Avoiding pitfalls in life science transactions

Collaborative partnerships are of increasing importance for successful innovation in the life science industry.

Updated: Oct 07, 2021 1:25 PM
collaborative partnerships, life science industry, in-house research, biotech, pharmaceutical industriesIn recent years, the biotech and pharmaceutical industries have seen an unprecedented increase in investment.

By Sanjay Kumar

Collaborative partnerships are of increasing importance for successful innovation in the life science industry. The old-fashioned, in-house research of pharmaceutical companies 15 20 years ago, which is no longer tenable, has given way to the current focus on making deals that support the industry’s ailing pipelines and fuel innovation.

In recent years, the biotech and pharmaceutical industries have seen an unprecedented increase in investment. Both large pharma and investors are alert for the next big scheme to expand their portfolios and spur growth. With risk being high, a key part of mitigating this is effective due diligence. Simply put, due diligence is the investigation of a business or asset prior to signing a contract.

As with any transaction, information is never accurate, establishing the necessity of a thorough study before signing the deal to ensure significant improvement in the quality and amount of available data, provide balance at the negotiation table, and  abet an informed decision with regard to the best deal terms. Such a systematic agenda provides the evaluating party the best possible framework to correctly assess the potential partner’s ability to achieve the desired objectives.

Major life science deals covering typical scenarios

  1. Share acquisition of standalone entity: The structure is straightforward acquisition of shares and minimal transition services to replace intragroup services.
  2. Asset acquisition of business by a local licensed buyer: The structure is asset acquisition with transition services being limited to the period where standard consent is issued for the transferring asset.
  3. Asset acquisition of business by a third party: The structure is asset acquisition with transition services being limited to the period where standard consent is issued for the transferring asset. Third party compliance issues.
  4. Asset acquisition of business by a local buyer with local infrastructure but no license: The structure is transfer of certain assets where the seller remains the local seller under transitional distribution arrangements.
  5. Asset acquisition of business by a local buyer with no local infrastructure: The structure and outcome are economic benefit arrangements.

Key potential pitfalls for life science transactions

In a transaction of Marketing Authorization (MA) transfers and distribution, a critical drawback is a buyer being unable to sell his/her products after closing a deal. The MA transfer process and timelines vary from one market to another, depending on the jurisdiction of the regulatory authority (RA). The solutions may therefore also vary by market (e.g., buyer appointed as distributor). There are several interdependencies:

  1. Impact on import/export (e.g., importer of record)
  2. Pending MAs and outstanding variations before RA
  3. Labelling and artwork changes (grace periods)
  4. Tenders, pricing, and reimbursement
  5. Manufacturing site changes.

Solution: The solution lies in minimizing Day 1 hurdles by using a transitional services agreement, establishing a separation/integration team before closing the deal, and delivering separation plans agreed with relevant stakeholders.

While using transitional services, certain precautions pave the way to favourable negotiations: these include confirmation on any agreement on scope or pricing, planned transition costs/commitments, interdependencies between transitional services, timelines, and separation plan (e.g., IT, Finance) , and manufacturing and supply arrangements (including tech transfer and different sites).

The pre-signing consideration may be to access IT systems to provide transitional services (e.g., firewalls, corporate approvals), change the control process for additional services and modification in scope, last-man standing costs, and clear exit strategy.

Potential pitfalls in the disposition of data include: likely interruptions to transferring business post-closing, inability or high cost in operational implementation, lack of clarity on the data/records transferrable to the buyer, separation of mixed data, third-party confidentiality obligations, retention period for data in the scope of transfer, privacy regulations, and the right to access data post-closing (e.g., HR, tax, quality, litigation).

The solution lies in limiting the scope of data, considering what can be specifically transferred, not overpromising, limiting duplication, and maintaining a collaborative approach with the buyer.

Sometimes, creative solutions to close main deals earlier through deferred consideration in some territories could create unexpected difficulties.

People/employee issues

Certain complex and pervasive issues that may arise if identified late in the deal include:

  • Incentivization of employees
  • Employee information and consultation
  • Automatic transfer of employees if assets transfer (TUPE) and risk of such transfer even if the agreement differs
  • Risk of no automatic transfer at end of the Transitional Services Agreement (TSA) if assets are already transferred (so employees may refuse to transfer and claim severance).

Anticipating and preparing for key potential pitfalls at different stages of transaction

Planning and preparation are key and must begin on Day 1. The primary focus should be information collation as early as possible,  allowing time to execute strategy on the disclosure of sensitive information. Parties need to formulate a scheme for each of the potential legal issues and ensure qualified workstream leaders are in charge wherever relevant. Parties need to understand the essential role of reverse due diligence in respect of regulatory requirements, scope of transitional services required, data transfer, possible closing structures, and contract strategy/approach.

Parties must prepare a well-defined plan for pre-closing, i.e., before signing the deal. This can be achieved by presenting issues to the counterparty with pre-determined solutions (or inform the counterparty that in the absence of a solution, the issue should be priced in). Further, parties should engage with deal counterparty on legal issues and address material problems expeditiously.

Important steps in pre-closing

  • Consider separation/integration planning meetings – involve all relevant workstream leads
  • Align workstream leads at buyer and deal counterparty – encourage direct dialogue, but ensure reporting to the central deal team
  • Ensure awareness of antitrust gun-jumping
  • Prepare plan for post-completion (especially on MA transfers) and prepare relevant documentation/filings
  • Collate outstanding information for data disposition.

Important steps in post-closing

  • Execute plan for MA transfers
  • Ensure release of letters to commercial contract counterparties with regard to change of owner
  • Support transitional services and ensure cut-over milestones maintained
  • Ensure relevant workstream leads remain engaged in the deal to implement deferred closing
  • Execute plan for MA transfers
  • Internal restructuring.

General considerations relevant to avoiding pitfalls in transactions, including stakeholder management and internal processes of parties, should be kept in mind while being engaged in life science deals.

(The author is Counsel, J Sagar Associates,Mumbai. The article is for informational purposes only.  Views expressed are personal and do not reflect the official position or policy of the Financial Express Online.)

 

 

 

 

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