For venture-backed biotech companies, the approval of a new drug is a long-term prospect that requires extensive time and effort for research, development, pre-clinical and clinical trials, and, in the United States, U.S. Food and Drug Administration (FDA) approval. For many biotech companies, the funding required to finance development, testing and approval activities requires ongoing investment. Larger pharmaceutical companies often provide this funding; it’s a partnership that works well, as these companies drive growth through the distribution and sale of new and innovative drugs that are protected by patents. Securing rights to new drugs, whether they are being developed in-house or through partnerships with biotech firms, is therefore an essential strategy for keeping the product pipeline full.
Given that a large number of well-known patents are set to begin expiring in the next few years – the so-called “Patent Cliff” – there is an intensifying drive for building new product pipelines. This is fueling a number of mergers and acquisitions (M&A) of biotech companies by large, multinational pharmaceutical companies. According to global financial services firm Burrill & Company, “M&A has been the preferred exit strategy for privately-held [biotech] companies as the market for initial public offerings in recent years was at first effectively shut down by the global recession and continues to be muted.”1
With the likelihood that this M&A trend will continue, how do companies on both sides ensure a successful transaction? According to a recent Harvard Business Review study, 70 to 90 percent of all integration efforts fail to deliver expected value.2 Some common reasons that postintegration results do not meet expectations include incompatible organizational cultures, insufficient due diligence, and lack of integration of business processes and systems.
Often, these issues can be addressed by ensuring a focused effort is brought to the integration process.
Our point of view is that successful M&A integration efforts require a robust Program Management Office (PMO) – a critical vehicle through which the integration effort is managed. A PMO’s management responsibility in the M&A process can be categorized into three main focus areas: due diligence, integration planning and integration execution.
Successful integrations start with a robust and detailed due diligence plan and assessment. When developing the due diligence plan, the PMO can lead the effort in:
- Reviewing all relevant background material of both the acquiring and target enterprises
- Understanding business rationale and drivers
- Understanding the likely business integration model
- Understanding the scope, scale and nature of expected contributions to synergies and/or redundancies
- Defining the scope and priority focus areas for the due diligence effort
- Developing the due diligence approach and the action plan; the action plan is then executed by performing assessments across the main functional areas
For life sciences industry due diligence, specific attention will be focused on research and development activities, pre-clinical and clinical trial details, current and pending patents, current licensing and distribution, and other contract arrangements. During this phase, assessment teams conduct interviews and analyze data across the key functional areas, which typically include finance and accounting, information technology (IT), operations, and legal and regulatory, among others. The output is a set of recommendations for high-, medium- and lowpriority areas based on cost-saving opportunities, integration needs and risks, a targeted operating model, and anticipated operating synergies.
Integration planning activities take place between the transaction signing date and “Day 1” for the combined entity. During this time, the PMO is responsible for managing activities across four key areas (as outlined in the table below):
- Develop Initial Integration Scope/Plan
- Analysis and Direction-Setting
- Define Future Services
- Finalize the Integration Plan
The following table shows some of the main activities and outputs across each of those key areas.
On Day 1 for the combined entity, the PMO’s efforts shift to ensuring a successful integration effort is achieved. Much effort will have gone into ensuring a smooth cutover on Day 1. It is just as important that the first 100 days of activity – and then, the period beyond the first 100 days – are properly managed and executed. The following table shows some of the primary activities the PMO will undertake in each of those time periods.
It is critical to understand and develop a plan for addressing the primary factors that will help to ensure a successful post-integration outcome:
- Know what the organization is getting into – Detailed due diligence and proper integration planning are core to identifying potential issues.
- Get the right people involved – Determine essential stakeholders early and get them involved. By doing so, retention and change issues will be minimized.
- Know what the organization wants out of the deal – Determine objective business decision criteria to minimize political issues and the impact of personal preferences.
- Get it done right – Devote the necessary resources even if the company is “running lean.” Transaction execution and integration are together a full-time job.
- Know what success means – Establish a performance measurement process to measure the success of integration activities.
- Don’t underestimate the infrastructure – The IT function must be an integral part of both the due diligence and integration planning efforts. IT is a critical enabler of other integration efforts.
- Over-communicate – Personnel will be forgiving at first and will not expect all the answers. They will, however, expect strong leadership that has a vision and a plan for how to get there.
How Can Protiviti Help?
In our experience working with clients on both sides of the M&A continuum, the key value drivers needed from an M&A partner are speed, expertise, results, flexibility and a focus on risk. What we bring to the transaction against each of these demands are:
- Speed and rapid response – With no conflicts of interest, and a seamless global operating model, we provide the immediate response and quick start you need for these challenging efforts.
- Expertise – We have experienced professionals with extensive industry experience and deep skills in core areas such as finance and accounting, operations, human resources and compliance.
- Results – We maintain a focus on “getting things done.” We work to make your job easier by executing in those areas that create the most value in your transactions.
- Flexibility – We provide professionals with a culture of working collaboratively with our clients, adapting to constantly changing full-time or variable resourcing needs.
- Focus on risk – We focus on key risk areas like no other partner you will work with. We help you identify and then manage these risk areas in your transactions with proven program/project management tools and techniques.
About Our Life Sciences and Pharmaceuticals Practice
Protiviti’s Life Sciences consultants provide solutions that allow organizations to strengthen compliance, improve the auditing process and drive financial performance.
Companies within the life sciences industry include pharmaceutical manufacturers, biotechnology companies and medical device manufacturers. These organizations are among the most regulated in the world. They continually face the challenge of complying with a wide and ever-expanding body of laws and regulations, including the numerous requirements of the FDA, the Foreign Corrupt Practices Act, the Prescription Drug Marketing Act of 1987 and OBRA 1990. Additionally, these companies are subject to privacy and data protection laws, corporate governance and consumer protection laws, threats, fraud detection and prevention, and increasingly demanding customers.
At Protiviti, our Life Sciences industry experts understand the challenges faced by pharmaceutical, biotechnology and medical device companies. We can assist your organization with services such as internal audit outsourcing and co-sourcing, pre- and post-acquisition guidance, compliance reviews and revenue risk management.
Some of our key solutions that are designed to help you turn challenges into competitive advantages include:
- M&A Due Diligence – Planning and Assessment
- Acquisition Integration – Planning and Execution
- Internal Audit Co-Sourcing
- Internal Audit Outsourcing
- Revenue Risk Management
- Supply Chain Optimization
- Enterprise Risk Assessment
For additional information about the issues reviewed here or Protiviti’s services, please contact:
1G. Steven Burrill, CEO of Burrill & Company, a diversified global financial services firm focused on the life sciences industry and
author of Biotech 2012: Innovating in the New Austerity.
2Clayton M. Christensen, Richard Alton, Curtis Rising and Andrew Waldeck, “The Big Idea: The New M&A Playbook,” Harvard
Business Review, March 2011