When managing liability in life sciences industry mergers and acquisitions (M&A) and joint ventures, it is not just who you know, but how well you know them; relationships are important.
Today, when pharmaceutical, biotechnology, and medical device companies contemplate a merger, acquisition or joint venture (JV) they need to broaden their focus beyond just determining financial risks to investigate risks associated with product safety and reliability, regulatory compliance, and reputation.
The challenge is taking due diligence to the next level – to identify and truly understand a potential target’s hidden liabilities, including its regulatory and compliance structure (or lack thereof) – to minimize existing or potential risk. The new watch words: Know the relationship; know your partners. This is true whether the potential partner is in the developed world or in an emerging market.
Steps to manage M&A/JV liability
When contemplating a potential M&A transaction or joint venture – domestic or foreign – a life sciences company should consider taking the following steps to help manage liability:
- Identify the risk profile of your M&A/JV strategy and prepare for it. For example, if the focus is growth via emerging markets, are you ready to address potential FCPA issues? Are you willing to build out a significant in-country oversight infrastructure? This should not be a situation where you seal the deal with a handshake and walk away.
- Conduct pre-due diligence during the target screening process. Learn everything you possibly can about a potential acquisition or partner. Review all publicly available information, examine the regulatory environment in which the company operates, and determine if/how they are interconnected with other companies. Also involve experts from Quality and Compliance early in the process.
- Establish and practice strong, consistent M&A governance from corporate to local levels. The lack of established and consistent M&A controls can complicate and slow down the deal process. It also can reduce the quality of the diligence process.
- Be patient and move judiciously; take the necessary time to conduct thorough due diligence and uncover all potential risks to the best of your ability. You can include all the warranties you like in a deal and may be able to create a contract in which you avoid legal liability, but with reputational damage; you will have to face the court of public opinion if something goes wrong down the road.
- If a strategic partnership is your preferred strategy, continue oversight for the duration of the relationship. Establish a governance team (including members with an historical perspective of the deal) that meets regularly to assess potential risks and manage them accordingly.
Added complexity: M&A in emerging markets
Increasingly, life sciences companies are conducting M&A and JV transactions in emerging markets. This can add considerable legal, cultural, and geographic complexity to the due diligence process, as well as the potential for a variety of liability issues, as these markets are still in flux and may have new or unfamiliar or unreliable legal and regulatory systems, and different accounting practices and different customs. Among potential concerns are the quality and veracity of financial information; lack of infrastructure and substantive controls; inadequate reporting of liabilities; unclear legal title of assets; and questionable local governance and operational practices.
It is important that U.S. pharmaceutical, biotech, and medical device companies allot additional time for due diligence when transacting emerging market deals; it can be difficult to “get behind the curtain” because syndicated data and reliable research may not be as well developed as the sources routinely consulted in developed markets. Drawing upon the (independently verifiable) knowledge of advisors with experience in specific country and market practices can facilitate the process; however, local representatives should be thoroughly vetted to avoid Foreign Corrupt Practices Act (FCPA) issues.
At the end of the day, managing liability in a life sciences industry M&A transaction or joint venture is about managing relationships. Whether you are acquiring a company or joining forces with a new partner, you need to deeply understand who you are working with, what potential liabilities may accompany that relationship, and how you can avoid or mitigate them to protect product integrity, market share, and corporate reputation.