In today’s highly competitive healthcare environment, investors may find themselves in an auction process where they must conduct due diligence pre-exclusivity. With limited time and mounting pressure, it can be difficult to know what issues to prioritize. Here are some practical tips for focusing your due diligence efforts strategically in a pre-exclusivity setting:

  • Quality of Earnings: Against the backdrop of high valuations, quality of earnings should be a key diligence focus, particularly in the context of high-complexity transactions  such as corporate carve-outs, partnerships with corporates and public-private pairings. For example, it is critical to examine the pro forma EBITDA to see if it excludes costs or includes questionable adjustments or add-backs.
  • Timeline: How competitive is the auction process and when are bids due? Does the buyer plan to conduct a full due diligence review pre-exclusivity, or instead look for big ticket liabilities that have a potential to impact valuation or derail the transaction?
  • Legal Showstoppers: Keep an eye out for legal showstoppers—issues that go to the core of the business, are not isolated incidents and are not fixable through purchase price adjustments, indemnification, escrow or enhanced compliance measures. For example, referral relationships that are based on illegal arrangements, systemic upcoding, quality of care issues, tenuous relationships with hospital partners, untenable and promised salary increases, a culture of non-compliance, or a retiring physician workforce without adequate succession planning.

As you plan your due diligence, keep in mind these additional factors that can inform how you structure your efforts:

Continue Reading Tips for Conducting Effective Due Diligence in an Auction Process

The Food and Drug Administration (FDA) has communicated a commitment to ensuring that firms marketing dietary supplements are not misleading particularly vulnerable consumers (e.g., elderly, cancer patients, or children) with baseless disease treatment or prevention product claims. Prior FDA leadership was vocal about the need to closely monitor the dietary supplement industry because of the significant footprint the industry has established. Couple the bustling supplement industry with the awakening cannabis and cannabis derived industry, and there is colossal business opportunity. The opportunity, however, must be married with measured restraint, particularly in advertising and marketing claims.

Trailing the 2018 Farm Bill, FDA is pushing forward with its information-gathering efforts to determine if it will embark on a rule making process to allow the marketing of cannabidial (CBD) as a dietary supplement. Currently, dietary supplement products containing CBD cannot be legally marketed in the United States. As previously explained, under current federal law, marketing is prohibited because CBD is an active ingredient in an FDA approved drug that was the subject of substantial clinical investigations.

On July 22, Curaleaf Inc., a Massachusetts firm, received a warning letter from the FDA, citing the company for marketing products containing CBD (i.e., CBD lotion, pain-relief patch, tincture and vape pen) in violation of the Food Drug and Cosmetic Act (FD&C Act). Curaleaf operates online and has dispensaries in 12 states. The company markets medical marijuana and sells dietary supplement products containing CBD derived from hemp, under its Curaleaf Hemp brand and Bido brand for pets. This is the fourth letter this year that the agency has issued to a firm that markets products containing CBD. The Agency’s letter identified a number of statements from Curaleaf’s website that FDA says establishes that the “products are drugs under section 201(g)(1) of the FD&C Act, 21 U.S.C. 321(g)(1), because they are intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease and/or intended to affect the structure or any function of the body.” The FDA specifically called out product claims and social media promotion that touted these products as treating Alzheimer’s disease, anxiety, depression, cancer, opioid withdrawal and Parkinson’s disease. Curaleaf was also cited for marketing CBD products for use in pets that suffer from arthritis and pain associated with aging.

Continue Reading FDA Regulatory Check-Up: CBD and Dietary Supplements

Nora Klein
Associate
Office: Chicago
Years at Firm: 2

What is an interesting fact about yourself that others may not know?

I played college golf at University of Illinois and in September 2019 I will be competing in the United States Women’s Mid-Amateur National Championship in Flagstaff Arizona. This will be the 33rd annually national championship for female golfers over 25 years old. The United States Golf Association runs 16 National Championships a year and to be able to play in one is every golfer’s dream. I feel so grateful to work at a place that quite literally supports me on and off the golf course.

What is the biggest opportunity and greatest challenge facing clients in your area of focus today?

The biggest challenge for our clients is also the biggest opportunity – how to grow in the revolutionary and highly profitable yet competitive life sciences industry, which is continuously expanding into new and often groundbreaking subsectors. Navigating these issues makes working at McDermott an enjoyable challenge. We not only need to assist our clients in finding innovative ways to grow their enterprises and remain compliant with healthcare rules and regulations, but also provide thoughtful, forward-looking solutions and plans that allow them to grow as these new subsectors emerge.

Continue Reading Five Questions with a Life Sciences Lawyer: Nora Klein

In 2016, Congress passed the 21st Century Cures Act (Cures Act), which contained provisions to help accelerate medical product innovation while reducing regulatory burden, as well as to increase efforts for critical research and increase the involvement of patients and their perspectives in research and the product development process. The Cures Act specifically provided the US Food and Drug Administration (FDA) authority to modernize product development and review, and create greater efficiencies and predictability in product development and review. In June 2018, in response to this congressional mandate and corresponding new authorities, as well as reauthorizations of FDA’s user fee agreements, FDA made a series of announcements for a proposal to modernize new drug development.

Highlights of FDA’s initial proposal included:

  • Focusing on recruiting talent across disciplines;
  • Building multidisciplinary teams for more efficient collaboration;
  • Prioritizing operational excellence through a single and consistent review process;
  • Improving knowledge management through enhancements to information technology and honed expertise within review divisions;
  • Emphasizing safety and risk-benefit analysis before and after approval; and
  • Incorporating the patient voice into product development.

As articulated by former FDA Commissioner Scott Gottlieb, “[a] principal aim of these proposed changes is to elevate the role of . . . scientists and medical officers to take on even more thought leadership in their fields.”  The agency contemplates implementing organizational and structural changes that make drug review divisions more therapeutically-focused to promote efficient review and transparency in – as well as patient and stakeholder access to – the review process. According to the agency, these and other changes that are part of the Cures Act will result in a 20 percent improvement in efficiency.

Continue Reading Modernizing FDA’s New Drugs Regulatory Program – Reviewing the Guidance Ecosystem and Implications for Life Sciences Companies

Rachel Stauffer
Director, McDermott+Consulting
Focus Area: Health Policy Advocacy and Lobbying
Years at McDermott+Consulting: 1.5

What is your favorite part about your health policy work at McDermott+Consulting? 

We have a deep bench of experts on a wide variety of health policy issues. This allows our team to be involved in so many different aspects of health policy – and that is my favorite part. There is no “normal” or “typical” day here. We work on different types of projects (advocacy, stakeholder engagement, strategic planning, for example) for different clients, including hospital systems, diagnostics, rural health, physician groups and others, in any given day. It keeps me on my toes and gives me an opportunity to learn new things every day.

What is the biggest opportunity and greatest challenge facing clients in your area of focus today? 

The biggest opportunity and greatest challenge facing clients today is the same: the unsettled health policy landscape. The politics around health policy are not as clear cut as they used to be, even just a few years ago. This puts clients in a unique position to shape and influence policy in ways that were not necessarily available a few years ago. On the other hand, there is little ability to predict what happens next. , It can be challenging to navigate and understand where to focus and how to deliver your message when the politics become murky but, that is what we are here for!

Continue Reading Five Questions with a Health Policy Specialist: Rachel Stauffer of McDermott+Consulting

Drew Elizabeth McCormick
Associate
Office: Boston
Years at Firm: 2

What is your favorite part about practicing health care law at McDermott? 

I get to work with world class lawyers on cutting edge issues and help our clients navigate the challenges of succeeding in a very dynamic, heavily regulated industry. I am constantly being challenged and learning new things, all while having the honor of helping guide our clients in transforming health care.

What is the biggest opportunity and greatest challenge facing clients in your area of focus today? 

Definitely the ability to take on risk and succeed in a value-based payment paradigm. We are seeing many shifts in the industry, which are largely being driven by fundamental changes in reimbursement structures away from fee for service. Compounding this, the regulatory framework is lagging behind in many regards, creating tensions and uncertainty that our clients lean on us to help them resolve.

Continue Reading Five Questions with a Health Lawyer: Drew Elizabeth McCormick

The current environment for healthcare transactions is fiercely competitive with high prices, tough deal terms and limited time for proper due diligence. In terms of both value and number of deals, 2018 was the biggest year for health care private equity (PE) since the financial crisis. More large cap PE firms are moving into the small and mid-cap space, increasing competition. At the same time, non-health-care entrants are competing with US and international PE, especially in the area of physician practice management and other related health care services.

Faced with this stiff competition, sponsors are getting more creative in their healthcare partnerships, whether that means partnering with management teams on new strategies, partnering with large strategics or even with one another.  These innovative collaborations can open up more investable opportunities, including public to privates and secondary trades among sponsors.

Even with these creative new opportunities, submitting a winning bid for a health care services business in a hotly contested auction can be a Herculean task. When outbidding the competition is not an option, here are some tips to help differentiate your offer:

Continue Reading Tips for Winning Competitive Health Care Auctions

Anisa Mohanty
Associate
Office: Washington, DC
Years at Firm: 3

What is your favorite part about practicing health care law at McDermott? 

I started out pre-med in college, but I quickly realized what excited me was the intersection between science, medicine, policy and law. Many of our clients are at the forefront of shaping policy in the life sciences space through their innovations, and the quality of our health care practice means we have the opportunity to partner with and support them in really exciting projects. I am grateful for the breadth and depth of knowledge and experience of my colleagues—it pushes me to be a better, smarter and savvier lawyer.

What is the biggest opportunity and greatest challenge facing clients in your area of focus today?

Because our clients are addressing some of the most complex challenges in healthcare and healthcare delivery, often there aren’t straightforward regulatory paradigms for their businesses. Our clients want to do the right thing, but that can be challenging because their regulators haven’t yet articulated how they will enforce the law as it applies to their services and solutions. Digital health is a great example of this and there’s a lot of opportunity to advocate for our clients so that regulators can take industry perspectives into account when finalizing regulations.

What kind of client work gets you most excited when it comes across your desk?

I love when a client has a service or product under development that has real potential to address an unmet public health need. It goes without saying that the American healthcare system is incredibly complex, but if I’m doing my job well, piece-by-piece, I’m helping to untangle it so our clients can deliver meaningful therapies and solutions.

Continue Reading Five Questions with a Health Lawyer: Anisa Mohanty

In today’s competitive and fast-paced life sciences dealmaking environment, buyers and investors are often unable to spend as much time on due diligence as they might like. Market players are often highly focused on the science itself and, as a result, may pay less attention to issues such as supply chain, intellectual property components and reimbursement. However, addressing these topics at the due diligence stage is critical—they can cause a deal to unravel if left unexamined, regardless of the strength of the science.

Due diligence standards and considerations vary significantly across life sciences subsectors— pharma, medical devices, digital health and AI are each governed by unique regulatory structures and operate in very different deal landscapes. Buyers and investors are well advised to consider end-game issues such as reimbursement options, protection for valuable IP and pathways to commercialization early in the planning process. Framing the areas of diligence focus around the value drivers of their target deal model and key contract elements requiring verification will allow buyers to leverage their diligence findings into an informed, forward-thinking action plan.

Reimbursement. When evaluating a potential life sciences transaction, it is never too early to start thinking about reimbursement. Due diligence should take into account the commercialization channel for the product and include engagement with data sources on alternative therapies and their reimbursement. If the product in view is entering an existing market, conversations with reimbursement specialists can help a buyer determine the best path to reimbursement. A product that is opening a new market, however, is more challenging and requires larger amounts of data.

Intellectual Property. The strength and security of the IP portfolio is central to the M&A discussion and in some cases will influence the deal outcome and valuation itself. Taking a deep dive into IP-related matters—including contracts and consulting agreements—is important for reducing risk, but can also be very expensive. Companies should plan their IP diligence strategy around their specific business needs. Careful attention to contracts—whether with development partners, manufacturers, or parts suppliers—is a critical element of IP due diligence, because it prevents surprise IP ownership claims from arising just as a transaction is about to conclude.

Leadership. The target company’s management team should be another key area of focus of diligence efforts to ensure a smooth transaction. In early-stage life sciences companies, for example, the founding CEO may be a scientist or an engineer with little experience building or leading a company. Considering whether the company has the right people with the right skillsets to successfully manage the company through every stage—preclinical, clinical, and commercial—is critical to success.

Sell-Side Considerations

Is there a marketplace for this innovation? What does that buyer’s current portfolio look like and what other acquisition targets are they considering? What are the options for reimbursement? Are the IP licenses set up with a view to the eventual commercialization partner? While first-time life sciences entrepreneurs and company founders may be surprised to face these types of end-game questions so early on in the process, a realistic picture of the final result is vital for both the company’s strategic plan and a successful transaction. Early-stage and emerging companies should be proactive in contemplating diligence issues so they are prepared to answer questions from investors and buyers. This advance work will prepare companies so they can either provide answers when due diligence issues arise during the course of the transaction or identify a path to developing solutions. Such planning should take into account the ultimate buyer and how the specific product or company will fit into the broader life sciences landscape in the future.

It is never too early to get a head start on diligence so that all parties are well prepared to come to the deal table. Evaluating the competitive landscape and commercialization pathways early on can help buyers and sellers alike identify potential problems, work to mitigate risk, and ultimately create efficiencies that will save time and money in the long run.

Erika Mayshar
Partner
Office: Los Angeles
Years at Firm: 2

What is your favorite part about practicing health care law at McDermott? 

When I moved to McDermott, I was proud to be joining the nation’s top health care law practice,   but the industry rankings don’t tell the whole story. The breadth and depth of expertise are backed by a collegial and innovative culture that builds strong relationships among colleagues and clients. Health lawyers at McDermott truly enjoy their work and working with each other.

What is the biggest opportunity and greatest challenge facing clients in your area of focus today? 

Industry disruption in health care is an ongoing reality for boards of directors and health system leadership. Being able to respond to moving-target opportunities is a challenge for leaders facing fast-paced regulatory change and economic pressure. The challenge is to determine what type of change makes sense for each organization – not to embrace disruption for the sake of staying current, but to seek opportunities that further the corporate mission and then implement change with meaningful stakeholder involvement. Tax-exempt nonprofit hospitals face additional hurdles, both cultural and legal, but are continually finding new ways to serve their communities and collaborate with for-profit businesses in creative ways.

Continue Reading Five Questions with a Health Lawyer: Erika Mayshar