Pharmaceutical M&A

Diligence Due

Despite heavy regulation, many pharma acquisitions fail from a lack of due diligence.
By: | February 22, 2016 • 6 min read

Pharmaceutical and life science companies plowed billions of dollars into acquisitions over the last two years, just to maintain revenue growth and stay ahead of the competition.


Additional pressure from shareholders seeking a quick return, a surplus of cheap capital and persistently low interest rates only fueled the growth in mergers and acquisitions (M&A) activity.

Meanwhile big corporations are selling off or divesting the slow-growing and less profitable parts of their business in order to focus on their core market instead. The result is that brokers and attorneys in the life science/pharma space are staying very busy.

“In the last couple of years we have seen really good deal conditions in terms of the cheap financing available because of low interest rates,” said Damian Arguello, a partner at law firm Davis Graham & Stubbs.

Damian Arguello, partner, Davis Graham & Stubbs

Damian Arguello, partner, Davis Graham & Stubbs

“Many companies are also looking to get away from a focus on short-term profitability and to refocus on their core business and divesting those parts that aren’t core.

“At the end of the day, it comes down to a feeding frenzy — everyone’s doing something so what opportunities are you missing out on if you are not acquiring or divesting your assets?”

Since the start of 2014, more than $860 billion worth of pharma M&A deals have been announced, according to analysts Dealogic.

In the last year alone, the industry spent a record $677.5 billion on M&A, led by Teva’s announced $40 billion purchase of Allergan’s generics business, and Pfizer’s $160 billion merger with Allergan.

“In the last couple of years we have seen really good deal conditions in terms of the cheap financing available because of low interest rates.” — Damian Arguello, partner, Davis Graham & Stubbs

That trend is set to continue through 2016, with companies taking advantage of lower valuations and access to new geographical areas, lines of business, products and customer bases.

Other benefits include the cost and efficiency synergies that can be gained through building scale and tax inversions if the target operates in a more favorable jurisdiction.


However, experts warned that at least 75 percent of companies that bought a new business over the last year failed to execute proper due diligence.

That has left them exposed to a host of unforeseen risks including shareholder lawsuits and directors and officers (D&O) liability claims, or worse still, the collapse of the deal.

Due diligence has, therefore, become a vital part of the M&A process, with risk managers being required to carry out thorough checks at every stage of the deal.

Due Diligence Risks

Arguello said that the biggest risk for the acquirer was overlooking a key part of the due diligence process because of the pressures of a short timeframe to get the deal done.

Alexander Moscho, managing director, Bayer UK/Ireland

Alexander Moscho, managing director, Bayer UK/Ireland

He said that risk managers also have to be aware of the increasing risk of class-action lawsuits resulting from products in the development pipeline that fail to deliver on their initial promise or to gain regulatory approval.

Product liability claims can also extend to design and manufacturing defects, and failure to warn customers about the possible side effects of a drug or product after it has been developed, he added.

“This industry, in particular, faces a lot of regulatory risks, as well as safety issues that won’t necessarily reveal themselves until further down the road,” he said.

“There are any number of long-term product claims that could come out that are only exacerbated by insurance companies pushing to limit the ability of corporate successors to tap into their predecessor’s insurance.”


Arguello estimated that less than one-quarter of companies do their proper due diligence when acquiring a new entity or product.

The worst case scenario for companies if they get it wrong, he said, is an asbestos-type fallout with serious long-term or intergenerational effects for the customer further down the line.

Alexander Moscho, managing director of Bayer’s UK and Ireland business, estimated that two-thirds of all M&A deals over the last year have failed to deliver on their initial financial targets because of post-merger integration problems — a knock-on effect from not having done thorough due diligence.

“It’s really the big picture issues that you need to look at when doing your due diligence, such as the company’s culture.” — Gordon Zellers, Colorado practice leader, Woodruff-Sawyer & Co.

He cited the example of Daiichi Sankyo’s acquisition of Ranbaxy for $4.6 billion in 2008, shortly after which the U.S. Food and Drug Administration launched an investigation into the newly acquired company over concerns about its manufacturing processes.

A year later, Daiichi was forced to write off $1 billion, and in 2013 it paid out $500 million to settle claims with the U.S. Department of Justice, before selling its remaining stake in Ranbaxy to Sun Pharmaceuticals for $3.2 billion in 2014.

“They lost a lot of money over a short period of time because they neglected some of the risks that due diligence could have addressed,” Moscho said.


Gordon Zellers, Colorado practice leader, Woodruff-Sawyer & Co

Gordon Zellers, Colorado practice leader at Woodruff-Sawyer & Co., said that joining the two companies’ cultures together is often one of the biggest stumbling blocks in the M&A process.

“You can almost always get the insurance-related parts of the deal right like the carrier relationship, program structure and collateral — it’s really the big picture issues that you need to look at when doing your due diligence, such as the company’s culture,” he said.

Jim Walters, a managing director with Aon, added that among the biggest risks that need to be recognized when buying a company were the potential effects that cost synergies will have on the new company in the future, including layoffs and plant closures.

Risk Management Involvement


Zellers said that the main problem with due diligence is in many cases risk managers don’t get involved until the transaction has been completed, because management is so keen to push the deal through.

He said that it is vital to assemble an experienced team including financial, legal, tax and risk experts that can sort out the key details of the deal in advance such as dispute resolution mechanisms, performance goals and monitoring.

“Often the finance and legal departments aren’t aware of the types of insurance solutions available to cover them against unforeseen risks.”

John Connolly, North American practice leader, life science and pharmaceuticals, Willis Towers Watson

John Connolly, North American practice leader, life science and pharmaceuticals, Willis Towers Watson

John Connolly, North American practice leader, life science and pharmaceuticals at Willis Towers Watson, said that it is essential to put a valuation on any potential net exposure that your company may incur as a result of the acquisition, as well as looking at settlement opportunities.

He added that it is also important to ensure that the target’s insurance programs are fully compliant with the law from day one, in addition to reviewing and understanding its risk management procedures, reporting guidelines and communications, and loss control.

“Look to create protocols that embrace the best of both approaches but, above all, ensure that the new operations and people are able to meet your existing standards at minimum,” he said.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance


Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”


“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.


“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?


“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.