Navigating Mergers and Acquisitions Evolution in Life Sciences: Rethinking Risk and Insurance

Navigating Mergers and Acquisitions Evolution in Life Sciences: Rethinking Risk and Insurance
November 30, 2023 12 mins

Navigating Mergers and Acquisitions Evolution in Life Sciences: Rethinking Risk and Insurance

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Navigating complex, large mergers and acquisitions is a rare challenge for risk managers in life sciences. In these high-stakes scenarios, a reassessment of risk profiles and a strategic overhaul of risk financing becomes imperative to ensure the effectiveness of deals.

Key Takeaways
  1. Although most life sciences risk managers and their teams will be familiar with navigating deals, large acquisitions or spin-offs can be a once-in-a-career situation.
  2. Complex, large acquisitions and spin-offs are situations that most likely require a reassessment of the risk profile and a reset of the entire risk financing strategy, with allocation of known and unknown risks between buyer and seller.
  3. Depending on the integration of organizations or spin-off timelines, some decisions need to be made early on, and some can be made later in the timeline – successful strategy definition and implementation requires stringent planning.

Traditionally, M&A activity in life sciences has been punctuated with big pharma acquiring small entities with new products in development, boosting their R&D pipeline. Over the past three years, significant social, political, and environmental uncertainties have shaped the face of mergers and acquisitions in the sector.

The Evolution of Risk and Insurance in Life Sciences

In Q1 2023, biopharma dealmaking accounted for 50 percent of the value of dealmaking in life sciences, mainly driven by one mega-merger announcement. In a move to advance as leaders of oncology, a US-based pharma giant acquired a global biotech for $43 billion. This momentum carried into Q2 2023 from a deal-volume perspective while the number of deals slightly dropped.1 Market sources suggest that dealmaking in MedTech has been slowing down in recent years, a trend that appears set to continue.2

Although tight financing conditions and macroeconomic volatility are curtailing large-scale transformational dealmaking in other industries, organizations in the life sciences sector are bucking the trend. While 68 percent of respondents in Aon’s industry-wide M&A Risk in Review 1H 2023 report3 say they are pursuing many smaller deals rather than larger, one-off transactions, the life sciences industry has experienced a spike of large and complex mergers, acquisitions and spin-offs, in addition to smaller deals.

These deals are not only backed by a cash windfall made during the pandemic but driven by a patent cliff in relation to pharma and biologic blockbusters. An estimated $200 billion of projected revenue will disappear for organizations over the next five to six years4 as those organizations face imminent competition with drugs losing exclusivity. As large organizations acquire other large entities, the number of spin-off deals has increased, with pharma companies seeking out strategic ways to "make up" for the pending exclusive revenue loss.

Quote icon

With so much capital at stake within large, complex mergers, acquisitions and spin-offs, the risk manager’s role is becoming magnified in the life sciences sector.

Lars Sorensen
Life Sciences & Pharma EMEA Industry Vertical Leader, Aon

Rethinking Risk Management: A New Approach for Complex M&A Deals

Large-scale, complex mergers are not something that happens regularly in the workflow of a risk manager — often being a once-in-a-career occurrence. It’s crucial that people involved in managing risk associated with large mergers and acquisitions identify, mitigate and allocate risk effectively.

Establishing the right processes to reap the business benefits of M&A activity starts with addressing key insurable risks. Key insurance areas to identify are:

  • Property Damage Business Interruption (PDBI)

    To make accurate PDBI insurance calculations, risk managers must check the availability of data and review risk engineering reports. If using the same sites for production after a spin-off, quantifying and defining what risk lies within the new and original company is crucial. After large mergers, harmonization of risk engineering and business continuity management (BCM) strategies should be addressed.

  • Cyber

    If a material cyber security risk has been discovered at a target company, 86 percent of dealmakers are willing to walk away from the deal.5 With multiple operating systems at play and likely dependencies on legacy tech stacks during M&A activity, risk managers must assess system integration, and implement proactive cyber security practices and comprehensive cyber due diligence.

  • Product Liability

    Risk profiles should be updated to manage risks associated with product failures, especially in pharma. This is essential if the new company has a different product portfolio. Revisiting the risk financing strategy will help establish where businesses can create efficiencies.

  • People

    As competition for talent remains intense,6 implementation and management of people programs carry high costs and risks. Increased pressures on leadership roles and c-suite executives mean risk managers should identify appropriate D&O insurance and employee benefits.

  • Transactional

    Unknown transactional risks such as the accuracy of representations being made about the business by the seller can also negatively impact deal value. Known risks uncovered in diligence can impede a deal from completion. Transactional risk allocation and mitigation must be considered to secure investments and returns.

Operational Targets for Risk Managers

Planning operational targets for a new company enables managers to align with business goals, create efficiencies and mitigate risks. From the start, it’s important to get these fundamentals right:

  • Map Team Functions

    Align reporting committees with corporate aspirations in relation to risk management governance, ESG and insurance integration.

  • Define Operational Functions

    Identify in-house and outsourced functions to ensure margins are protected. Outsourcing to CDMOs can generate cost efficiencies and enhanced resource utilization.

  • The Right Talent

    Risk managers should identify candidates or partners with the right skill set who can support the strategic delivery of M&A deals, insurance and broader business objectives.

98%

of deal teams see talent acquisition, retention, culture and leadership as a moderate to significant focus area.(7)

How Can Risk Managers Prepare for Spin-Offs and Divestitures

Aon’s Risk in Review 20238 shows 28 percent of senior executives in corporate development teams are focusing more on divestments and restructuring, with only 22 percent reducing the size of deals. As pressure to streamline business mounts from investors, divestments show organizations’ appetite to focus on their core offerings. This is resulting in major spin-offs and large acquisitions, shedding ‘non-core activities’ that burn capital.

After organizations review their portfolio, they have the opportunity to offload products that no longer have exclusivity. While production can be handed over to generics companies or CDMOs, organizations are increasingly opting to sell off business interests entirely through divestitures. These spin-offs often inherit insurance programs, as well as risk philosophy and appetite.

However, new business means new risk profiles, requiring a rethink of risk and insurance strategies and decisions on what risks can be retained and transferred. In this context, decisions on structuring organizational risk retention should be made, particularly as many life sciences organizations are sophisticated users of (re-)insurance captives. At Aon, we’re seeing organizations approach spin-offs in two ways either:

Lift and Drop

Copy the same processes from the old organization, then step-by-step, work through each item and adapt over time. This includes adapting insurance programs and risk assessments, tailoring everything to the new organization and building loyalty with teams and stakeholders already in place.

Reshape

A complete reshaping of operations prior to day one allows the capture of relevant data and insights from the former parent organization to shape the new risk financing strategy. However, this strategy requires clearly defined and differentiated brand and messaging from the offset. It needs time and capacity considerations to manage delivery within the deadline.

Conclusion

In the evolving life sciences M&A landscape, organizations must effectively manage, mitigate and allocate risk and implement effective insurance programs. Failure to do so may expose their business for years to come.

When involved in M&A and business transaction situations, risk managers can get ahead by prioritizing key insurances and defining clear operational targets that create risk transparency. Working with an experienced global risk partner from the earliest possible stage enables decisions to be made correctly the first time.

With structured planning, life sciences businesses can make valuable decisions from the very start of the process. Aon’s dedicated life sciences team works with clients across the industry to tackle risk and human capital strategies, supporting foundations for success across M&A deals.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

Terms of Use

The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.

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