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Exit This Way

Investment in the pharmaceutical industry within the first quarter of 2015 has been truly record-breaking; more investment took place within the first three months of this year than in the entirety of 2014.

A couple of notable deals include the acquisition of Pharmacyclics Inc by AbbVie Inc for $21 billion and the purchase of NPS Pharmaceuticals by Shire Plc for $5.1 billion. Moreover, with the rise of CROs, greater coverage has been afforded to companies outside of the pharma giants.

Market Forecasts

The pharmaceutical sector is far from cash-strapped; with new product development and innovation cycles ranging significantly – depending on the drug being developed – each company very much has its own ‘fingerprint’. This is a unique set of circumstances detailing the perfect time for mergers and acquisitions (M&As) to occur, and an owner to exit – this is true not only for the business owner, but employees, the purchaser, product and scientific innovation and, ultimately, the consumer.

Whether it be delivering on infrastructural needs, stimulating discovery and growth, managing risk or, perhaps it simply boils down to a change in direction sought by the owner, for whatever reason, there are many which suggest M&As can provide the best solution. It is important to stress, however, that an exit strategy should be considered from a company’s inception, and not as an afterthought, or worse, as a knee-jerk reaction to an on-the-table offer.

CRO Partnerships

The steady rise of CROs has powered developments in pharma over a number of years. According to recent figures, CROs are estimated to receive around 40% of drug discovery and development spending, while partnerships with CROs account for the second most common type of relationship in the US. Globally, CROs function as a key partner for pharma and biopharmaceutical vendors at all stages of drug development. They range from small niche organisations – perhaps single-site companies – through to full-service international businesses.

The challenges for the biggest industry giants filter down right through to small niche CROs. As pharma heavyweights change the way they enter into agreements with the largest CROs, they are attempting to develop stronger partnerships with greater integration on longer-term projects. This means the stakes are higher for mid-tier CROs looking to break into the top bracket by making it onto preferred supplier lists and obtaining similar contractual commercial relationships. Small specialists are, therefore, attractive for mid-tier firms hoping to enter into commercial agreements with big players; the mid-tiers can fill in skills or specialisms, thereby offering a more comprehensive service to big pharma vendors.

The market conditions facing CROs are reflective of the pharma industry as a whole. Changes to the popularity of certain types of drugs and healthcare products, and the rise of biopharmaceutical products – at the expense of chemical drugs – highlight the strategic opportunities available to firms actively seeking to acquire CROs. As the market heats up in the coming years, small CROs aiming to take advantage of the opportunity to either exit, or deliver a part-sale, will need to ensure they put the right measures in place to succeed.

M&A Planning

CROs face a combination of exclusive, industry-specific challenges, in addition to the typical issues surrounding both growth and exit strategies.

In terms of industry-specific hurdles, there are a number of things to bear in mind when considering exit plans. One particular area is the significance of contractual relationships in the industry. Sponsor partners – typically the biggest pharma companies in the industry – have a huge impact on the future planning around M&As for CROs intent on doing a deal. As a result, it is important to manage expectations around the deal, so that existing commercial partners are kept at the forefront of all stakeholders’ minds.

Other analysts add scepticism, alluding to the risks attached to industry personnel. Not only are there shortages of qualified staff in niche scientific industries, but due to the contractual basis of the work completed by CROs, project management staff with their commercial skills and networks are also sought after. Consequently, smaller firms may struggle to provide work for a range of R&D clients. It is, therefore, crucial that poor workforce planning does not negatively affect the business in the short-term, nor disrupt owners’ long-term exit strategies.

Prepping for a Deal

While specific challenges impact every industry, there are additional issues confronting businesses more generally when they decide to embark on the M&A route. Seeing as the process can take an indeterminate length of time, trust, patience and competition remain the key areas to focus on when preparing an exit strategy. As a result, it is very important to form strong relationships, built on confidence and transparency.

Embarking on an exit strategy is a significant step for any business owner. While the reasons for preparing to exit or deliver a part-sale are unique to each owner, it remains paramount that there exists a level of confidence and openness with all stakeholders. By delivering a full picture of your business – not only strengths and successes, but potential risk-points – the procedure is likely to be far more rewarding for all parties involved. One reason for this, is that possible hazards identified in one industry may hold greater appeal to acquirers from another, valuing the package as a sum of all synergies together. Through rigorous planning and lucid communication, risks to the business and any potential deal can be managed to ensure that the main drivers are not compromised.

Competition is a considerable part of the undertaking because it may change the conditions encircling a deal, altering the expectations of both sellers and potential acquirers over the course of the 12-18 month period. During the process, different sums, terms and conditions, and deal structures may develop following negotiations. While the proposals may ultimately be of benefit to all stakeholders, there is no guarantee that such offers will materialise into concrete deals. These variables are all factored into the ultimate valuation of the business. As a result, transparency and the introduction of the correct methods can ensure the right buyer is found, the seller achieves the desired multiple (and the future multiple anticipated for the buyer), and the options are open to the acquirer to deliver on the deal, even if circumstances change.

Pragmatic Approach

M&As are not something that should be feared by business owners or even employees: they should always be carefully considered but – particularly in the pharma industry – seen to be a driver for progress. The pharma industry as a whole, and the different types of firms operating within it such as CROs, face unique challenges when looking to M&As as a means to exit the business. This altogether highlights the importance of strategic planning to ensure that any eventual sale is the right deal for all stakeholders involved. Conditions in the market reflect changes to the way customers of pharma vendors are buying permit consumer drugs and health products.

As the effects move down to CROs, M&As will allow a variety of businesses to achieve their own distinct objectives. By contributing to the industry’s own natural catalyst for innovation, M&As will encourage business leaders to look to acquire smaller firms rather than develop in-house expertise from scratch. This not only drives efficiencies – as each product can take more than 10 years to develop and costs amass into billions – but also enables products to realise their full potential; ensuring only the best make it to market and giving ultimate protection to the consumer.

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Roger Forshaw is an Associate Director at Benchmark International, specialising in facilitating M&As across key industries. A University of Sheffield Business Management graduate, Roger joined the Benchmark International team in 2010 as a Research Analyst. During his five-year career with the company, he has quickly proven himself as a formidable figure in completing maximum-value transactions, including for clients in pharmaceuticals and energy industries.
Roger Forshaw
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