Pharmaceutical and Life Sciences Deals Insights Quarterly Q3 2013 November 2013 A publication from PwC’s Deals business At a glance Deal value and volume in the third quarter of 2013 increased relative to the second quarter and approached the levels of the third quarter of 2012. While economic and industry trends are combining in Russia to create opportunities for investment, considerable challenges and risks remain. Non-traditional consideration, including earn-outs, seller financing, and structured transactions, remains prominent in the pharmaceutical and life sciences industry. This quarter, we highlight trends and discuss practical considerations in deal structuring.
Transcript
Pharmaceutical and Life Sciences Deals Insights QuarterlyQ3 2013
November 2013 A publication from PwC’s Deals business
At a glance Deal value and volume in the third quarter of 2013 increased relative to the second quarter and approached the levels of the third quarter of 2012.
While economic and industry trends are combining in Russia to create opportunities for investment, considerable challenges and risks remain.
Non-traditional consideration, including earn-outs, seller financing, and structured transactions, remains prominent in the pharmaceutical and life sciences industry. This quarter, we highlight trends and discuss practical considerations in deal structuring.
PLS Deals Insights Quarterly 1
This issue of Pharmaceutical and Life Sciences Deals Insights Quarterly brings you PwC’s perspective on deal activity in the industry. Each quarterly publication features three sections:
1. Market update: A summary of M&A deals and trends for the previous quarter. This issue covers Q3 2013.
2. Country spotlight: An update on doing deals in selected geographies. This issue focuses on Russia. While traditionally known for its natural resources, Russia has begun to shift its focus to more effectively integrate into global trade and investment transactions and develop its market economy. This trend has given rise to opportunities for investment among pharmaceutical and life sciences companies. However, investors should be mindful of the risks and challenges that remain when entering this emerging market.
3. Strategy corner: A feature offering tips and insight on different aspects of deal making. Deal makers in the pharmaceutical and life sciences industry commonly rely on forms of “non-traditional” consideration to reconcile differences in value. We discuss recent trends in the use of earn-outs, seller financing, and structured transactions and spotlight practical considerations.
Refer to our prior publications to gain insights into doing deals in other geographic markets and to learn the aspects of successful transactions. All of our quarterly deals publications are available at www.pwc.com/us/deals.
Welcome to PwC’s Pharmaceutical and Life Sciences Deals Insights Quarterly
Q4:2012 Doing deals in China Driving divestiture success –Five critical components
Q1:2013Southeast Asia comes of ageRefining the price-value equation
Q2:2013Brazil: High growth potential but challenges to deal making Foreign Corrupt Practices Act
2 PwC
Market updateDeal volume and value increased in the third quarter while fundamentals and pending deals point to potential for heightened activity in the fourth quarter of 2013
Total deal volume increased approximately 10% during the third quarter of 2013 in comparison with the second quarter of 2013, while declining by approximately the same amount relative to the third quarter of 2012. Deal value increased by nearly 50% over the previous quarter while declining approximately 15% relative to the third quarter of 2012. The increase in the third quarter owes primarily to two large transactions in the medical device segment.
While the fundamentals for M&A activity remain strong in the pharmaceutical and life sciences (PLS) industry, the deal market may continue to face challenges due to the scarcity of assets available for sale and heightened focus from buyers seeking to increase the likelihood of deal success. While these factors are driving valuations and deal timelines, several large transactions announced in the third quarter indicate buyers remain active in the market and are seeking opportunities for growth through acquisition.
Figure 3: Total deal value and deal volume by industry segment (2012 Q3)
Deal value ($B)
Source: Thomson Reuters
Services
Diagnostics
Medical devices
Biotechnology
Pharmaceuticals
0 2 4 6 8 10 12
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Figure 2: Total deal value and deal volume by industry segment (2013 Q2)
Deal value ($B)
Source: Thomson Reuters
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Services
Diagnostics
Medical devices
Biotechnology
Pharmaceuticals 13
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Figure 1: Total deal value and deal volume by industry segment (2013 Q3)
Deal value ($B)
Source: Thomson Reuters
Services
Diagnostics
Medical devices
Biotechnology
Pharmaceuticals
0 2 4 6 8 10 12 14 16
0
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Note to Figures 1, 2, and 3: Numbers within bars indicate number of deals during the quarter.
PLS Deals Insights Quarterly 3
Quarter in review
The volume of PLS deals closed during the third quarter of 2013 increased 8.7% compared with the second quarter of 2013, but decreased 7.4% relative to the third quarter of 2012. The value of PLS deals closed during the third quarter of 2013 increased 50% relative to the previous quarter and decreased 16% relative to the third quarter of 2012. On a year to date basis, deal volume in 2013 is consistent with 2012, while deal values across the PLS industry have decreased from $60.2 billion to $37.6 billion. Unless otherwise noted, figures used for comparative purposes exclude “mega deals” with values in excess of $20 billion.
Deal value in the pharmaceutical and biotechnology segments decreased sharply relative to levels for the second quarter of 2013 and third quarter of 2012, while deal volume trends offer mixed indications. The number of pharmaceutical deals decreased significantly relative to the second quarter. Volumes were consistent with the third quarter of 2012. Similarly, while the number of biotechnology deals doubled relative to the second quarter of 2013, only four transactions closed, representing a 43% decline from the third quarter of 2012.
Deal activity in the medical device sector was a bright spot within the industry, with deal volume more than doubling relative to the second quarter of 2013 and value increasing several-fold relative to the second quarter of 2013 and the third quarter of 2012. These results are in part due to the completion of the acquisitions of Gambro AB by Baxter for $4 billion and Bausch & Lomb by Valeant for $8.7 billion, inclusive of debt assumed, and other cash adjustments. However, excluding these larger transactions, the sector posted a minor decline in deal value compared to the prior quarter and nearly 110% growth relative to the third quarter of 2012.
0 10 20 30 40 70 80
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2012 Q4
2013 Q1
2013 Q2
2013 Q3
Figure 4: Total deal value (2012 Q3–2013 Q3)
Deal value ($B)
22
18
12
76
18
Source: Thomson Reuters
Figure 5: Total deal volume (2012 Q3–2013 Q3)
Number of deals
0 10 20 30 40 50
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Source: Thomson Reuters
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• While third-quarter results suggest mixed results in deal activity among industry sectors, the fundamentals for M&A activity remain in place, including strong equity markets, healthy balance sheets, and access to capital. Further, several large transactions were announced in the third quarter and are expected to close in the fourth quarter or early 2014. These transactions indicate that acquirers remain active in the market and deal activity will likely continue to increase in the coming quarters. However, a relative scarcity of quality assets available for sale and a heightened focus by potential acquirers on successful execution may hinder deal activity.
• Industry participants continue to evaluate their product portfolios and seek opportunities to unlock value through divestitures. At the end of the third quarter, there were 11 pending divestitures with deal values announced. These deals ranged from $20 million to $1.9 billion, with an average value of approximately $575 million. Given current trends, divestitures are expected to remain a significant component of deal-making activity and continue to drive interest among both strategic and financial acquirers.
• Consistent with recent quarters, while strategic buyers continue to drive the majority of M&A activity in the PLS industry, financial buyers have remained competitive in acquisition processes and were successful in several announced and closed transactions in the third quarter. Further, the high-yield debt market showed strength late in the third quarter as issuers sought to raise capital in anticipation of continued rising interest rates. We expect financial sponsors to remain active in transactions in the PLS industry.
Trends and insights
0 10 20 30 40 70 80
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Figure 6: Total deal value by industry segment (2012 Q3–2013 Q3)
PharmaceuticalsBiotechnology
Medical devicesDiagnostics
Services
Source: Thomson Reuters
Deal value ($B)
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Figure 7: Total deal volume by industry segment (2012 Q3–2013 Q3)
PharmaceuticalsBiotechnology
Medical devicesDiagnostics
Services
Source: Thomson Reuters
Number of deals
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PLS Deals Insights Quarterly 5
Trends and insights
• PLS stocks continued to perform well relative to the overall market in the third quarter of 2013. The S&P healthcare sector index rose by approximately 8.7%, compared with a 6% increase for the S&P 500. These gains were driven primarily by continued improvement among biotechnology companies, which appreciated 38.1%, as measured by the S&P 500 biotechnology index. Among other sectors, the healthcare equipment and supplies sector increased 1.5%, while the pharmaceutical sector increased 4.1%. On a year-to-date basis, the S&P healthcare sector index has increased 30.6% relative to 20.3% for the S&P 500.
Figure 8: Equity Index Returns
0%
20%
40%
60%
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Sep-30Jun-28Mar-28Dec-31Sep-28Jun-29Mar-30Dec-30
S&P 500—Healthcare Sector Index
S&P 500—Biotechnology Index
S&P 500—Health Care Equipment & Supplies Index
S&P 500—Pharmaceuticals Index
S&P 500 Index
Source: S&P CapitalQ
2011 2012 2013
• The capital markets continued to demonstrate strong momentum in the third quarter of 2013 as the volume of new public listings matched the previous quarter and exceeded the third quarter of 2012, according to IPO Watch, a quarterly survey of IPOs listed on US stock exchanges by PwC.1 Overall IPO volume for the first nine months of 2013 surpassed overall volume for all of 2012, while the high yield market saw $255 billion of issuances, exceeding 2012 issuances through three quarters. There were a total of 63 IPOs in the third quarter of 2013. This level was consistent with the second quarter of 2013 while representing a 110% increase, compared with 30 listings in the third quarter of 2012. The first nine months of 2013 recorded 160 IPOs, surpassing the 108 IPOs in the comparable period last year, and the 146 IPOs for all of 2012. The healthcare sector was home to 18 IPOs in the third quarter of 2013, raising $3 billion. Current trends suggest this momentum will continue through the end of the year.
• Despite continued pressure on startups seeking to raise capital, US venture capital funding for the biotechnology and medical devices sectors improved dramatically in the second quarter of 2013 according to the MoneyTree™ Report from PwC and the National Venture Capital Association (NVCA).2 The biotechnology industry was the second-largest industry in terms of dollars invested, with $1.3 billion going into 103 deals, increasing 41% in dollars and 4% in deals from the prior quarter. The medical device industry received $543 million in 71 deals, representing a 1% decline in both dollars and deals from the prior quarter. For all sectors, venture capitalists invested $6.7 billion in 913 deals in Q2 2013, an increase of 12% in dollars invested and an increase of 2% in the number of deals from the first quarter of 2013, when $6 billion was invested in 896 deals. However, this was a decline of 9% in dollars and 6% in number of deals year over year.
• On August 6, Valeant Pharmaceuticals completed its acquisition of Bausch & Lomb, a manufacturer of ophthalmic goods and products, pharmaceutical preparations, optical instruments and lenses, and electric toothbrushes, from Warburg Pincus for approximately $8.7 billion, inclusive of debt assumed and other cash adjustments.
• On August 19, Johnson & Johnson completed the acquisition of Aragon Pharmaceuticals, a California-based manufacturer of pharmaceuticals to treat hormonally driven cancer, for $1 billion: $650 million in cash and up to $350 million of contingent payments.
• On September 6, Baxter completed its acquisition of Sweden-based Gambro AB for $4 billion. Gambro manufactures products for use in dialysis therapy.
• Cubist Pharmaceuticals completed its tender offer to acquire the shares of San Diego-based Trius Therapeutics on September 19. Consideration in the transaction consisted of $13.50 in cash and up to $2.00 in contingent value rights per share, or a total value of $786.6 million.
Key announced transactions
• On August 25, Amgen completed its tender offer to acquire shares of Onyx Pharmaceuticals, a developer of oncology therapies, by accepting approximately 79.2% of Onyx’s common shares outstanding. Amgen offered $125 in cash per share, or a total value of $9.7 billion, an increase from its previous offer of $120 in cash per share, or a total value of $9.3 billion.
• On July 29, Perrigo agreed to merge with Elan, a Dublin-based biotechnology company, in a stock swap transaction valued at $8.5 billion. The combined company will be reincorporated in Ireland in conjunction with the transaction.
• On July 29, France-based Essilor International agreed to acquire the remaining 51% interest, which it did not already own, in Transitions Optical, a manufacturer of photochromic lenses, from PPG Industries for approximately $1.7 billion in cash and up to $125 million in profit-related payments. The transaction also included Intercast, an Italian supplier of sun lenses.
Figure 9: Total deal value and deal volume by deal size and quarter
2013 Q3 2013 Q2 2012 Q3
Number of deals Deal value ($ M) Number of deals Deal value ($ M) Number of deals Deal value ($ M)
$15M to $50M 8 260 5 111 7 180
$50M to $100M 0 0 3 222 3 183
$100M to $250M 6 985 4 662 5 897
$250M to $500M 7 2,539 5 1,742 6 2,165
$500M to $1,000B 1 787 2 1,260 1 925
> $1,000B 3 13,722 4 8,135 5 17,423
Total 25 18,292 23 12,133 27 21,773
Source: Thomson Reuters
PLS Deals Insights Quarterly 7
About the data
We define M&A activity as mergers and acquisitions in which targets are US-based companies acquired by either US or foreign buyers or foreign targets acquired by US pharmaceutical and life science companies. We define divestitures as the sale of a portion of a company (not a whole entity) by a US-based seller.
We have based our findings on data provided by industry-recognized sources. Specifically, values and volumes used throughout this report are based on completion-date data for transactions with a disclosed deal value greater than $15 million, as provided by Thomson Reuters as of September 30, 2013, and supplemented by additional independent research. Information related to previous periods is updated periodically based on new data collected by Thomson Reuters for deals closed during previous periods but not reflected in previous data sets.
Deal information was sourced from Thomson Reuters and includes deals for which buyers or targets fall into one of the following industry sectors: biotechnology, medical devices, medical diagnostics, pharmaceuticals, or services (i.e., contract research organizations). Certain adjustments have been made to the information to exclude transactions that are not specific to the PLS industry. Capital market and equity return information is sourced from S&P Capital IQ.
• On July 30, Cubist Pharmaceuticals agreed to acquire the entire share capital of Optimer Pharmaceuticals for $10.75 in cash and up to $5.00 per share in contingent value rights, or a total value of $775.5 million.
• On September 5, Otsuka Holdings of Japan agreed to acquire Astex Pharmaceuticals for $8.50 in cash per share, or a total value of $886.9 million.
• On September 27, a subsidiary of Kohlberg Kravis Roberts & Co agreed to acquire an 80% interest in Panasonic Healthcare Co., Ltd., a Tokyo-based manufacturer of medical equipment, for approximately $1.7 billion in cash. Panasonic Corporation will retain the remaining 20% interest in Panasonic Healthcare.
• On September 25, Stryker Corporation agreed to acquire the shares of Mako Surgical Corporation for $30 per share at $1.65 billion. Mako develops systems for robotic-assisted surgery in orthopedic procedures.
Market wrap-up
Fundamentals for deal making remain strong among PLS companies, and transactions announced in prior quarters suggest a heightened level of activity in the fourth quarter and early 2014. Healthy balance sheets, access to financing, and strong equity markets will allow PLS participants to continue to seek opportunities to grow through acquisition.
8 PwC
Country spotlightRussia: poised for continued economic change but challenges remain
Russia, boasting the world’s largest land mass at 6.5 million square miles and a population of 143 million, has begun to shift from an internal focus on its own natural resources and reliance on old institutions and practices to an effort to more effectively integrate into global trade and investment transactions and develop its market economy.
Rebounding from the global economic crisis, analysts increasingly see Russia as an emerging market moving in the direction of greater globalization. Russia joined the World Trade Organization in 2011 after a nearly two-decade effort to do so. While such changes portend an economy becoming more welcoming to business, in 2013, the World Bank ranked Russia as 112 out of 185 economies for ease of doing business.
To be sure, entering the Russian market can be challenging for outsiders. But several factors make the region attractive to investors:
• With Europe to the west and Asia to the east, Russia serves as a ground transportation link among its 14 bordering neighbors.
• Three-quarters of Russia’s people live in cities, towns, and urban centers.
• More than 99% of Russia’s population is literate, and women are well represented in the workforce.
• The education system, which replicates major components of the old Soviet system, is capable of creating world-class specialists in exact sciences such as mathematics, physics, chemistry, biology, engineering, and the like.
• Several universities have introduced high-powered socioeconomic science programs, which may drive a talent pipeline for fields such as economics, management, law, politics, and sociology.
Russia is poised to spur and support innovation, which may be crucial to boosting entrepreneurship, venture capital, and the country’s future viability as a more developed, robust market.
Ambitious goals for pharmaceuticals
Russia’s aging population and increasing GDP, among other macroeconomic factors, are driving a dramatic change in the country’s pharmaceutical and life sciences market. Regulatory changes and government promotion of the industry are part of the country’s broader efforts to promote better health for its people.
As part of that initiative, the government has established aggressive goals for the pharmaceutical industry, promoting local, high-quality production of medicines, along with major research and development programs.
As a result of these efforts, the government aims for 50% of the medicines used in Russia to be produced within the country by 2020. Simultaneously, pharmaceutical exports are expected to increase eight-fold.
To meet those goals, new regulations have been enacted to drive production capability, including a federal law, “On the Circulation of Pharmaceuticals,” which went into effect in September 2010. This law aims to:
• Ease administrative barriers to bringing medicines to the domestic pharmaceutical market.
• Support the Russian pharmaceutical industry and introduce innovations in the production of pharmaceuticals.
• Integrate Russian legal regulations with international principles and standards adopted with respect to the circulation of pharmaceuticals.
“As the country’s governmental authorities, business leaders, workers, and consumers work together to further enhance the maturity level of Russia’s institutions, infrastructure, and safeguards in line with ever-escalating global standards and expectations, investors should equip themselves to both understand the new market opportunities that may arise and counter the ill effects associated with this nascent giant’s evolution. They should seek to unravel Russia’s changing economic landscape, better understand the dimensions and attributes of the market’s risks, and plan accordingly. Inevitably, this means remaining committed to robust due diligence and anti-corruption programs.”
PwC, Marketmap: The Russian evolution: How can foreign businesses prepare to prosper? 2013 Issue 3,
PLS Deals Insights Quarterly 9
Russia has also begun to implement stronger regulatory and compliance measures, including limiting medical representatives’ access to physicians.
Growth opportunities and risks
Russia’s growth is projected to slow to 1.8% in 2013, down from 3.4% the previous year, but it is expected to increase to 3.1% in 2014, according to the World Bank.1 In 2010, Russia’s annual flow of Foreign Direct Investment (FDI) began a period of rapid acceleration, although cumulative FDI in Russia remains comparatively low. Indeed FDI inflows to Russia have increased dramatically in the last decade, from nearly $8 billion in 2003 to more than $51 billion in 2012.2
Business leaders around the world have begun to pay attention, ranking Russia among the top ten countries for growth prospects with one-third of those surveyed planning to invest in Russia, according to PwC’s 15th Annual Global CEO Survey.
While the opportunities for investment in Russia are attractive, many investors are also aware of the market’s most persistent challenges, including:
• Administrative bureaucracy — a regulatory environment lacking in legal safeguards and prone to “high levels of bureaucracy and corruption,” according to PwC’s “Doing business and investing in the Russian federation” (2010); a relatively new tax system; and a judiciary that is not independent.
• Property rights risk — routine copyright infringement, with computer software and electronic media the most popular targets, and sophisticated, ongoing efforts at intellectual property theft.
• Supply chains strained by geographies and infrastructure — a complex and fragmented supply chain, compounded by the country’s sheer size and geographical diversity. Further, energy grids, telecommunications, and other infrastructure don’t always meet increasing market requirements.
• Development that varies by region, economic segment, and institution — a reality requiring investors to understand how location and local traditions and culture can affect business practices and protocols.
• Corruption risk — While Russia’s new corporate leaders are beginning to address compliance functions, which historically have been less than robust, investors nevertheless should remain wary of corrupt influences. Further, Russia’s business practices rely heavily on intermediaries, including agents and joint venture partners, which can complicate due diligence processes and increase opportunities for corruption.
Conclusion
Russia’s large and complex market offers attractive growth and investment opportunities for global and domestic pharmaceutical and healthcare companies. In order to take advantage of those opportunities, however, companies must address regulatory challenges and other longstanding obstacles stemming from traditionalism and corruption. Interactions with wholesalers, government, pharmacists, and doctors can be challenging to navigate. But the upside — long-term, substantial economic opportunities — appears to be worth the challenges.
For a more in-depth discussion of the economy and market in Russia, please refer to our publication, Marketmap, The Russian evolution: How can foreign businesses prepare to prosper? PwC 2013. http://www.pwc.com/us/en/forensic-services/publications/marketmap-russia.jhtml
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$80M
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Figure 10. Foreign direct investment in Russia ($B) and GDP growth (%) (2003-2012)
Foreign Direct Investment ($B)GDP Growth (%)
-9.0%
-7.2%
-5.4%
-3.6%
-1.8%
0.0%
1.8%
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Source: The World Bank
Foreign Direct Investm
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rowth (%
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A poorly crafted earn-out or deal structure, for example, may cause management to boost short-term performance at the expense of long-term results, or it may not adequately address the specific risk from which the difference in value arises.
Case study: Contingent consideration
Contingent consideration remains a common tool for deal makers seeking to bridge value gaps. Contingent consideration provides for future payments between the buyer and the seller, based on the target company achieving measurable performance milestones. These measurable performance milestones can be financial, such as revenue or EBITDA targets, or non-financial, such as regulatory approval. In recent years, contingent value rights, or CVRs, have also gained popularity, particularly among PLS firms. CVRs often trade as listed securities that provide selling shareholders with both the ability to participate in the future upside of a company and near-term liquidity.
The graph on the next page presents data from S&P Capital IQ for acquisitions by PLS companies for the years 2008 through 2012, and for 2013 through September 30.1 This data suggests a significant increase in the frequency and value of contingent consideration offered in transactions. The value of contingent consideration offered across all deals represented 3% of total consideration in 2008 and increased to 10% in 2012. Several significant transactions caused this percentage to rise further, to 17%, in 2013. Similarly, from 2008 through September 30, 2013, the number of deals in which contingent consideration was offered increased from 27% to 35%, peaking in 2012 at 38%. Among deals in which contingent consideration was exchanged, the portion represented by contingent consideration increased from 36% in 2008 to 52% through 2012 and in the nine months ended September 30, 2013.
1 Source: S&P Capital IQ. Includes transactions in the following sub-industry classifications: healthcare technology, healthcare equipment and supplies, biotechnology, life sciences tools and services, and pharmaceuticals.
Reconciling differences in value between buyer and seller is the art of the deal in any industry. But it is particularly challenging in the pharmaceutical and life sciences industry because of the uncertainty and range of potential outcomes for products. In order to bridge the value gap, buyers and sellers have increasingly employed a variety of alternative deal structures, including seller financing, contingent consideration, and other transaction forms such as structured payments, royalty arrangements, and joint ventures.
These deal structures provide a variety of benefits to buyers as well as sellers. Buyers are able to gain access to a market or product category while mitigating some of the risk associated with the initial investment and managing cash flow. Sellers are able to bring in new capital or realize some liquidity while oftentimes remaining involved in the business and retaining a portion of the upside of the transaction.
Regardless of the specifics of the arrangement, transaction structuring requires careful consideration of several factors to facilitate alignment of objectives and preservation of value, while also avoiding unforeseen consequences.
Strategy cornerUsing non-traditional consideration to close the M&A value gap
Keys to establishing earn-outs
• What is the benchmark?
• How is the consideration paid?
• How is performance measured?
• How is the payment calculated?
• Over what period of time is the earn-out applicable?
• Who will run the business/operations?
PLS Deals Insights Quarterly 11
Critical success factors in deal structuring
• Measurement of impact on deal value
• Measurement of contingent variables post-transaction
• Impact on post-deal integration
• Financial reporting and tax consequences
In focus: pharmaceutical and life sciences industry
The increased reliance on contingent consideration corresponds with a period of relatively high risk and uncertainty due to the economic crisis that began in 2008, as well as the uncertainty within the PLS industry specifically as a result of the Patient Protection and Affordable Care Act.
Transactions involving contingent consideration also require careful consideration of the accounting and tax issues. For example, contingent consideration related to the employment of a seller may be accounted for as compensation, rather than purchase price. Otherwise, contingent consideration exchanged in a business combination is recorded at fair value as of the acquisition date, which may require relatively complex valuation techniques and models and may be classified as a liability or equity. Further, liability-classified contingent consideration is required to be re-measured at fair value in subsequent periods. Tax considerations may also play a role in deal structuring, particularly in the case of a closed transaction, when a tax liability is recognized by the seller at a different time than when the contingency is settled.
Figure 11: Percentage of deals with contingent consideration and contingent consideration as a percentage of deal value (January 1, 2008 through September 30, 2013)
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201320122011201020092008
% of deals with contingent consideration
Deals with CC—CC as a % of deal value
All deals—CC as a % of total deal value
Source: S&P Captial IQ
Alternative deal structures
Seller financing and step, or phased, acquisitions are two additional structuring mechanisms frequently employed in the PLS industry.
• Seller financing is another means for the seller to retain an economic stake in the divested business. It can come in the form of plain-vanilla debt or more complex instruments, such as convertible preferred stock. The form and the amount of seller financing depends on, among other factors, the nature of the transaction and the amount of risk and/or potential upside the seller wishes to retain.
• Step acquisitions provide an alternative approach to seller financing. For example, the acquirer may pur-chase 80% of a target common stock and concurrently receive a call option from, and writes a put option to, the selling shareholders for the remaining 20%. These transaction structures provide an incentive for the former owners to contribute to the success of the business post-transaction while providing flexibility to match the objectives of the buyer and seller. However, these structures also bring considerable tax and accounting complexities and may have significant financial statement impacts.
Conclusion
Due to the uncertainty and risks inherent in transactions in the PLS industry, buyers and sellers will likely continue to rely upon various forms of non-traditional consideration to bridge gaps in value. Deal makers who carefully evaluate potential deal structures and align the incentives of buyers and sellers will be more likely to achieve deal success.
PLS Deals Insights Quarterly 12
About PwC’s Deals Practice
Our deals professionals help clients understand the risks in transactions, so they can be confident they are making informed strategic decisions. From their deal negotiations to capturing synergies during integration, we help clients gain value and, ultimately, deliver this value to stakeholders. For companies in distressed situations, we advise on crisis avoidance, financial and operational restructuring, and bankruptcy.
PwC’s Deals practice can advise pharmaceutical and life science companies and PLS-focused private equity firms on M&A decisions, from identifying acquisition or divestiture candidates and performing detailed buy-side diligence, through developing strategies for capturing post-deal profits, to exiting a deal through a sale, carve-out, or IPO. With more than 9,800 deals professionals in 75 countries, we can deploy seasoned deals teams that combine deep pharmaceutical and life sciences industry skills with local market knowledge virtually anywhere and everywhere your company operates or executes transactions.
Although every deal is unique, most will benefit from the broad experience we bring to delivering strategic M&A advice, due diligence, transaction structuring, M&A tax, merger integration, valuation, and post-deal services. In short, we offer integrated solutions tailored to your particular deal situation and designed to help you complete and extract peak value within your risk profile, whether your focus is deploying capital through an acquisition or joint venture, raising capital through an IPO or private placement, or harvesting an investment through the divestiture process.
For more information about M&A and related services in the pharmaceutical and life sciences industry, please visit www.pwc.com/us/pharmadeals, www.pwc.com/us/pharma or www.pwc.com/us/medtech.
For views on the Health Industries Sector, refer to the US Health Services Deals Insights reports on the Deals section of our website.
Strategy corner–Using non-traditional consideration to close the M&A value gap
Matthew Sabatini Partner, Capital Markets and Accounting Advisory Services 646 471 7450 [email protected]
Country spotlight–Russia: poised for continued economic change but challenges remain
Harry G. Broadman Leader, Emerging Markets Strategy Consulting, and Chief Economist 202 312 0807 [email protected]
For a deeper discussion on pharmaceutical and life sciences deal considerations, please contact one of our practice leaders or your local Deals partner:
Martyn Curragh Principal, US Practice Leader, Deals 646 471 2622 [email protected]
