Are you merging innovation or submerging value?

This week’s Capital Agenda Blog comes from Matt Bartell, EY UK&I Transaction Advisory Services Life Sciences Leader and Andrew Jones, an Associate Partner in EY UK&I  Life Sciences Transaction Advisory Services.

Are you merging innovation or submerging value?

How do you integrate an acquisition when its value derives not from its physical assets, but from its ability to think and act outside of your industry norms? Can you still allow innovative spirit to flourish, whilst still guarding against regulatory, commercial or operational risk?

In this week’s blog we’ll explore the steps big pharma companies can take to preserve and enhance value when they buy companies with novel therapeutic technologies. The nature of the sector means that it has a more delicate balance than most to maintain between encouraging innovation and managing risk; but there are universal themes here that should resonate across the life sciences sector and beyond.

A new era

We’re living through an incredibly exciting time in biopharmaceutical innovation. The landscape is continuously evolving with the industry developing and commercialising novel technologies and ground-breaking therapies that help to save more lives. These include autologous CAR T-cell therapy, in-vivo gene therapy, digital therapeutics and RNAi therapeutics. We expect to see further launches in these categories as well as more first-of-kind approvals in the coming years.

The promise of these novel technologies is driving M&A, as biopharma companies seek to increase their innovative edge. Large biopharma companies have begun placing bets on novel technologies to secure platform capabilities and first-mover advantage. We estimate that US$40b has been spent on deals in this area – with this figure likely to represent the tip of the iceberg as companies find increasing success, the utility of these technologies broadens and assets mature.

The increase in deals here comes as part of a broader trends towards increasing deals in the life sciences sector. The latest EY Capital Confidence Barometer Report shows that 53% of LS executives expect to actively pursue M&A in the next 12 months, up from 48% six months ago and well above the 43% average of the last 10 years. Almost every life sciences executive also said that they expected to make significant investments into technology this year.

Finding the balance

The dilemma biopharma acquirers face is one that we’ve discussed here before. But it’s a predicament that is particularly heightened when companies make acquisitions at the cutting edge of their sector. How do you integrate companies without smothering their innovative spirit? This question is particularly pertinent to biotherapeutic innovation, since the uniqueness of these technologies creates distinctive operational challenges for those seeking to bring new therapies to market. These challenges apply equally to acquirers, who need to manage risk of integrating and commercialising new products, whilst also maximising the potential of their acquisition.

The acquired companies are by their nature likely to be small and immature, without the financial, commercial and cyber-risk management structures that are likely to be in place at their larger, more mature acquirers. So far, not so different to an acquisition of a small tech start-up. But there is obviously another vital layer of regulatory risk when buying a company engaged in biosciences and the development of therapeutic technologies. There is also the additional risk associated with buying into novel and untried therapies, where there will be development and regulatory issues that the buyer hasn’t previously encountered.

Moreover, the acquirer needs to be able to ensure that they integrate the target business within its financial, commercial, cyber and regulatory risk structures, without destroying the culture of entrepreneurship and innovation that will be an essential component of the target’s value. It can be especially challenging to retain the talented individuals that have driven this innovation, if they feel that their working culture has fundamentally changed. Being part of a larger, conglomerated company isn’t necessarily what they signed up for.

So how do you integrate a business in a risky sector in such a way that keeps what’s special, but also manages risk? How can biopharma companies maximise the potential of these new therapies and the value of their acquisition?

A subtly different approach

In our experience, post-deal integration – if managed smartly and sensitively should drive, not destroy value creation. Our experience tells us there are five areas that acquirers need to get right to complete a deal successfully and then deliver against the investment case. This approach to integration balances the need to take a robust approach to risk, whilst taking a more intuitive approach to integrating individuals and working with the culture of the organisation

  1. Ensure rigorous focus on quality
    Targets at an early stage in their corporate life often have developing areas like financial controls and navigating evolving regulatory standards. Given the high level of risk involved – and the potential for risks outside of the experience of the new parent company – these areas require a strong, early focus to ensure that the target matches the compliance level of the parent.

  2. Invest in talent retention
    The ability to retain top talent as well as cultural fit are essential to a successful integration. This robust approach to managing risk needs to be approached in the context of a deep understanding of the target’s talent, values, culture and behaviour. Most of value of the target will lie here and success relies on the buyer working with – not against – its individuals and culture.An understanding of these elements will help to create an environment in which the acquired business can prosper. Transparency and communication will be pivotal to talent retention, trust and continued innovation.

  3. Define the target operating model
    The existing operating model might be poorly defined and evolving, but the buyer shouldn’t force its model on the target. Instead it should seek out ways to work in partnership with the acquired company, leveraging existing capabilities and infrastructure to help streamline the targets strategy and utilise its existing resources.It’s important that medium and longer-term operating model guidelines are well defined to set expectations and that these are followed through.

  4. Integrate slowly and smartly
    Buyers should exercise caution to ensure value isn’t lost or diminished through unnecessary change. They should seek to integrate slowly and smartly by focusing on critical areas, while identifying opportunities to complement the target.

  5. Prioritise market access
    Long lead times may be required to educate and bring stakeholders on board. Buyers should co-develop and validate commercial pricing and reimbursement models and ensure the supply chain is optimised to maximise patient-reach and expedite market access.