Although many pharmaceutical companies currently have a significant amount of cash, turbulent public markets and financial system instability will adversely affect access to additional capital in the future, and it is unclear when the U.S. economy will begin a recovery. Moreover, the process for FDA approval of new drugs remains challenging.
As a result, pharmaceutical companies will have to make a more compelling business case to their shareholders before using available resources, and consequently their standards for deals will increase. Buyers will have less tolerance for assuming the risk of potentially unfavorable conditions discovered in the due-diligence stage of an acquisition, even after taking into account a reduced valuation.
This increased emphasis on risk mitigation, together with pharmaceutical companies’ increase in bargaining leverage relative to biotech companies, may have an effect on acquisition transaction terms other than valuation and may result in fewer announced deals actually closing. Buyers can structure acquisition payments so that most of the consideration is payable in the future and subject to contingencies, but this alone may not provide sufficient protection to a buyer. An acquiring pharmaceutical company may demand stringent conditions to closing to provide it with an increased opportunity to avoid completing an acquisition.
The negotiating leverage of many biotechnology companies is likely to decrease as they face fewer alternatives to an acquisition, narrowing fundraising options, and an increase in the number of anxious investors looking for exit opportunities. As a result, sellers may have to accept greater closing risks than would be acceptable under different conditions.
Acquisitions, for example, are often subject to the absence of a “material adverse change” in the seller’s operations or financial condition from the date that the acquisition agreement is executed to the proposed date of closing. Sellers often attempt to exclude from this definition changes in general economic conditions or changes in the seller’s industry, but sellers may not be in a position to successfully negotiate for such protections.
Buyers may also demand other favorable and broad closing conditions, such as the absence of adverse clinical events. The enhanced ability of a buyer to walk away from an announced transaction, together with a reduced tolerance for risk, may result in fewer announced acquisitions of biotech companies by pharmaceutical companies actually closing.