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Due Diligence in Life Science Transactions, 2nd Edition
Drug and Market Development Publishing, Oct 2007, Pages: 74
D&MD's Guide to Due Diligence in Life Science Transactions, 2nd Edition provides a comprehensive overview on due diligence and a proven path to success for professionals working in the life sciences industry. This guide includes summaries of key investigation areas and critical questions to ask during the due diligence process. Also included are checklist tools readily employable in day-to-day business operations.
Author Info:
Ian J. Mehr, Ph.D., MBA, a principal with Golden Pine Ventures, LLC, serving as a Managing Director. Previously, Dr. Mehr served as Vice President of Business Development for Qualyst, Inc., a biotechnology company focused on novel and proprietary ADMET products that increase the efficiency and effectiveness of drug discovery and development.
Due diligence is a critical component of any major business transaction. Quite simply, due diligence is the process of investigation employed by a Buyer to ensure that information provided by a Seller is accurate, and to uncover information not provided by the Seller that may affect the outcome of the transaction.
Due diligence involves extensive analysis, and frequently includes the use of expert opinions. In the case of purchasing a home, most people, at a minimum, analyze comparable neighborhood sales, and tap the expertise of a home inspector to look for hidden problems. This is similar to the due diligence process employed by many venture capitalists, who often seek the help of consultants to evaluate potential investments. External parties are important in the process of due diligence because one person cannot have all the expertise necessary to perform perfect due diligence. Lawyers and accountants are frequently employed in addition to domain (e.g. therapeutic indication) experts.
In the life science industry, Buyers and Sellers can take several forms. A Seller can be a company seeking a merger or acquisition, divesting a product line, licensing a technology, promoting an IPO, or an entrepreneur seeking venture investment. Buyers are, not surprisingly, the groups looking to acquire, invest, or otherwise purchase from the Seller. In any given business transaction the Seller will seek to achieve the highest price for their goods, and as a result has an incentive to polish (if not cover up) any blemishes that would reduce the value for their goods, or preclude the transaction from occurring. It is the responsibility of the Buyer to uncover these blemishes, and to determine how that affects the deal. Due diligence is the response to the cliché 'Let the buyer beware.'
The process of due diligence usually begins once the representatives of the Buyer and Seller have reached initial agreement to the terms of the business transaction, whatever it may be. The scope of the due diligence will be determined by the magnitude of the business transaction – a merger or acquisition will require much more diligence than a licensing transaction. The first step is to identify a leader or coordinator of the due diligence investigation. The leader then creates the budget, recruits a team, and establishes a confidential disclosure agreement with the Seller. A request for information is presented to the Seller, and the materials received by the Buyer are reviewed for issues. Additional requests for information are made if necessary, and the due diligence team produces a report on their findings. If nothing is significantly amiss, the transaction will be completed. However, if the due diligence team finds problems, the terms or valuation of the deal may be renegotiated, or the deal may collapse entirely.
Specific areas for investigation in due diligence include corporate history, financial stability, products and the applicable markets, competitors, research and development programs, intellectual property coverage, operations and manufacturing, legal and corporate issues, and human resources. Not all areas need to be investigated in every deal, and each deal will have aspects unique to that particular transaction.
Because due diligence is a critical step in major business transactions, especially in the life science industry, this Guide will provide potential Sellers with knowledge on what they can expect to encounter in a due diligence investigation, and provide a structure for preparing for inevitable requests for information by the Buyer. For the introductory Buyer, this Guide will provide a functional framework for running a due diligence investigation, and provide insights on critical areas where expert help should be sought. Guidance on common traps to avoid are provided, as are examples of a confidential disclosure agreement, a request for information, a memorializing memo, and a due diligence executive summary memo.
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