February 18, 2020 Healthcare
The healthcare industry has been a fountain of dealmaking lately. Healthcare M&A may continue in 2020 at a strong pace, although the value of those deals may not reach the heights of 2019, according to financial advisors from PricewaterhouseCoopers speaking at a recent conference. Companies wanting to make acquisitions or sell businesses this year should learn from the experts.
Centerview Partners’ Andrew Rymer is a longtime healthcare investment banker who has inked multiple deals for the industry’s heavyweights, including Pfizer and Novartis. Lindsay Androski, vice president of strategic partnering at biotech firm Roivant Sciences, offers insight from the executive ranks of a company that has made M&A a major part of its business.
A team and board experienced with M&A can help a company launch into significant dealmaking. Roughly a third of Roivant’s 150 employees are involved in the deal process, since acquisitions are a major part of its business model. Because regulators focus on antitrust concerns, it’s important for healthcare companies to think about the potential roadblocks to particular deals, Androski says. On the buy side, “I would try to predict what I would be asked to divest and what we would be able to sell those assets for and reflect those scenarios in our financial models,” she says.
Formulate an Aggressive Timeline
One of the risks of dealmaking is deal fatigue. Set an aggressive timeline and keep plowing ahead. “Momentum is what gets deals done; a lack of it is how they die on the vine,” Rymer says. Roivant speeds up deal timelines by running parallel processes, rather than waiting for due diligence to be complete before putting the term sheets together, for example. Androski also recommends keeping executives involved throughout the process, rather than handing the deal over to lawyers entirely once the financial and other key terms are finalized. On their own, lawyers may slow things down by arguing about issues that won’t matter in the end. “Often they fight about things nobody is going to sue over,” she says. “Only a business person can jump in and say that.”
Focus On Arriving At The Right Price
For most healthcare deals, it’s important for the buyer to not overpay, especially when the premium isn’t justified over the long term. “There is a lot of glory to be had in the industry for saying you did a deal with a big dollar amount,” Androski says. “It’s exciting. It’s high-profile.” But it’s critical to focus on getting the right price. “Don’t get emotionally attached to the company you are attempting to acquire during the competitive bidding process,” Androski says. “I think people do that, and they end up overpaying.” However, Rymer says big pharma lately has been an exception to the rule that investors want deals to be immediately accretive to the bottom line. “Investors give large pharma C-suite and business development teams a lot of credit that they can assess the science better than the market,” Rymer says.
On the sell side, it’s important that executives and board members understand the company’s value and rationale for that value before going into negotiations, Rymer says. A buyer will look for ways to sow doubt about that value. “The organization should really speak with one voice,” he says.
Resolve Social Issues At The Outset
Rymer has seen deals fall apart because an executive doesn’t want to move from the city to the suburbs. Figuring out what the team on the other side wants is key to putting together a successful deal. For example, contract drug manufacturer Catalent, based in Somerset, New Jersey, was able to acquire Paragon Bioservices last year for $1.2 billion, filling a key need for more high-quality gene therapy manufacturing. The deal and others like it increased the stock’s valuation by 56% in early February from a year ago.
Rymer advised on the Paragon deal and says ironing out social issues early was key to getting it done. “The management team of Paragon was the lifeblood,” Rymer says. “Catalent was astute in understanding that solving many of the key social issues early in negotiation, such as job titles, retention agreements, [the] footprint in Baltimore, was critical to building the necessary goodwill and trust to allow the deal to proceed quickly and efficiently.”
These are just a few of the ways to make sure your team gets a deal done. Of course, so much more goes into a successful deal. The acquiring company can make or break a deal based on how it handles integration and executing the promised synergies.
“Deals are fraught with complications,” Rymer says. But it makes sense to put some planning into dealmaking before jumping straight in. “Certainly on the sell side, this is the biggest choice you’re going to make in your company’s existence.”