As the speed of consolidation in the Pharma industry picks up again, there will be more opportunities for medium-sized companies to complement their portfolios by acquiring product rights pruned from the portfolios of global Pharma companies. In this article we look at strategy, process and pitfalls of product acquisitions.

Small- and medium-sized Pharma companies have always been trading national or regional product rights with each other as an alternative to licensing, co-marketing, or other types of cooperative deals. However, if the seller is a global Pharma company—thus there exists a significant size asymmetry between buyer and seller—it is difficult for smaller players to be recognized as credible buyers. Why is that?

The reason is an aversion of the sellers to risk and complexity. If global Pharma companies engage in pruning their product portfolios, they usually do so to focus their organization on key strategic areas and reduce complexity.

The financial aspects are important, but often not decisive. The main concern for the seller is to perform the divestment process with as little distraction for senior management as possible. To ensure this, they prefer to speak to larger companies with strong acquisition track records rather than to smaller players whose merger and acquisition (M&A) competencies are less well known.

Positioning as a potential buyer
Thus, the  first challenge for a smaller Pharma company is to be perceived as a credible potential buyer. Having a compelling strategic rationale for a specific product acquisition is a good stepping stone.

As in all M&A deals, an acquirer should have a sound, plausible and feasible acquisition strategy. To position themselves as buyers, smaller Pharma  firms should regularly communicate their strategy to global Pharma companies with interesting products in their portfolio. It is important that the strategy is realistic and is only adapted when necessary. Frankness and constancy build trust. Ideally, the strategy can be tailored to demonstrate why the bidder is the best potential owner for a specific product owned by the respective global Pharma company.

In the best case, the rationale is so compelling that the potential buyer is treated as a preferred bidder once a divestment process is envisaged. Even if a global Pharma company will rarely admit, they often have their preferences when selling, and trust based on transparency is an important factor for them.

Making an offer credible. One of the issues which small- and medium-sized Pharma companies face is that they are perceived as risky, i.e. unreliable bidders. Large sellers believe the small candidate buyers are more likely to withdraw from an M&A process, and that they will be less capable to manage the transfer of products professionally.

Thus, once the process starts, the bidder needs to establish three additional elements to actually win the deal. First, obviously, an offer which is appealing as a package, taking into account the up-front valuation and all post-deal terms such as manufacturing obligations of the seller. Second, transparency that financing is secured. And third, evidence that the buyer has the internal manpower and competence to execute the deal and integrate the product.

Keeping it simple. At this stage, it is important to reconsider the objectives of the seller: Realize an attractive valuation while reducing complexity without too much distraction in the process. Therefore, a seller wants to have one credible buyer for the product rights which are up for sale. If the products are sold globally, the seller may carve out the rights for the U.S. and/or Japan if necessary, but further splits typically are unfeasible, even if the sum of the offers for the separate parts may be higher than for the total.

The buyer is well advised to formulate its offer by proactively addressing potential issues perceived by the seller: Financing of the transaction should be fully disclosed (e.g. presenting bank warranties, or the balance sheet of the buyer); the due diligence team should be in place; and the post-deal integration process should be explained in detail.

Typically, a limited auction progresses through several stages, and a buyer may add to and amend its initial offer. Again, transparency and consistency help to build trust and credibility. The buyer should emphasize the strategic fit of the proposed acquisition, and state any concerns and limitations openly and early.

Flexibility to help the seller. Once a price level is established, the seller will invite one or very few bidders to the due diligence and negotiation process.

The sale of product rights is far more complex than selling a company. Areas of concern are the product’s regulatory and reimbursement status; its supply chain in a post-closing transition phase and in the long term; third-party rights to the product such as sub-licensing agreements; and marketing considerations. These topics run through many different functions of the seller, and require quite often laborious and time consuming alignment exercises.

Here is one of the advantages smaller bidders have over global Pharma company buyers: They are more flexible to build solutions for the many detailed issues which arise in the negotiation and implementation phase. Finding a balance between flexibility to address technical issues of the seller and firmness where vital interests of the buyer are concerned is a key element in contract negotiations. 

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Christoph Bieri is managing partner with Kurmann Partners, a Swiss-based M&A boutique focused on mid-market transactions in the pharmaceutical and medtech industries and adjacent segments. Christoph has led numerous buy-side and sell-side international transactions concerning targets based in the Europe and North America. Prior to joining Kurmann Partners, Christoph was chief executive officer of a venture-financed R&D technology company for biotechnology, and before that a consultant with The Boston Consulting Group.