Regulatory Due Diligence Remains Key in Pharma M&A

The Importance of Due Dilligence in Pharma M&A

Catherine Geyman offers a word of caution when it comes to the M&A spree in pharma this year.

It looks like a record year for mergers and acquisitions in pharmaceuticals. Time will tell if that’s a good thing.

Beginning, as it did, with Bristol-Myers Squibb’s $74 billion purchase of Celgene, 2019 has looked a promising year for pharma M&A from the off. With AbbVie’s $63 billion takeover of Allergan ending the first half as well, it’s unlikely to disappoint those looking for big numbers.

In fact, with transactions worth $172 billion, the pharma, medical and biotech (PMB) industry led the way for M&A in the months to July and put the last couple of years activity in the shade: the value of the top ten deals announced in 2019 is up by almost half (47%) on the same period last year.

Moreover, we can probably expect activity to continue in the remaining months. New leaders at giants such as Gilead Sciences and Pfizer show continued appetite for deals, and the list of candidates to drive activity remains strong.

Let’s hope, though, that Pfizer has learnt lessons from its takeover of Hospira back in 2015 with respect to the cost of underestimating the regulatory risks presented by a company with a poor compliance history.

Pharma M&A drivers

Senior Female Scientist Works with High Tech Equipment in a Modern Laboratory. Her Colleagues are Working Beside Her.

 

There are, in fact, a number of reasons to be a little cautious about the scale of activity we see.

First, some of the mega mergers mentioned do tend to skew the figures. The bulk of the value is found in just  one or two of the biggest deals (of which the BMS merger was the largest), and overall activity is a little less impressive: by transaction volume, the PMB industry ranks only fourth in the M&A tables, and in the first quarter the number of pharma deals was actually 10% lower than in the same period in 2018.

There also remain significant barriers to deals in some cases, as illustrated by Roche’s continuing attempted takeover of US gene therapy specialist Spark Therapeutics – delayed again in June due to regulators’ competition concerns. Potential regulatory action in other areas, such as over pricing (already being seen in countries such as Canada), could also dampen activity in the future.

Third, it should be noted that the deals are as much of a sign of weakness as they are of strength. Some of the drivers for M&A are benign, including pent-up demand after lower activity in 2017 and 2018, as well as US tax reform in 2018 that left big pharma companies with more cash. Higher activity also reflects significant opportunities in oncology; with M&A being used as a way for big players in pharma to expand into new therapeutic areas – as was the case with the BMS deal and Eli Lilly’s $8bn purchase of Loxo Oncology, among others.

As ratings agency Standard and Poor’s makes clear however, the activity also points to pressures over pricing, continuing patent expiration and fewer alternative avenues for growth. While M&A may stave off some of these issues, it’s hardly a silver bullet. Furthermore, S&P warns that groups’ consequent willingness to “compromise financial policy strength” and buy rivals at higher values could put pressure on some of their credit ratings.

Regulatory due diligence

Pfizer pharmaceuticals building in Tokyo

 

The most important reason we should not get too excited about the rash of deals we’ve seen, however, is that successful mergers and takeovers are notoriously difficult to pull off.

Completion of the purchase is a big milestone in any M&A, but it is really when the real work begins if the deal is to bring anything more than a short-term boost to the businesses involved. And if it’s not handled right, it can end up being a long-term burden.

The industry is awash with less than successful M&A that should force us to take a sober attitude to current activity. Pfizer’s $11bn aquisition of Array is among the headline deals that show M&A strength continuing in the second half of the year, for instance (as well as another example of the continuing attractions in oncology for the big players). But will it prove more successful long-term than the giant’s ill-fated takeover of Hospira?

In 2015 when that deal was announced, Hospira seemed to offer Pfizer an opportunity to dominate the generic sterile injectables drugs market, which was forecast to see rapid growth, as well as the biosimilar market – generic versions of expensive “biologics” medicines. It therefore promised to provide the business with avenues for rapid growth as well as mitigation for expiring patents.

Instead, the deal has helped drag down Pfizer’s sales figures and make a significant contribution to drug shortages affecting the US, with Hospira’s McPherson plant singled out by the American Society of Anesthesiologists in its contribution to the FDA’s public discussion on the root causes of shortages.

“[W]e observed the impact of how business decisions, such as mergers, impact drug shortages. The purchase of Hospira by Pfizer, for example, brings to light what can happen during manufacturer and production consolidation. The quality issues that are facing Pfizer in the McPherson plant have greatly impacted access to sterile injectables,” wrote the society’s President Linda Mason.

It certainly serves as a powerful lesson in the importance of due diligence when it comes to mergers and acquisitions for pharma companies.

A common problem

White lightbox with word fda recall on wood background

 

Hospira had a history of problems with  Rocky Mount, the North Carolina plant when Pfizer bought the business. In the three years before the deal, there were 239 recalls relating to the plant, according to the FDA. Despite assurances the problems had been largely addressed by 2015, these persisted afterwards, with a further 45 or more in the three years following. It’s been a continuing headache for Pfizer.

As recently as March, the company announced a recall of three lots of 8.4% sodium bicarbonate injection due to contamination by glass particles in some vials. In January, it also announced the closure of two manufacturing facilities in India, which have long been troubled, too.

Such problems are hardly unique to Pfizer and there is a range of other examples we could examine:

In other cases, businesses have had lucky escapes– such as Fresenius in 2018, when it realised the scale of the data integrity non compliance issues just in time to back out of its acquisition of Akorn.

For all of the above examples, major non compliance notices had been published by regulators such as the FDA or EMA prior to these acquisitions, suggesting that regulatory due diligence was either lacking or the potential impacts of ongoing issues seriously underestimated.

Nevertheless, these cases don’t necessarily reflect badly on the businesses involved so much as reflect the scale of the challenge. There are of course, risks for any industry when it comes to M&A. Often in pharma, as elsewhere, it’s the “soft factors”, such as culture, brand and people – and whether those of the two businesses fit well together – that determine the success or otherwise of the venture. That’s a handy reminder to those of us too tempted to be impressed by the big values being bandied about: It’s not all about the numbers.

But pharma also faces some unique issues relating to the tight regulation of the industry. Indeed, as this piece by Jenny Yu at insurer Munich Re makes clear, the regulatory risk facing the industry has been exacerbated in recent years by two factors: first, the move to outsourcing much of the pharma supply chain and second, ever expanding regulatory requirements.

As Pfizer’s woes with Hospira (and Bayer’s issues with its Leverkuesen plant) illustrate, there is a significant challenge in  addressing problems such as contamination and other regulatory issues when they do occur – not to mention potentially massive expense; major manufacturing issues have cost the biopharma industry over $12bn in lost revenues and remediation in the last two decades.

The key is to make sure you thoroughly do your due diligence on the business and its entire supply chain and then do it again. To do so, businesses should use all the tools at their disposal, including developments such as SCAIR’s Regulatory Incident Monitor tool. It collects a wide range of regulatory non compliance data from major North American and European regulators into a single historical report for each company – giving you an at-a-glance warning of any red flags.

It not only provides businesses with an early warning system for potential acquisition targets, but also a way to continually monitor and keep ahead of supplier issues. It can help businesses make sure they make the right decisions at the outset – so they don’t end up paying for others’ mistakes later.

Catherine Geyman, Director, Intersys Risk Ltd

Head shot of Catherine Geyman, Director, Intersys Risk Ltd

Out and about at CPhI Worldwide

Greetings from Frankfurt where we've been at CPhI Worldwide.

We’re just returning from a successful week taking SCAIR to 36,000 pharmaceutical professionals.

You don’t have to be at the conference long to appreciate the importance of technology: The event brings in participants from every part of the pharmaceutical manufacturing and delivery, with over 20 dedicated zones covering ingredients, APIs, excipients, packaging, biopharma, machinery and so on. There are also participants from over 150 different countries.

Visiting this conference, it’s impossible not to get a sense of the both complexity of the modern pharma supply chain and its truly global nature. With new innovations announced every day at the conference, you also get a sense of how fast moving it is.

CMO uncertainty

And you get a sense of the risks: The annual report of the event’s organisers picks up on some of these, including including political uncertainty in the US, with a new administration that has shown a “keen political desire… to reduce drug prices, but with very little indication of policy”.

That’s left pharma companies and the contract manufacturing (CMO) “in the dark”, the report notes, and vulnerable to decisions that could disrupt their entire business model.

We’re at CPhI to show how technology such as SCAIR can address this type of risk, as well as more long-standing challenges that affect operators across continents and across the supply chain.

We don’t pretend to be able to control Trump, but SCAIR can enable businesses to quickly get to grips with the impact any changes may have. With the software they can visualise their end-to-end supply chains and quantifying accumulated exposures of the company’s product portfolio to each critical supply point.

Nat cat and compliance

This Supply Node Exposure module in the software is also used to identify locations critical to the company for natural catastrophe alerting. Warnings and reports of hurricanes, earthquakes and floods are overlaid on these locations to rapidly highlight potential losses.

Finally, SCAIR deals with another key concern across the industry and highlighted frequently at CPhI: Compliance. It collects and consolidates non-compliance and supply chain interruption information from leading regulators such as the FDA and EMA. Root cause analysis of data such as recalls, production shortages, enforcement actions helps avoid issues in future.

As fast as the industry changes, events like CPhI make it clear these traditional concerns, along with issues such as maintaining data integrity and good manufacturing practice, continue to be key. It also suggest, though, that those companies that tackle them successfully, can look forward to the future with considerable confidence.

When the storm comes

Hurricane Irma once again shows us the importance of mapping supply chain risks for the pharmaceuticals industry.

The storm has passed, but the effects will be felt for months to come. In the Florida Keys up to a quarter of homes in the low-lying islands are reported to have been destroyed. Many in the Caribbean have had it worse.

There will, as always, be lessons for industries, including pharma. Puerto Rico, for example, is a huge centre for pharma manufacturers – the fifth biggest in the world with more than 80 plants. It accounts for about a quarter of the country’s GDP.

The island was actually spared the worst of the hurricane, but still three died, 50,000 were left without water and 600,000 without power. The storm served once again to expose the fragility of the island’s infrastructure. Nor are hurricanes the only recent disruption to hit the island. Only at the start of the summer did it declare its outbreak of the Zika virus over, after it infected more than 40,000.

Weather risk: an unavoidable reality

It’s not just Puerto Rico, of course; Irma brought potential for disruption across the Caribbean, to Florida and on inland. And it’s not just Irma; it followed hard on the heels of hurricane Harvey.

The industry has got better in recent years at dealing with these events, not least because of government encouragement to avoid disruption to medical supplies that can exacerbate the tragedy. One of the untold stories of both hurricanes Harvey and Irma is the shortage of urgently needed medicines; untold, because the problem was largely avoided with some improved planning.

But we’ll be tested again. Yes, hurricane Irma was unusually strong, but we’ve seen storms this powerful – and perhaps more so – before. We’ll see them again. The role of climate change in developing such storms will continue to be debated. What’s unarguable is that pharma – and a wide range of other industries with global supply chains – will always be at risk of exposure.

Preparing in advance for real resilience

Modern technology is a big part of the answer to managing this risk. The information businesses and the public have on a hurricane’s trajectories and strength is unparalleled; they can now track it online in real-time. Combine that with modern software solutions and we can quickly map risks for at-a-glance understanding of exposures.

That’s always useful in directing emergency responses when the storm comes. It’s more useful, though, used to map exposures and build resilience through continuity plans before. The power of Irma may have been a surprise, but storms in the hurricane season are not. Fortunately, we have the tools to weather them well; we just need to make sure we use them.

Brexit and the pharmaceutical supply chain

There’s work to be done on all sides – not just by the negotiators – to prepare supply chains for a future outside the EU.

For anyone already sick of Brexit, Michael Barnier’s recent announcement won’t have been encouraging: “The hard work starts now,” the EU’s chief negotiator Michel Barnier told reporters – more than a year after the UK voted to leave.

It’s a big issue – and a particular challenges for some.

One is the pharmaceuticals industry, and a couple of days before Michel Barnier was urging the UK to knuckle down, leaders in the UK and EU pharmaceutical industry were issuing a warning to both Barnier and Britain’s Brexit Secretary David Davis of the risk to supplies of life-saving medicines.

“In the case of an unorderly withdrawal, there is a risk that all goods due to be moved between the UK and EU could be held either at border checks, in warehouses or manufacturing, and/or subject to extensive retesting requirements,” the letter warned.

And it’s not just the industry that’s worried. The week before, the UK’s health secretary and its business secretary called for continued co-operation with the European Medicines Agency after the UK left the EU – “in the interests of public health and safety”.

Preparing your supply chain

Hopefully, these warnings will have their desired effect, and arrangements – transitional or otherwise – will be in place when the negotiations finish. In that case, this will all be put down as a crisis averted or just another “scare story”, according to taste.

As we’ve noted before , though, whatever happens Brexit will be a game changer not just for pharma but for all businesses. The currency volatility we’ve already seen could well return as the deadline for negotiations gets nearer; the regulatory framework remains uncertain; and supply chains are going to have to get more complex – perhaps in the short-term, as contingencies are put in place, or in the long-term to deal with new realities.

Many companies have already made changes to their supply chains to make them more resilient to whatever results from the negotiations; many other are still looking but have at least gained an understanding of the risks they face and the vulnerabilities in their supplies. For any that haven’t made much progress, though, or those that haven’t even begun, the hard work truly does need to start now. Time is not on our side.

No lucky strike for supply chains

It’s a new year, but the problems for supply chains are much the same. Among them, increasingly, is industrial action.

December drew comparisons with the Winter of Discontent with strikes or threats by Post Office staff, train and tube drivers, airport workers, and even Argos delivery drivers. With the tube strikes this week, that discontent has followed us into 2017.

As others have noted, comparisons with the 1970s are overplayed. It actually became harder for unions to take legal strike action in the UK last year, for example, with the passing of the Trade Union Act in May. Unions now require a ballot turnout of at least 50% for industrial action – and 40% support of all eligible to vote when it comes to vital public services such as health, education, transport, border security and the fire brigade.

Nevertheless, recent activity does suggest something of a resurgence in the UK following a near-record low in the number of days lost to industrial action in 2015. The action we’ve seen also has significant impacts. Academics estimate the Southern Rail strikes alone have cost the UK £300 million. The tube strikes this week may even cost the same, according to some of the higher estimates.

Moreover, while levels of UK industrial action have trended downward in the last few decades and remain modest, they’re much higher elsewhere, including in some of our near neighbours. France, Denmark, Norway, Belgium (which saw a particularly high number of strikes last year), Spain, Finland and Ireland have all lost anything from double to seven times the number of days as the UK to action in recent years. If businesses are not directly affected themselves, others in their supply chain may well be.

All of which is simply a reminder that industrial action remains a key threat to the supply chain. Businesses need to build in resilience and redundancy to account for it, and to do that, they need to have an accurate view of their exposures.

Supply Chain Impact of Water Shortages

Whilst the December snowfalls have taken their toll on the UK’s ability to deliver Christmas goodies, the impact of the thaw is creating further disruption for many companies. The water shortage in Northern Ireland is continuing to affect a huge number of home owners, but how are businesses coping across the area?

For manufacturing sectors such as food, pharmaceuticals and chemicals, water can be a critical dependency in many ways:

Perhaps your next supply chain risk assessment, should give some thought to the following:

It isn’t simply a winter problem. Water rationing in dry spells has the potential to cause disruptions that could go on for even longer.