An acquisition in the life sciences sector raises various issues, some of which are specific to the sector. For example:
- Is the target company the owner of all the intellectual property rights which it claims to possess? The target company’s intellectual property rights may infringe third-party rights, or it may be necessary to commence proceedings to prevent third parties breaching the target company’s intellectual property rights.
- The principal product of the target may still be in the clinical trial phase and so there is uncertainty as to whether the product will gain final regulatory approval and achieve commercialisation. Many M&A transactions in the life sciences sector include substantial deferred payments such that the seller only receives a proportion of the purchase price on closing. The balance of the purchase price will be calculated by reference to achieving milestones or other performance targets. Negotiation of triggers for the payment of deferred consideration can be complicated.
- Has the target company obtained the necessary regulatory authorisations and is the target company in compliance with them?
- Life sciences products can be subject to product liability claims.
- The target company may be dependent on licence agreements. Will the transaction trigger a change of control provision? Do the licence agreements include any non-compete provisions which could impact on the purchaser’s existing products? Are there any milestone or royalty obligations?
A decision will need to be made as to whether the transaction is to be structured as a share or asset sale. Factors in deciding structure include:
- Does the purchaser want to acquire the entire business?
- Are the assets easily transferable?
- Are there liabilities that the purchaser wants to exclude?
- Are there tax and accounting issues which could impact?
Alternatively, it may be that to achieve their commercial objectives, an acquisition is not the best structure, in which case a joint venture, co-promotion or licensing deal may be more advantageous.
Prior to negotiating the acquisition documentation, Heads of Terms should be agreed which, with the exception of confidentiality and exclusivity provisions (to the extent not previously agreed and documented) are not intended to be legally binding. The Heads of Terms will identify and address key issues including the principal terms and conditions of the transaction. It may be that the Heads of Terms identify issues which result in the transaction not proceeding but at least time and money will have been saved since neither detailed due diligence nor drafting of acquisition documentation should have commenced.
The sale agreement will typically contain extensive warranties covering many different areas including intellectual property rights, regulatory and legal compliance, product liability and product approvals. Who gives the warranties will have to be agreed. Institutional investors, such as venture capitalists, will strongly resist giving warranties, leaving management shareholders in the firing line. They may be backed up by a warranty and indemnity insurance policy taken out by the purchaser, in which case who will bear the cost of the policy. Limitations will need to be agreed in respect of the warranties including financial, materiality, knowledge and duration.
There may be ancillary agreements required relating to manufacture, distribution and supply. The seller and the purchaser may also have to agree to provide support services to each other for a transitional period.
Successful M&A transactions in the life sciences sector require comprehensive due diligence to identify risks as well as an understanding of the relevant legal and regulatory issues. The parties will need to agree on value and on deal structure. It will then be possible to prepare and negotiate appropriate transaction documentation that meet all of their requirements.
Gary Green is Partner at CMS.
Learn more: This article features in the LSX C-Suite Challenges in Life Sciences Survey 2018, published in September 2018. The full report is available to download for free via the link below. You can also read the survey findings focusing on M&A and deal making in our white paper extract:
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