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.
