Doing Deals in the Pharmaceuticals Sector

Practical Law Legal Update 8-530-2673 (Approx. 5 pages)

Doing Deals in the Pharmaceuticals Sector

by PLC Corporate & Securities

Pharmaceuticals Industry Overview

Corporate practitioners can educate themselves on these issues by beginning with our overview of the pharmaceuticals industry in Practice Note, Pharmaceutical Industry Guide. The Practice Note includes a discussion of the main sectors and products, the market's competitive characteristics and common types of business arrangements other than full acquisitions. It also analyzes the industry's:

Regulatory scheme, covering:
- the FDA drug-approval process;
- the FDA's four approaches for encouraging the development of new drugs for serious diseases and to accelerate the lab-to-market time frame;
- the impact of the Patient Protection and Affordable Care Act and other elements of healthcare reform; and
- relevant environmental legislation.
Special risk factors, including:
- government regulation and managed-care trends;
- competition from generics producers;
- dependence on key products and attendant risk of losses from recall, patent expiry or competition;
- the cost of R&D and risk of failure to receive regulatory approval;
- risk of financial losses and reputational damage if the manufacturer cannot meet market demand for popular drugs or there is a product recall due to quality-control issues during the manufacturing process; and
- patent, product liability, consumer, commercial, securities, environmental and tax litigations.
General tax and finance issues, including:
- transfer pricing;
- tax incentives for R&D and manufacturing; and
- adoption of International Financial Reporting Standards.

Acquiring Pharmaceutical Manufacturers

Performing high-quality due diligence is the best way for a buyer to protect itself against the risks involved in an M&A transaction. If a bidder for a pharmaceutical business discovers compliance failures or other material risks during the due-diligence process, it must find a method to mitigate the risks or else the deal may be threatened. After identifying these risks, the buyer must effectively negotiate transaction terms between itself and the seller or target that properly allocate those risks.

Practice Note, Acquiring Pharmaceutical or Medical Device Manufacturers explores selected legal and compliance issues for buyers to focus on when pursuing an M&A transaction involving a target that is a manufacturer of pharmaceuticals or medical devices. In particular, the Practice Note:

Reviews the preliminary goals of effective due diligence and provides guidance on the most important areas of investigation when acquiring a pharmaceutical or medical device manufacturer, including:
- the adequacy of the target's compliance programs and systems;
- risks stemming from the target's fraudulent or abusive business conduct;
- financial risks related to products liability claims and to product labeling and advertising that may result in misbranding and FDA enforcement actions;
- the target's policies and practices on protecting, exploiting and prosecuting its intellectual property;
- whether the target has obtained and maintains all necessary licenses and has followed proper product-approval processes; and
- the target's compliance with the requirements of HIPAA.
Highlights some of the strategies that buyers can use to mitigate risks discovered through the due-diligence process, including:
- indemnification provisions;
- escrows; and
- holdbacks.

Option Structures in Pharmaceutical M&A Deals

Buyers of pharmaceutical businesses often propose risk-sharing structures that include:

The use of royalty payments tied to sales.
Less commonly, contingent value rights and milestone payments linked to clinical trial success or receipt of regulatory approvals.

However, buyers are increasingly employing another risk-sharing strategy, commonly called an "option deal," when structuring their transactions. In this structure, the buyer makes an initial up-front payment in exchange for a call option to acquire either:

An exclusive license to commercialize and sell the applicable product candidate.
The entire target company.

If the buyer exercises the option, then the acquisition or the license can be completed on terms set out in either a fully negotiated acquisition agreement or license agreement.

An option transaction raises a variety of unique considerations, some of which relate to the terms of the option itself. Other issues relate to terms that are generally included in acquisition agreements, but that have different implications in the context of an option transaction.

Practice Note, Using Option Structures to Reduce Buyer Risk in Pharmaceutical M&A Deals discusses some issues to consider when structuring and negotiating options to acquire a company. These include:

The purchase price.
The duration of the option.
Events triggering the option.
Product development plan.
Antitrust and accounting implications.
Information rights.
Interim operating covenants.
Stockholder approval.

What's Market for Pharmaceutical M&A Deals

As in any M&A deal in any particular industry, practitioners stand to benefit in their negotiations when they known what currently constitutes the market terms for a given issue. PLC What's Market allows you to compare the terms in acquisition agreements in the pharmaceutical and biotechnology sector for both private and public M&A deals. For the respective private and public What's Market databases for the pharmaceutical and biotech sector, see:

PLC What's Market, Private Acquisition Agreements.
PLC What's Market, Public Merger Agreements.

Doing Deals in the Pharmaceuticals Sector | Practical Law