Carve-outs strategic business, finance and tax considerations Wednesday, March 22, 2017
Global life science M&A landscape
M&As continued with the new normal of total deal value >US$200b; divestitures constituting a major chunk Deal amount (US$b) 400 350 300 250 200 150 100 50 0 20 0 Life sciences M&A by year New normal: $200b+ 2011 2012 2013 2014 2015 2016 900 800 700 600 500 400 300 200 100 0 Deal volume Deal amount (US$b) -20-40 -60-80 -100-120 -140 Life sciences divestitures by year Source: Thomson One Biotech Medtech Pharma Page 2
Life sciences sector The number of deals remained strong in 2016 across both strategic and financial buyers Financial vs. strategic buyers No. of deals* * Deals from 2005 through Feb 22, 2017 Source: Capital IQ, Page 3
Global Corporate Divestment Study Highlights 43% 76% 88% plan to divest in the next two years of companies feel that their last major divestment created long-term value, down from 84% last year of companies generate a sale price above expectations when they understand the forces affecting the sector and business 41% of companies believe they held on to assets too long Participant profile 1,000 executives from 60 countries and 10 industry sectors 78% CEOs, CFOs or other C-level executives Page 4
Key life sciences findings 56% Build Firepower for M&A in focus growth areas 38% life sciences companies plan to divest in the next two years 68% 41% Spend time on separation and act early; 58% highlighted saving opportunities for buyer held assets for too long that they felt they should have divested 87% Evaluate contingent consideration to complete deals 60% view R&D success as critical milestone for contingent consideration Page 5
Panel discussion
Panelist introduction Moderator: Subin Baral Divestiture Advisory Services Ernst & Young LLP Panelists: James D Arecca Chief Accounting Officer Allergan, Inc Vineeta Dinesh Senior Director, Acquisitions and Divestiture Operations Johnson & Johnson Dr. Nancy Stempin Executive Director Ernst & Young LLP
Strategic considerations and timing Portfolio review process Rigor of process can help identify divestiture or growth opportunities before you are forced to act Embed analytics into portfolio management Timeline to plan and execute A successful divestiture may be longer than you expect Key challenges exist Use the time to enhance value Perform tax structuring and communication of upside Page 8
Buyer pool assessment and impacts Buyers may have different financial information needs Strategic vs. financial buyers Deal vs. GAAP-audited financials Basis and perimeter may be different Buyer pool can impact transaction form Sale, joint venture, IPO or spin-off Page 9
Financial statement preparation challenges IT systems may not support the process Manual identification of assets/liabilities Shared legal entities P&L allocations Corporate overhead and other costs may not be included in historical management reporting Lower materiality Income taxes, goodwill and pensions Page 10
Separation issues Stand-alone cost estimates Key challenges Often reflect significant assumptions Can offer a common language to provide context to operations to multiple buyers Transition services arrangements (TSAs) Advanced preparation can minimize use or reduce timelines Page 11
Typical divestiture process Role of Accounting Day 0 Day 1 Day 2 Strategy Identify value Prepare Confirm value Report Secure value Close Deliver and retain value Beyond Deliver and retain value Strategic review Position business for sale Planning and preparation Issue Teaser Issue IM Issue sell-side report Buyer diligence Negotiation and completion Transition Close Postcompletion Postcompletion Accounting impact of deal structure identify risks and ops Provide insight on valuation methods Value review in the areas of accounting and finance systems/policies Finance planning Accounting Goodwill and held-forsale asset considerations Prepare data for businesses for sale Member of separation project management office (PMO) Identify TSA for finance and accounting Identify stand-alone issues Identify any impairments/write-offs Prepare transaction financials/audits Carve-out systems Pro forma Due diligence support Review sale agreement Prepare accounting white paper Operational carve-out implementation TSA drafting contribute and review for impact in accounting treatment/potential deferral Finalize transaction financials Due diligence questions Identify content required for disclosure Statutory support Management presentation Bidder Q&A Close down outstanding buyers due diligence questions Stranded cost management Create disclosures Record and move assets/liabilities Create/review SEC filings if applicable Create accounts for TSA if necessary Value optimization Create billing Cut off procedures Review allocations Accounting for TSA/transition Continue the focus of the PMO as a member Establish Day 2 Governance Track performance against the metrics of the deal Disclosure Execute under TSA/transition manufacturing arrangement (TMA) Transition TSA/TMA activities Ensure segregation of TSA/TMA Bill TSA/TMA Support audit if applicable Close out TSA/TMA Support disclosures and filing Assess impact on controls True up contingent purchase price adj. Page 12
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