Life Science M&A Liability Risks

Mergers and acquisitions are a common occurrence for pharmaceutical, biotech and other life sciences companies. In fact, despite a restrained venture capital environment in 2023, deal flow finished strong at $191 billion – an increase of 34% from the year prior.¹

Life science companies often seek to acquire products and services that are currently on the market or about to be brought to market. This is especially true if those new products and services will allow them to:

Acquire new skills or technologies
Deepen product pipelines
Create efficiencies or savings
Lead to product, distribution or geographic expansion

Although biopharma has been the main driver of M&A activity in recent years, the life sciences sector at-large is expected to see increased deal-making in 2024. Experts anticipate an uptick due to horizontal acceleration and a large number of investors who withheld in 2023 now needing to deploy cash. Analysts predict deal volume will continue to be less than pre-pandemic levels, yet deal value to remain high.^2,3

While companies acquire new businesses or products to accelerate growth, they also need to assess potential risks, such as:

Product liability exposure
Potential regulatory changes
Supply chain disruptions

Life sciences business insurance can help life science companies find the stability they need so that they can continue to innovate and grow, while still delivering safe and efficacious products.

Product Liability Risk

Product liability continues to be the most common legal and reputational risk for life sciences companies. It can often be a hidden risk during a merger or acquisition. Once a company or product has been acquired, the buyer could be held liable for claim activity that happened before acquisition. Every deal carries significant risk and opportunity, so due diligence is essential before completing any transaction. It’s also important to remember that some presumed liabilities are commonly not covered by standard liability insurance coverage, such as liability assumed by contract. So, taking the right actions upfront helps to protect your bottom line.

To limit successor product liability risk, it’s important for the buyer to take the following steps before any merger or acquisition:

Determine if there are outstanding liability claims against the company to be acquired. This includes any of its subsidiaries. Review the company’s claim and litigation history to assess potential near-term and historical risk. Be mindful of any prior issues; including serious adverse events and litigation with other-similar-products that could lead to future claims. Keep in mind that claims can materialize several years after a product is initially manufactured, distributed, sold or used.

Assess historical FDA activity including recalls, adverse events, import refusals, inspections and findings/observations from third-party registrars. Potentially misleading statements made by an acquired company to the FDA during the approval process for its products should be thoroughly examined. Misleading statements could result in injured consumers, as well as civil or criminal liability. It can also cause civil or criminal liability under the False Claims Act.

Evaluate any outstanding debt or liabilities and determine if there are any unpaid claims. The acquisition contract should clearly state which entity retains liability for the company’s past work.

Review adverse event trends and the potential risk of mass tort litigation. This should include trends not just related to the entity, but also the product classes in general. Consider using third-party analytical experts who specialize in parsing FDA data obtained under the Freedom of Information Act rather than an internal analysis. Third-party analytics often use algorithms that address the life science area’s unique characteristic of voluminous adverse event reports and combine the results with scientific literature review to provide a more complete or nuanced picture of future risk related to product liability.

Regulatory Risks

Life science companies operate in a highly regulated industry. Beyond the FDA, life science companies often need to follow rules set by the:

Department of Health and Human Services
Justice Department
Federal Trade Commission
Centers for Medicare & Medicaid Services
U.S. Attorneys General

To limit regulatory risk, buyers should consider taking the following steps:

Determine if the company has all the required FDA clearances, approvals or authorizations to manufacture and distribute its product or service. Without the required authorizations, the company may have limited value. For instance, the buyer needs to assess if the company owns all the necessary intellectual property rights, including patents, trademarks, trade names and copyrights. If the company is still developing a product or service, be mindful that the new product or service might not yet have the necessary approvals.

Investigate if there are any pending regulatory changes that could impact the company and its ability to manufacture or distribute a product or service. Remember, products or services that are still in development may not have the necessary approvals.

Evaluate the company’s data privacy policy and its marketing practices. Many life science companies use data and analytics tools to market their products. So, be aware of any new upcoming data privacy regulations. Assess whether the company has been complying with industry guidelines and regulations related to data privacy.

Supply Chain Risks

Before a merger, it’s a good idea to consider any potential supply chain disruptions. Buyers should:

Map out supplier locations
Identify source of components and raw materials
Identify sole sourcing pathways
Prior performance history with an emphasis on quality and delivery
Find out whether there is a risk of not getting raw materials
Determine which suppliers are interconnected

Before completing a sale, make sure you know important information about the suppliers to limit supply chain risks, including:

Contact names and information
Products or services supplied
Whether any products or services are proprietary
Presence and adequacy of the Quality Agreement
Contract termination date

Identify any single-source suppliers. This means a single supplier has the business, despite there being other companies who do the same thing. It’s also a good idea to identify any sole-source suppliers who provide unique materials that can’t be obtained elsewhere. Both types of suppliers could limit your ability to find alternative material sources. They can also prevent you from meeting higher demand for a product or service.

Plan for any possible supply chain disruptions that could delay products or services from getting to market. It’s important to participate in a simulation exercise to see how your life science business needs to adapt to any disruptions.

Learn more about specialized life science insurance solutions.

¹ “Deals are back: Surge in life sciences M&A fueled by sector's capital reserves and quest for new revenue growth,” EY – Global, January 8, 2024

² “2024 Outlook for Health Care and Life Sciences,” Deloitte US, January 16, 2024

³ “2024 forecast: M&A saw an uptick in 2023. Analysts expect the trend to continue,” Fierce Pharma, December 22, 2023

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