Deals in pharma and life sciences: processes and pitfalls
External investment can transform life science and pharmaceutical companies, and there are plenty of investors ready to make deals. But how can new businesses best prepare for the huge upheaval of a deal process, asks Tarifa Simpson, Partner and Co-head of Healthcare and Life Sciences, Mazars, UK
he life science and pharmaceutical sector is hugely attractive to investors. Carrying on a trend that first arose over the decade prior to the pandemic, the level of deal activity remains high.
There used to be a concern among investors that involvement in the sector required specialist expertise. But today, many are drawn to the attractive characteristics of these businesses: they often have good cashflow generation, strong margins and – thanks to contracts with big pharma companies – a high level of stability.
But while there is a great deal of investor interest, businesses need to have a certain level of readiness before they seek investment. And for life science companies, this may require thinking ahead right from the start.
Partner and Co-head of Healthcare and Life Sciences, Mazars, UK
Accelerated growth phase
Life science businesses often have quite an accelerated initial growth phase. If a life science business secures a contract with a significant cornerstone client, it can quickly reshape the enterprise, accelerating growth and attracting investor interest.
Within two to three years of its launch, a business can find itself looking for investment to finance growth or being approached by potential investors. For this reason, life science companies should start to consider their appetite for external investment from an early stage.
Find out what steps to take to get ready for investment
For many life science and pharmaceutical businesses, external investment is a core part of the long-term strategy – whether to fund a drug trial or a proof of concept, or to gain access to the resources and expertise required to expand into new markets.
For such companies, it is worth working with outside advisers, either formally or informally, in order to assess and discuss what steps the organisation needs to take to get ready for investment, even if a deal is not on the immediate horizon.
One area that often receives this kind of attention is tax, since there are many schemes and incentives on offer, and what might be in the business’s best interest now may not still be appropriate when investment is sought.
Fix your financial information
Having high-quality financial information can be a hugely powerful tool in any deal process.
Some companies shy away from developing their financial reporting, because of concerns that it will require a great deal of upheaval and expense. But for life science start-ups, the process can be relatively straightforward: these are often quite simple businesses, with a handful of key clients and a fairly simple cost base.
To upgrade a business’s financials may take no more extra resource than hiring part-time support or temporary assistance at key times. There is also the option of using the services of an outsourcing partner, which has the advantage that it allows those leading the business – usually scientists and technicians – to get on with what they do best.
Avoid any nasty surprises
One of the advantages of getting a specialist to produce or review your financials is that it can uncover hidden issues, such as those that arise when small businesses have to make certain commercial decisions or concessions to secure contracts with big clients.
Such issues can include:
- Commercial terms have been negotiated that mean money paid is in fact returnable, for example, if a project is cancelled.
- Extended payment terms have been agreed that mean the business is funding its own working capital for longer than required.
- Contracts have not been updated or renewed and may have been left on a rolling basis.
These are issues that a prospective investor may quickly uncover, and they can cause some concern.
They may not wholly derail an investment process, but it’s always better for business owners to know about any such issue ahead of time so that they can stay confident and in control.
Build your network
Many of the steps suggested above involve businesses starting to engage with external experts and advisers. At the start, these relationships don’t have to be particularly formal or expensive and, in fact, they tend to start small and develop over time.
By building these connections and relationships long before an investment process begins, business owners will find that when the time comes for a deal – a process more intense, stressful and labour intensive than most people imagine – they have a network of specialists on hand to guide and support them, specialists who know them and their business.
And in my experience, it is this willingness to build a network that most often characterises those who get the smooth and successful deal process that they want.