By Anna Geist, Director, Regulatory Merger & Acquisition Services, PharmaLex
The appetite for mergers and acquisitions has shown no signs of slowing down. Despite the COVID-19 pandemic and economic uncertainty, there were a record number of deals by major pharmaceutical companies in 2020 as businesses sought to tap into innovative technologies. During 2021, while there have been few mega deals, excitement over the potential of cell and gene therapies and other advanced technologies has led to a number of high-value M&As.
In September, Merck announced it would acquire Acceleron Pharma for $11.5 billion (€10.15 billion) to gain access Acceleron’s expertise in transforming growth factor-beta (TGF-beta) superfamily biology and protein engineering. Unsurprisingly, large pharmaceutical companies have been particularly interested in companies focused on mRNA-based products, such as Sanofi’s acquisition of Translate Bio.
Top 20 pharmaceutical companies were involved in higher volume of transactions, although the value of these was down on previous years. In total, there were more than 90 deals undertaken in 2021.
Perhaps what is most striking is the types of deals being made, with M&As falling into three main categories. The first is the more traditional M&A of companies within the pharmaceutical business dealing either with an acquisition, where a large company buys a smaller or similar size or even where an entire branch of a business or a portfolio line is acquired or where there is a merger between two similarly sized entities.
In recent years, a second type of M&A has emerged where investors or value capital companies who do not have any pharmaceutical background and infrastructure in place at all, decide to enter the market. These businesses have a completely different set of end needs. They are focused on the sales aspect of the product and plan to outsource the other infrastructure to partners who has global reach, for example a regulatory partner who can manage licenses from a compliance perspective.
A third trend that gained even more impetus during the pandemic was growing interest by large pharmaceutical companies in entering joint ventures with smaller biotech companies to simply buy the ideas by providing the smaller partner with the logistical expertise and infrastructure as well as industry heft to get products through marketing approval and distribution.
Weighing the impact of M&A
There are important considerations during mergers or acquisitions that will depend on the type of deal and the companies involved.
Logistically speaking, the impact for large companies when acquiring a small start-up business is fairly minimal. Large companies have the infrastructure, functions and expertise to support a smooth integration. For smaller companies, the impact is inevitably greater. For example, they might need people on the ground in a variety of markets acting on their behalf to manage distribution, and even build new local legal entities to enable them to market and manage their products.
One important consideration for companies of any size acquiring advanced technologies or merging with a company that has developed advanced technologies are the specific logistical capabilities needed to support the research and development of those products. Is the company only acquiring the idea with the intention of developing the product independent of the expertise currently working on the product? Or does the acquisition or merger include personnel? The more complex the development of the product is, the more important it would be to buy the expertise behind it.
If a product is in the development phase, the acquiring company would need to ensure they had the capabilities to compile and run the product registration process, to manage the marketing authorization submission and to market a complex new technology. And if there are any additional clinical requirements to be considered, they would need the support of the clinical research organization to finalize studies.
When it comes to manufacturing cell and gene therapies, companies need to consider whether the sites they work with, or plan to work with, are equipped to produce these complex products. Often, when acquiring a marketed product, companies buy the related manufacturing facilities, or they collaborate with facilities that have the necessary expertise.
If they are buying the intellectual property and developing the product from scratch, they will need to factor in investment in the infrastructure to develop the technology or acquire the IP plus the manufacturing know-how.
The role of regulatory in M&A
One aspect of M&A that does need to change is the negotiation phase. Typically, M&A negotiations involve teams from finance and legal carrying out due diligence to determine risk, looking at issues such as patents, revenue and pipeline potential. Please read the blog on merger and acquisition due diligence from Dr. Diane Seimetz in the February Biopharma Excellence newsletter.
To improve M&A outcomes, regulatory and quality experts should be brought into the negotiation and to be involved in the due diligence process. Without bringing in these experts, companies could miss significant issues related to the availability and quality of regulatory documentation, which in a worst-case scenario, could result in a need for expensive compliance initiatives. It’s not uncommon for companies to acquire a company or portfolio of products that looked good from a financial perspective, only to discover that documentation has been poorly stored and archived, or that all regulatory information has been captured on paper and will need to be converted to electronic to meet regulatory requirements. That conversion is typically a painstaking documentation and data management process that takes time and resources to manage.
As an example, from a regulatory perspective there should be someone involved in the negotiations to review the overarching strategy and plan for license transfers, considering countries involved, goals and targets, the infrastructure in place versus what is needed. Can the updated artwork be registered and completed on time? Can all regulatory approvals be achieved to comply with the supply chain plans and management? Without that pre-planning, the acquiring company will realize too late that important steps have been overlooked, which can delay or even halt market goals.
In addition, it is recommended that information technology experts be involved in the M&A process to review the document management systems involved and determine the impact data migration will have on the business.
Some companies have recognized the value in bringing more functions into the negotiation process early on to assess any potential implications. This knowledge can provide the acquiring company with more leverage when negotiating price. For example, if there are compliance red flags during the discussion phase – whether issues at a manufacturing site or problems with the documentation – the acquiring company might be able to reduce the price it pays or gain some other advantages.
Easing the M&A process
In a complex and constantly changing regulatory environment, any M&A activity should begin with a thorough due diligence process that takes into consideration the impact of heightened regulatory requirements, in particular the growing move to digital requirements, such as entering clinical trial information through the European Medicines Agency’s Clinical Trials Information System (CTIS) and reporting changes on marketing status through EMA’s IRIS platform.
To address these requirements, companies should determine whether they have the expertise in-house or whether to outsource these crucial assessments to a services provider. This would include conducting a red flag analysis to determine whether there are serious issues that could jeopardize an acquisition. There should also be a more detailed due diligence, or compliance project, to go through documents and processes and assess how these stand up to current and new regulations.
The good news is that many companies are beginning to take a more proactive approach to assessing regulatory and quality aspects during the M&A assessment. However, there are still plenty that simply trust that all the data, processes and documentation are in order when they go into negotiations. Unfortunately, those are the companies that learn the hard way when agencies undertake an inspection and pull the acquired product from the market. It’s really not a risk worth taking.