Industry Consolidation: Role of Compliance in Mergers, Acquisitions, and Divestitures

Transcription

1 Industry Consolidation: Role of Compliance in Mergers, Acquisitions, and Divestitures Prepared for CBI s Pharmaceutical Compliance Congress April 28, 2017

2 M&A Activity in the Pharmaceutical Industry THE TREND TOWARD INDUSTRY CONSOLIDATION Over the past two decades, M&A activity within the pharmaceutical industry has been prolific. In fact, when examining deals valued at more than $1 billion, the results are shocking Since 1995, 60 pharma companies have, through acquisitions and mergers, consolidated into only 10 companies! 2

3 M&A Activity in the Pharmaceutical Industry THE TREND TOWARD INDUSTRY CONSOLIDATION 3

4 M&A Activity in the Pharmaceutical Industry THE TREND TOWARD INDUSTRY CONSOLIDATION RECENT ACTIVITY 4

5 M&A Activity in the Pharmaceutical Industry TYPES OF ACQUISITIONS 1. Horizontal: Acquisition of companies that have a high quality product line and are trading in markets where the acquirer is also present Allows for improved cash flow Tend to be more profitable if new products are acquired AND new territories are entered 2. Vertical: Acquisition of companies to enrich the lifecycle of existing products Integration: Acquisition of a biotech company to obtain enabling technologies or enrich one s one R&D pipeline Extension: Acquisition of a generics company to protect one s own products when patents expire OTC Switch: Acquisition of an over-the-counter company to switch one s prescription products to the OTC field 5

6 M&A Activity in the Pharmaceutical Industry THE TREND TOWARD INDUSTRY CONSOLIDATION M&A activity within the pharmaceutical industry is likely to trend upwards in 2017 and beyond but why? Rising costs and risks of drug development Diminishing conversion levels Influence of managed care Attempts to limit eligibility for patients Increased competition due to generics and biosimilars Increased demand for new drugs due to aging demographics and global population increases Increased purchase power due to more divestitures of non-core assets Additionally, the Trump Administration s pledge to allow companies to repatriate at a lower tax rate could encourage even more industry consolidation! 6

7 Pre-Acquisition Due Diligence Due Diligence Objectives High Risk Areas Prioritizing Risks Assessing Risks Making Due Diligence Decisions

8 Pre-Acquisition Due Diligence DUE DILIGENCE OBJECTIVES What IS due diligence? The process of identifying and evaluating the information and issues material to achieving a pharmaceutical company s objectives in the sale or purchase or a business or asset group. What are we trying to achieve when conducting due diligence? Understand the business of the target Discover red flags (i.e., hidden/unexpected liabilities and risks) Determine whether those red flags go to value or illegality such that a company does not want to go forward with the deal Inform the company s post-acquisition work plan from an operational standpoint 8

9 Pre-Acquisition Due Diligence HIGH RISK AREAS As an initial matter, it is important to understand the areas in which the government is most actively attempting to develop and pursue claims against companies within the pharmaceutical industry: Foreign Corrupt Practices Act ( FCPA ) Anti-Kickback Statute ( AKS ) o o HCP Speaker Programs and Meals Research Programs and Travel o Rebates False Claims Act ( FCA ) o o Off-Label Promotion False and Misleading Marketing and Labelling Ex-US Third Party Risk Overseas The potential harm caused by these risks is largely informed by the target company s business model, the countries in which it operates, and the robustness of the company s existing Compliance Program. 9

10 Pre-Acquisition Due Diligence HIGH RISK AREAS FCPA 2016: Andrew Weismann, Chief of the Fraud Section DOJ Criminal Division, emphasized the DOJ s dedication to enforcing the FCPA. The DOJ is committed to enhancing its efforts to detect and prosecute both individuals and companies for violations of the FCPA, which criminalizes various acts of bribery Memorandum from Andrew Wiessmann (April 5, 2016) Since then, the DOJ has utilized increased enforcement resources and coordinated with foreign counterparts to successfully bring high-profile actions against violators, making it increasingly important to review the target company s interactions with ex-us third parties. AstraZeneca: Paid more a $5m penalty related to improper payments made by subsidiaries to Chinese and Russian officials GlaxoSmithKline: Paid a $20m penalty when its China-based subsidiaries engaged in pay-to-prescribe schemes to increase sales Teva: Paid a $519m penalty related to bribes to officials in Russia, Ukraine, and Mexico 10

11 Pre-Acquisition Due Diligence HIGH RISK AREAS FRAUD As with anti-bribery enforcement, the DOJ has made it clear that fighting healthcare fraud is one of its top priorities. Additionally, the high return on investment in healthcare enforcement contributes to the DOJ s focus currently, the federal government recovers eight dollars for every dollar invested! Certain activities undertaken by pharma companies are more heavily policed than others, resulting in claims under the AKS and FCA: Prior Authorizations: Warner Chilcott paid a $125m fine related to paying kickbacks to HCPs to manipulate prior authorizations to induce insurance companies to pay for prescriptions of one of their products Clinical Trial Data: GSK paid a $3b fine related to, among other allegations, preparing, publishing, and distributing a misleading medical journal article that misreported that a clinical trial of a product demonstrated efficacy in the treatment of depression in patients under age 18, when the study failed to demonstrate efficacy Rebates: Novartis paid a $380m fine related to the provision of rebates to specialty pharmacies as inducements to increase the pharmacies prescription of their products 11

12 Pre-Acquisition Due Diligence PRIORITIZING & ASSESSING RISK Once the acquirer understands which activities the government most closely scrutinizes in the pharmaceutical industry, one must determine the risk profile of the target company in relation to those high risk activities and plan accordingly but how? In a perfect world, the acquirer should conduct an enterprise-wide analysis, including a full assessment of the target company s compliance program and a corresponding audit, which would involve: 1. Identify Risks through an enterprise-wide Risk Assessment; 2. Rank Risks based on managed risks identified in the Assessment; 3. Perform Audit of both compliance and operational risks by reviewing policies, conducting interviews with risk owners, and testing existing controls; and 4. Evaluate Findings and Identify Gaps within the context of existing policies and applicable external standards. 12

13 Pre-Acquisition Due Diligence PRIORITIZING & ASSESSING RISK The tools used to conduct the enterprise-wise analysis (in a perfect world!) may look like this: Compliance Risk Assessment Template Enterprise Wide Model 13

14 Pre-Acquisition Due Diligence PRIORITIZING & ASSESSING RISK Business Unit Evaluation Template 14

15 Pre-Acquisition Due Diligence PRIORITIZING & ASSESSING RISK Business Activity Risk Assessment Evaluation Key 15

16 Pre-Acquisition Due Diligence PRIORITIZING & ASSESSING RISK Unfortunately, we do not live in a perfect world! Here s the reality: Deals in the pharmaceutical industry move quickly and urgent deadlines are common, making it nearly impossible to conduct a full assessment of a target company. Therefore, in order to uncover any potential deal-breakers, the acquirer must conduct focused, thorough, and often costly due diligence but how? 1. Plan, Plan, Plan: Given the target company s business model and the countries in which it operates, prepare a detailed work plan to identify the activities that would pose the most frequent and severe risks. 2. Perform Limited Analysis: Pull samples of documentation related the highest risk activities (e.g., Open Payments data, invoices from HCPs, promotional materials) and analyze. 3. Identify Red Flags: Drawing informed conclusions from the limited samples examined, identify, and rate any potential red flags based on materiality to the underlying deal. 16

17 Pre-Acquisition Due Diligence PRIORITIZING & ASSESSING RISK There is no one-size-fits-all solution to conducting pre-acquisition due diligence. Therefore, an acquirer s plan of attack should be specifically tailored to risk profile of the target company. For example: Does the target have marketed products? Pull the target s publicly-available Open Payments data and cross-reference against its top prescribers is there a positive correlation? What are the target company s Key Opinion Leaders doing? o Do the marketed products include specialty drugs? Take a closer look at reimbursement mechanisms, clinical trial data, drug prices, etc. If there are no marketed products, what is happening in the R&D pipeline? Assess clinical trials and independent studies who is conducting them? If the target company is foreign, it most likely does not maintain a robust body of policies what do you assess? Because 90% of overseas risk is created by third parties, vet engagements with HCPs, researchers, distributors, and government officials. 17

18 Pre-Acquisition Due Diligence PRIORITIZING & ASSESSING RISK CASE STUDY Your company is deciding whether to acquire a privately-owned pharmaceutical company based in Mexico that has a number of products on the market and a robust R&D function. You are managing the due diligence process, and you have a short timeline to report back with your findings. What are the top three risk areas you will look at? What kind of activities expose this target to the most risk? How will you properly vet those activities to ensure any bona fide red flags are identified? 18

19 Pre-Acquisition Due Diligence MAKING DECISIONS BASED ON DUE DILIGENCE Upon completion of the due diligence process, an acquirer is often left with a number of red flags and must then determine whether any constitute a deal-breaker. It is important to remember that red flags will need to be defended to the potential buyer, so ensure that all red flags are bona fide to maintain credibility. Also keep in mind that even where bona fide red flags exist, there are a number of potential outcomes to consider: 1. Re-evaluation of investment, price, or return 2. Re-negotiation of key terms/contractual language or introduction of new terms 3. Amendment of regulatory strategy 4. Abandonment of the transaction 19

20 Post-Acquisition Integration Integration Challenges Integration Activities Panel Discussion: Prioritizing Integration Activities Structuring Integration Plan Executing Integration Plan

21 Post-Acquisition Integration INTEGRATION CHALLENGES Soyou ve closed the deal! But what now? While every deal is different, there are certain common postacquisition challenges that arise when preparing to integrate the target company into your own: Limited pre-deal transparency Different company culture Workforce transition Different or inconsistent policies Separate or incompatible systems Cybersecurity measures Customer Retention Successor liability 21

22 Post-Acquisition Integration INTEGRATION ACTIVITIES The first days after an acquisition are crucial. It is important to hit the ground running with a work plan informed by the pre-acquisition due diligence process but how? Verify due diligence data. Gather additional information. Prioritize Activities. Implement! Establish integration teams. Adjust work plan accordingly. 22

23 Post-Acquisition Integration PANEL DISCUSSION TOPIC OVERVIEW Integration Activity Prioritization Integration Plan Structure Integration Plan Implementation 23

24 Contact Information Ed Buthusiem Managing Director, BRG Sarah Chopp Senior Corporate Counsel, Pfizer Philip Munkacsy Senior Director Corporate Compliance, Impax Labs