Top ten issues for M&A

Eversheds LLP Richard Lewis  United KingdomMay 24 2012. There has been a steady stream of cross-border life sciences transactions so far this year such as GSK’s offer for Human Genome Sciences and Abcam’s acquisition of Epitomics International, both in the US. Although this year we have seen very few of the mega-mergers of recent years, last year there was an increase in the number and value of pharma/biotech M&A transactions, especially in the mid-market $100 million to $1 billion range.There are a variety of reasons for this but many acquisitions are still implemented to address the ongoing patent cliff with companies continuing the search for new drug developments to replace those coming off patent - a recent example being AstraZeneca’s $1 billion offer for Ardea Biosciences including its lead product lesinurad in Phase III development for gout. Interestingly, AstraZeneca’s offer follows closely behind Takeda’s acquisition of URL Pharma and its branded version of the gout treatment colchicine – highlighting another reason to acquire, namely where there is a growing market for drugs to combat a particular disease or where there is an unmet clinical need to tackle a particular disease.Other reasons we frequently see for acquisitions include those companies looking for cost synergies, those seeking access to emerging markets and those looking to access new areas (such as biologics, companion diagnostics, clinical trial technologies and so on). There is also the ongoing march of consolidation within the generics and biosimilars market (Watson Pharmaceuticals’ acquisition of Actavis being a recent example) as well as originators adding generic capabilities to their product portfolio.Therefore it seemed like a good time to highlight our top ten issues to be considered in an M&A transaction.1. Deal structuring: it may seem obvious but at the outset the parties should ensure that there is a degree of certainty on the key terms of any transaction - this will reduce a lot of angst further down the line.2. Cultural awareness: on a cross-border deal, understand at the outset the cultural complexities involved at the negotiating table and how this might impact on decision making – this can help manage expectations in advance of and at negotiating meetings.

3. Buy side execution risk: for sellers it is particularly important to understand what the key execution risks are for any particular buyer. Typical concerns relate to buyer specific competition concerns and export control issues.4. Ability to pay: is the buyer able to pay the purchase price (including any post closing adjustments, licensing or milestone payments) and any payments due under any transitional or ongoing arrangements. Sellers should consider whether to undertake any due diligence (esp financial) on a buyer.5. Standing behind claims: conversely, for buyers one key issue is understanding whether cash will be available within the seller post-closing in order to fund any warranty or indemnity claims post closing. If there are concerns then a hold-back or escrow arrangement should be considered.6. Due diligence: key operational areas for consideration include:  Commercial contracts – understand what R&D, clinical trial (and related informed consent), manufacturing, supply, procurement, outsourcing and pharmacovigilance agreements are in place and any associated liabilities under those agreements;  IP/Patents - the technology licensing and partnering arrangements of a company (whether in or out) will be key but equally so, a buyer needs to ensure that it is getting all the rights which it expects to receive in relation to both patent and trade mark protection (and understanding any opposition proceedings at European and national offices);  Regulatory issues – understand the regulatory approvals in place whether in Europe, the US or elsewhere, together with the status of any applications to relevant regulators. Depending on the structure of the transaction, dossier acquisition and marketing authorisation transfers may also need to be factored into the timetable;  Data protection/privacy – reviews should be undertaken on data protection compliance and understanding the implementation program in place;  Compliance – spend time with management to understand what procedures are in place to ensure compliance with the UK’s Bribery Act and the US Foreign Corrupt Practices Act (and other similar local legislation); and  Product liability – specialist input is often required to understand the nature of any ongoing product liability disputes, the likelihood of successful claims and the amount of any liability.Many buyers address legal due diligence through the data room but there is a lot to be gained by buyers seeking to have a legal Q&A session as well in order to understand the commercial context and importance of the various documents.7. Pricing provisions: ensure that the pricing mechanism is adequately reflected in the drafting and is appropriate for the basis of valuation, particularly where “locked box” mechanisms, net asset and working capital adjustments, earn-out provisions, or milestone payments are included.8. Protection package: the protection package around the warranties and indemnities and the associated limitations by which the seller will seek to reduce or limit its liability typically takes up a lot of negotiating time. Ensure that appropriate legal specialists are involved who have industry knowledge. Watch out for the use of a material adverse change clause to enable pre-closing termination of an agreement in the event of specified market or business events – US buyers in particular will see this as an important part of the protection package.9. Leave sufficient time for ancillary documents: there is often a raft of documents to be negotiated at the same time as the acquisition agreement. Associated supply and manufacturing agreements will often go right to the heart of the viability of any price which has been negotiated for the acquisition. Consider disentanglement carefully where there is a disposal from a group.10. Integration: finally, consider what arrangements there are for integration postclosing. The need for specific integration teams depends on the complexity of the business being acquired. We are currently undertaking some research on the efficiency of the legal integration process post-closing and more details on this will be provided later this year.