Concerns about the impact of protectionist regulations on M&A are rising. Globally, 54 percent of dealmakers believe national security and antitrust matters will sink more deals this year than European data privacy and #MeToo issues combined, according to the results from a recent Merrill Insight poll.
Nowhere is this concern more evident than in some of the major proposed health-care tie-ups from last year. For instance, in late March the FTC filed a second request regarding Bristol-Myers Squibb’s planned purchase of Celgene.
Aetna’s sale to CVS Health last year has also gone through an antitrust roller coaster ride, with Judge Richard Leon of the U.S. District Court for the District of Columbia most recently throwing a spanner in the newly finalized acquisition by asking for more time to review the proposed antitrust settlement.
Adding to the regulatory uncertainty, the 2018 U.S. elections brought in a wave of legislators promising to crack down on high drug prices and corporate consolidation. Several 2020 U.S. presidential candidates also plan to tighten the antitrust screws if elected.
It’s no wonder that health-care executives appear to be getting cold feet, pulling back on big deals. Instead, split-ups and spin-offs seem to be the tactic of the day. Some recent examples include Novartis spinning out Alcon, GlaxoSmithKline and Pfizer announcing plans to split off and merge their consumer health division and Eli Lilly’s September listing of Elanco.
Additional spin-outs and divestitures seem likely, driven by cash-rich specialist private equity firms and activist shareholders. For instance, several Bristol-Myers shareholders have come out in opposition to the Celgene merger.
But while the vagaries of regulatory regimes and activist shareholders may be out of dealmakers’ control, health-care executives can take several practical measures to mitigate the risks of deal failure.
Steps to Mitigating Risk
First, and most obviously, hire good lawyers far in advance of any transaction announcement. And remember that for many health-care companies, the regulatory process is global, not local. Often, executives will focus on the jurisdiction they are most familiar with and underestimate, for instance, the time it takes to work through Chinese M&A regulatory approval processes.
Second, make information security a central focus. When we asked dealmakers what they thought would sink the most deals next year, the EU data protection law (GDPR) and data privacy followed closely after regulatory concerns, with 43 percent of U.S. M&A professionals listing GDPR compliance as their top concern.
Data privacy risks are particularly acute in health-care, where additional laws protecting patient privacy like the U.S. Health Insurance Portability and Accountability Act of 1996 (HIPAA), as well as a central focus on sensitive IP and R&D, necessitate stricter information controls than in most other industries. HIPAA, for instance, entails certain data housing requirements not provided by all document management platforms.
Finally, stay organized. Large M&A deals grind forward slowly, often involve project teams stretching into the hundreds, with numerous jurisdictions, regulatory authorities and internal and external stakeholders. Transactions must be project managed the same way any other large-scale transformation program is run, with clear assignment of ownership, workstreams and tasks.
Keeping documents up-to-date and organized for the long haul is a critical part of this process. For instance, on the drug development side, taking a drug from initial research to Phase II or Phase III typically requires multiple funding rounds, a stock exchange listing, licensing, partnerships and often an acquisition or secondary IPO. That’s a lot of work!
Where we see many health-care startups fail is when the financing falls apart. A contributing factor is that the company’s management, often a small group of scientists, overlooks how challenging managing the document review process can be on the financial side of things.
Health-Care Outlook Remains Strong
Despite these challenges, the health-care M&A pipeline remains robust. Corporate carve-outs, activist shareholders and private equity dry powder seem set to drive billion-dollar activity in the short to medium term.
In fact, at Merrill Corp. we saw a 5 percent increase in the number of health-care projects we helped manage last year, which continued a 39 percent increase in the number of health-care projects we’ve handled over the last five years.
Additionally, US health-care hubs such as San Francisco, Boston, New York and New Jersey launch new biotech, health-care technology and medical device start-ups almost daily. The field of oncology shows huge promise, as do companies focused on disrupting the way health-care does business. For instance, there are many promising health-care insurance startups focused on improving the patient experience. To me, that’s incredibly exciting news and cause for optimism.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Rusty Wiley is chief executive officer for Merrill Corporation. Merrill is a leading global SaaS provider for professionals in the M&A community, and helps power secure, intelligent due diligence and enterprise collaboration for thousands of deals in more than 170 countries.