Are you prepared to mitigate the top 5 risks in life science M&A transactions? Learn how now
The life science business is continually developing and evolving, and mergers and acquisitions (M&A) transactions are one of the primary drivers of this growth.
In recent years, the life science industry has experienced a surge in M&A activity as businesses seek to consolidate their positions, extend their services, and gain access to new markets. As the sector evolves, we may anticipate more M&A activity in future years.
But, like every M&A transaction, these transactions are not without risk. This article will discuss five significant risks — strategic, compliance, financial, operational, and reputational — particularly relevant for M&A deals in the life sciences sector. Each risk will have its section detailing a description, a mitigation, the organizational function responsible, and an example from the life sciences.
Strategic Risk
The strategic risk associated with M&A transactions considers that the acquisition will fail to accomplish the desired strategic goals. The impact might lead to missed opportunities in the life science business, such as missed talent acquisition or retention or insufficient synergy.
Mitigation
Before engaging in any M&A transaction, firms should do a thorough strategic assessment that includes a review of the company’s current strategy, the possible impact of the transaction on the competitive values, and positive and negative scenarios resulting from the transaction.
Owner
The Chief Strategy Officer or an equivalent executive-level or an equivalent executive-level in M&A team
Example in life science
Bristol-Myers Squibb paid $74 billion for Celgene in 2019. In addition to getting access to Celgene’s medication development pipeline, the transaction planned to increase Bristol-Myers Squibb’s oncology product portfolio. Several investors and experts, however, questioned the purchase, citing pricing worries and the efficacy of the overall operation from a strategic standpoint.
Compliance Risk
Compliance risk is the possibility that an M&A transaction would result in noncompliance with applicable laws and regulations. These might include failing to comply with FDA standards, breaking anti-corruption legislation, or violating data privacy restrictions in the health sciences field.
The organization should undertake a thorough compliance audit before engaging in the transaction around the target company’s compliance policies and processes, the compliance history, and regulatory concerns related to the forming organization.
Mitigation
The organization should undertake a thorough compliance audit before engaging in the transaction around the target company’s compliance policies and processes, the compliance history, and regulatory concerns related to the forming organization.
Owner
The Chief Compliance Officer or an equivalent executive-level in the Legal team
Example in life science
Pfizer proposed a $160 billion merger with Allergan, becoming the world’s largest pharma firm in 2016. The U.S. Treasury Department’s announcement of new regulations targeted at blocking corporate tax inversions, which was the main driving force behind the merger, caused the agreement to fall through.
Financial Risk
Financial risk in M&A deals is the risk that the acquisition may result in material financial losses or harm the company’s financial situation. The impact might vary from overpaying for the target firm to incurring excessive debt or financing charges or experiencing severe stock price volatility in the life sciences industry.
Mitigation
Organizations should undertake a thorough financial study before engaging in any M&A transaction that involves an examination of the target company’s financial statements, an analysis of any potential financial risks connected with the transaction, and an impact assessment on the company’s overall financial situation.
Owner
The Chief Financial Officer or Chief Controlling Officer
Example in life science
Abbott Laboratories announced plans to buy Alere, a diagnostic test business, for $5.8 billion in 2016. Nevertheless, following the announcement of the transaction, Alere experienced substantial financial and regulatory hurdles that harmed its financial performance. As a result, Abbott Laboratories attempted to dissolve the agreement, and the two corporations engaged in a legal dispute.
Operational Risk
The operational risk associated with M&A transactions is the possibility of operational interruptions or inefficiencies related to the acquisition. The impact might result in production or supply chain interruptions, product development delays, or the loss of critical staff in the life sciences business.
Mitigation
To reduce this risk, firms should do a thorough operational review that involves an assessment of the target company’s operations and infrastructure, any possible operational risks connected with the transaction, and the capacity to integrate technology, processes, and culture.
Owner
The Chief Operating Officer or Chief Information Officer.
Example in life science
Pfizer purchased Hospira, a provider of injectable pharmaceuticals and infusion systems, in 2015. the operational integration of the two companies was a considerable endeavor that necessitated substantial planning and coordination. The firms encountered operational issues, including interruptions in production and supply chain activities during the merging.
Reputational Risk
The reputational risk connected with M&A transactions considers that the acquisition may lead to wrong impressions or damage the company’s reputation. The impact might result in negative media coverage, a public view of the deal as unethical, or a loss of trust among consumers or stakeholders in the health sciences business.
Mitigation
To reduce this risk, firms should do a thorough reputational review before engaging in any M&A transaction, including a target company’s reputation assessment, an analysis of potential reputational risks related to the deal, and a communication strategy to mitigate any unfavorable impressions.
Owner
The Chief Communications Officer or an equivalent executive-level in Public Relation team
Example in life science
Mylan received widespread backlash and criticism in 2016 after acquiring Meda, a Swedish pharmaceutical business. Opponents contended that the deal was motivated solely by tax benefits and it would result in price rises for some pharmaceuticals. As a result of the poor media coverage and public perception of the purchase, Mylan suffered considerable reputational harm.
Conclusions
Life science M&A transactions can be cumbersome and risky, but they can also provide considerable prospects for development and expansion. Organizations should do the following to maximize the benefits of these transactions while minimizing the risks:
- Before going into any M&A deal, conduct extensive due diligence and research.
- Identify and analyze possible transaction risks around strategic, compliance, financial, operational, and reputational implications.
- Create a thorough risk mitigation strategy that includes techniques for mitigating each identified risk.
- Executive-level roles such as the Chief Strategy Officer, Chief Compliance Officer, Chief Financial Officer, Chief Operational Officer, and Chief Communications Officer must own the risk mitigation strategy.
- Continuously monitoring and assessing the impact of internal discoveries or external changes before, during, and after the finalization of the transaction is a success factor.
