and acquisitions (M&A) in the pharma sector has never been more topical: the recent failed £69 billion takeover bid for AstraZeneca by Pfizer has dividing opinion in the pharmaceutical industry, and touched on questions of pharma industry strategy, investment in science, and tax.
Meanwhile GlaxoSmithKline and Novartis have also recently signed a major deal in which they swapped their respective oncology and vaccines businesses. So is M&A once again the business model of choice? And if it is, what can small and medium sized businesses (SME) do to get your house in order for that lucrative M&A offer?
Times are changing
Mergers and acquisitions have always been part of the pharmaceutical business plan. This is not new, and we have seen companies such as Sanofi successfully grow through M&A activity, not to mention the megamergers of Astra with Zeneca and Glaxo Wellcome to SmithKline Beecham. The change we are seeing now is the rate and dominance at which M&A is being used to achieve diversification and growth across global markets.
The problem is that traditional business models are not working. Product pipelines are drying up and research and development is not producing the results that defined the "blockbuster" age. The effect of this is that innovation is slow and high profit levels are becoming harder to maintain. Larger organisations are therefore starting to "shop around" for ways to enter emerging markets and expand their product portfolios. This "plan B" is all about diversification and growth through acquisitions, collaborations and strategic partnerships rather than the classic "plan A" - research and development.
"M&A has always been part of the sector: the difference is the rate and dominance at which M&A is being used to achieve diversification and growth across global markets"
Why are mergers and acquisitions good for SMEs?
M&A can benefit the industry. Many SME pharma companies have an exit strategy in place; in fact, some innovative investors bank on it. Bringing a product to market is a lengthy and expensive process, if an SME has a brilliant idea, but does not have the funding to take it to the next level (as well as pay for the global patent protection that the product may need), this is where larger pharma organisations with strong cash reserves can step in and keep the pharma economy ticking. These types of acquisitions enable high-risk products to be given a fighting chance to come to market, for the benefit of patients globally.
The cold, hard fact is that stakeholders want a return on their investment and M&A is often the quickest and easiest way to see this happen.
"If the purchaser finds something that it doesn't like, it is likely to ask for a reduction in the sale price"
Making your business more attractive to purchasers
When an organisation looks to purchase a business, it wants to know exactly what it is buying. The result is an often intensive (depending on the size of the deal) due diligence exercise where the target organisation is scrutinised by the purchaser. If the purchaser finds something that it doesn't like, it is likely to ask for a reduction in the sale price, additional protections at the seller's risk, or it may just walk away from the deal altogether. To avoid this happening, organisations need to get their "house in order". Here are our five top tips to look at in your business in advance of an M&A strategy:
1. Are you compliant with the law? Ensuring that you have the right regulatory approvals and commercial/employment contracts, bribery policies and health and safety procedures in place can reduce the level of risk a purchaser sees in your organisation. Low risk equals happy purchaser.
2. Are your customers and suppliers bound by solid contracts? Certainty has a value and contracts (well-written ones at least) give a business certainty; for example, they show how a business can terminate the relationship, what to do if that relationship goes wrong and the likely level of income which can be expected.
3. Are your products and your brand protected? Intellectual property (IP) is often a big part of the purchase price in a pharma deal. It is important that your organisation has protected its IP and its brand; for example, if you have an external company create a logo or design for you, make sure they have assigned the rights in the design to your business.
4. Are your records up to date and easily accessible/how is your credit control looking? A purchaser will want to see your records. Make sure they are well organised and you have no gaps in your record keeping, especially in your financial and compliance documentation. Gaps equal uncertainty, and uncertainty can be costly for a seller. If in doubt, seek the assistance of a regulatory expert or a Qualified Person to ensure your business does not have any skeletons in the closet which may affect the purchase price.
5. Have you been keeping your corporate governance up to date? Company law requires that a company keeps certain registers of its shareholders and any shares which it has allotted. A purchaser will want to see these registers and will check that they are up to date - make sure that it is not disappointed.
Guidance is crucial
A seller wants to get a good price for the sale and ensure that the process is smooth, efficient and cost effective. If there are any bumps in the road, you will need advisors which you can rely on to give you good legal and commercial guidance and, most importantly, not let you get bullied by what can often be a larger and more aggressive purchaser. This is true whether you have been made an unexpected offer or you are actively taking your business to market.
M&A: Here to stay?
Megamergers or small acquisitions - the pharma industry has it all. It is not clear how the sector will evolve over the coming years, but the current trend in M&A strategy does not look set to slow down any time soon. Prepare for the trend to blend and see what the future holds in store for your organisation.
About the authors:
Laura Barrell is a Solicitor and Member of Life Sciences and Healthcare at Matthew Arnold & Baldwin LLP.
T: +44 (0) 1923 215007
F: +44 (0) 1923 215004
E: laura.barrell@mablaw.com
Paul Gershlick is Partner and Head of the Pharmaceuticals and Life Sciences team at Matthew Arnold & Baldwin LLP; he can be contacted using the details below:-
T: +44 (0)1923 208816
F: +44 (0)1923 215004
E: Paul.Gershlick@mablaw.com
