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8 critical success factors for biotech deals
Oct 20, 2022
When it comes to the successful integration of an acquired biotech, a one size strategy does not fit all. To make the most of a transaction, life science executives need to rework their deal-making playbook with a focus on the long game.
We expect large-scale scale M&A to be minimal in the coming year given the evolving regulatory landscape. That and the fact that many companies have recently spent significant time and effort transforming themselves to focus on core therapeutic areas and continued innovation. With many companies facing patent and pipeline challenges in the 2024-28 period and the fact that biotech valuations appear to be rebalancing, the sweet spot these days for biotech deals appears to be in the $5 billion to $15 billion range.
The challenge is that even with rebalanced valuations, the premiums required to get deals done will continue to make it imperative that the underwritten deal value is fully realized.
To ensure an acquired biotech company’s value is maximized by the acquirer, we believe a new playbook is needed. It’s important to have a more streamlined and less invasive approach to integration and to make the deal-making experience more rewarding for both buyers and sellers.
After helping many clients maximize the value of their acquisitions, we’ve found that there are several critical success factors you should consider to steer your deal’s outcome.
- Focus on the value drivers. While an acquisition target may have many products in development, it’s usually just one or two assets that drive deal value. This often includes products that are set to be submitted for approval and launch within a six- to 12-month window of deal closing. Unlike mega-deals that tend to be synergy driven, based on public commitments, biotech deals generally benefit from a focus on near-term operational milestones. For example, differentiated trial design to enable expedited regulatory submissions and accelerated launch timelines. Consequently, clearly articulating the value drivers and aligning them with your integration strategy will help you deliver better shareholder returns.
- Accelerate the R&D pipeline. As is often the case with biotech M&A, much of the deal value can hinge on the success of the acquired R&D pipeline. Driving development, supporting trials and ultimately improving commercialization efforts are critical. Additionally, making decisions about what to keep and what to terminate (or sell) is important in order to concentrate resources on the value drivers. Accordingly, a robust R&D due diligence and integration plan is fundamental.
- Win hearts and minds. With the great resignation, quiet quitting and the persistent labor challenges around scientific and other talent, retaining and inspiring pivotal employees is critical. Retention packages are only one part of the total equation. Don’t forget that many employees join biotech companies because they’re inspired by the idea of participating in an entrepreneurial, nimble, less hierarchical environment. As an acquirer, you have to be able to sell your mission. Let your acquired employees know how they’ll be able to maintain their work culture while benefiting from being part of a new, larger organization. And don’t neglect your existing employees. They’ll want to know their needs are being safeguarded as well.
- Communicate with impact. Communication is a critical tool in driving the integration forward, ensuring the organization is focused on the appropriate value drivers, and to help in winning over acquired employees. Communications need to be delivered holistically to the acquired organization as well as across the acquirer’s organization. Consistency, purpose and delivery to the right levels at the right time help create impact with your communication.
- Integration planning starts in diligence. Competition for scientific assets remains incredibly fierce and delivering returns means you’ll need an impeccable integration strategy. Your company’s integration team should get involved during the diligence process to quickly shape a strategy to deliver value. Integration leaders should be part of the retention and people strategy, and they should be prepared at closing to have their plan ready. Executive sponsorship should be established in order to accelerate decision-making and ensure consistency throughout the transition from the time of initiating the deal to integration to business as usual.
- Diligence should be tech-enabled. Many processes in pharma companies are standardized by enterprise resource planning (ERP) and cloud-based computing. Unfortunately, the diligence process usually isn’t one of them. Instead, it often remains an ad hoc experience with cross-functional collaboration happening through brute force rather than by design. In our experience, successful biotech deals are increasingly centered around real-time insights delivered through a tech-enabled process like automated contract reading.
- Leverage differentiated capabilities. While closing a biotech deal can be a cause for celebration, it never means the work is done. As an acquirer, concentrate on how your in-house capabilities in key functional areas such as sales, marketing, regulatory or clinical operations can be brought to bear to deliver incremental value. Being aware of ongoing market dynamics for a specific therapeutic area, for instance, needs to be taken into account in your integration planning. Close alignment with the business and functional leaders will drive coordination and speed.
- Have a clear view of integration archetypes. One size does not fit all. Early in the diligence and integration planning effort, you should consider which integration archetype — buy and hold, fully consolidate, hybrid — will most favorably enable the deal value drivers and give you the greatest chance for success. Each has its pros and cons, so give each careful consideration.
Pros and cons of the integration archetypes
Pros:
- Minimal disruption, business can continue to function in same way
- Potential for less employee turnover
- Maintains culture and entrepreneurial spirit
Cons:
- Acquirer control on aspects of the business is limited
- Ability to protect downside from brain drain/people leaving
- Visibility into processes and timing can be limited
- No/limited synergies
Pros:
- Leverages acquirer’s infrastructure
- Synergies are captured/available
- Better control of business
- Can leverage acquirer’s processes and knowledge earlier and more fully
Cons:
- Potential to lose entrepreneurial spirit/fabric of biotech
- Retaining key colleagues is more difficult if they do not want to work for Big Pharma
- Speed and nimble approach can be lost in the hierarchy of Big Pharma
Pros:
- Flexible structure that allows for tailoring of best practices by key area of value
- Helps acquired team overcome Big Pharma optics by being innovative, collaborative and flexible
- Can keep entrepreneurial spirit around areas of value creation
- Can leverage acquirer’s investments in infrastructure for non-value added items
Cons:
- Can be nuanced and at times lead to inconsistent understanding since it is not a binary approach
- Needs proper focus/planning
- Understanding cross-functional linkage is critical as hybrid requires trade-offs in certain areas that could have knock-on effects
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