M&A in Pharma: Balancing Growth and Risk

Justin Kozak

The pharmaceutical industry has witnessed a resurgence of mergers and acquisitions (M&As) as companies seek to gain a competitive edge, accelerate innovation, and drive growth. By consolidating resources, expanding market reach, and acquiring valuable intellectual property, pharmaceutical organizations are reshaping the industry landscape. However, these deals come with significant risks that must be carefully managed to ensure long-term success.

The resurgence of M&As in pharma

M&As are making a significant comeback in the life sciences. Companies are leveraging M&A strategies to strengthen their market positions, diversify pipelines, and access innovative technologies. This trend in dealmaking reflects the growing need for efficiency and competitive advantage.

Pipeline diversification remains a key driver of M&A activity, allowing companies to broaden their product offerings and mitigate risks tied to single-drug portfolios. Additionally, acquisitions often accelerate time-to-market for ground-breaking treatments by bypassing lengthy R&D phases. Another motivating factor is cost synergies, achieved through shared resources and economies of scale, which reduce operational expenses. Accessing emerging platforms, particularly in biotech and AI-driven drug discovery, also pushes companies toward strategic deals.

Recent notable deals underscore this resurgence. For example, Pfizer’s acquisition of Seagen in 2023¹ highlighted its focus on advancing cancer therapies. Similarly, Amgen’s purchase of Horizon Therapeutics in the same year² aimed to expand its presence in rare diseases, aligning with a long-term growth strategy. Each deal exemplifies the industry’s commitment to combining strengths and adapting to market demands.

The strategic rationale for these transactions is clear: companies are seeking to maintain relevance in a rapidly evolving landscape. Whether by enhancing product pipelines, reducing costs, or securing cutting-edge technologies, M&A activity is shaping the future of pharma. This resurgence signals an exciting phase of innovation, collaboration, and growth for the industry.

Risks associated with M&As in small pharma companies

M&As in smaller-sized organizations can drive growth and innovation, but they also carry significant risks. Addressing these challenges requires careful planning and strategic execution to ensure success post-merger.

• Regulatory hurdles.Navigating the complex regulatory landscape is one of the biggest challenges in M&As for small pharma. Each merger involves aligning with different regulatory frameworks, which can delay deal completion or increase costs. Post-merger, ensuring ongoing compliance is equally daunting, especially as regulations evolve across global markets. Failing to address these issues can lead to costly penalties or loss of market access.
• Integration challenges. Combining two distinct organizations often brings cultural and operational conflicts. Merging diverse workforces and integrating different IT systems can cause disruptions, leading to inefficiencies and delays. Without proper planning, these challenges may result in productivity losses, potentially derailing the intended benefits of the merger.
• Market volatility. Economic downturns and geopolitical events can significantly impact the value of M&A deals. Fluctuating valuations may lead to higher deal premiums, making transactions riskier for small companies. Furthermore, unexpected market shifts post-merger can compromise the financial stability of the combined entity.
• Dilution of shareholder value. Shareholder dilution is a common concern in M&A transactions. When deals involve issuing new shares or acquiring debt, existing shareholders may experience reduced ownership percentages, which can impact long-term value and investor confidence.
• Operational risks. The practical aspects of combining supply chains and manufacturing processes also pose challenges. Supply chain disruptions, quality control issues, and operational bottlenecks are potential risks that can delay product delivery and harm brand reputation. These problems are particularly pronounced in those industries with strict compliance standards, such as the pharma sector.

M&As in small pharma companies can unlock growth and innovation, but only if the associated risks are carefully managed. Addressing regulatory, integration, market, and operational challenges with proactive strategies ensures that these transactions deliver their intended value. For small pharma, success lies in preparation, adaptability, and a keen understanding of the unique challenges inherent in the industry.

Mitigating risks and ensuring a smooth exit

M&As can be transformative for companies, offering growth and market expansion opportunities. However, to ensure a successful and smooth exit, careful planning and post-acquisition risk management are essential.³ Addressing key factors in strategic planning, due diligence, integration, risk management, financial planning, and legal considerations can significantly improve outcomes.

Strategic planning and due diligence

A successful M&A begins with a well-defined strategy that aligns with the company’s long-term objectives. This involves identifying potential acquisition targets that offer strategic value, such as complementary products or market presence. Assessing the strategic fit ensures that the merger strengthens the company’s position while minimizing the risk of misalignment.

Due diligence is crucial to uncovering hidden risks and liabilities. This process involves analyzing the target company’s financial health, intellectual property, and regulatory compliance.⁴ For example, reviewing contracts and patents helps identify potential legal issues, while evaluating operational practices ensures compatibility with the acquiring company. Thorough due diligence lays the groundwork for a seamless transition and avoids surprises post-merger.

Proactive risk management

Integration challenges often derail the benefits of an M&A deal. A comprehensive integration plan can mitigate this risk by addressing key operational and cultural differences. Clear communication channels should be established to foster collaboration and align teams across both organizations. Leveraging technology, such as unified IT systems, can streamline processes, improve efficiency, and reduce disruptions during the transition.

Identifying and managing risks early in the M&A process is critical. Companies should develop contingency plans for potential disruptions, such as supply chain interruptions or regulatory hurdles. Implementing robust risk management frameworks allows for agile responses to unforeseen challenges, ensuring stability throughout the integration process.

Legal and financial considerations

Adequate financing is essential to cover acquisition costs and post-merger integration expenses. Life sciences companies must evaluate the financial impact of the deal on cash flow and the balance sheet, ensuring sustainability. This analysis helps prevent over-leverage, which can strain resources and jeopardize long-term success.

Navigating complex legal and tax implications requires experienced advisors. Ensuring compliance with relevant regulations and addressing potential tax liabilities are critical to avoiding penalties or delays. Proper legal guidance ensures a smoother transaction and safeguards against unforeseen complications.

Mitigating risks in M&A transactions demands strategic planning, detailed due diligence, and proactive integration and risk management.

By aligning financial, legal, and operational frameworks, companies can ensure a smooth exit and maximize the value of their merger. A well-executed approach not only reduces risks but also sets the stage for long-term success.

About the Author

Justin Kozak is the Executive Vice President at Founder Shield, a tech-enabled commercial insurance brokerage. He leads the life sciences practice, having 10+ years of experience in risk management with Hub International, PBC, and now Founder Shield.

References

1. Pfizer Completes Acquisition of Seagen. Pfizer press release. December 14, 2023. https://www.pfizer.com/news/press-release/press-release-detail/pfizer-completes-acquisition-seagen

2. Amgen Completes Acquisition of Horizon Therapeutics Plc. Amgen press release. October 6, 2023. https://www.amgen.com/newsroom/press-releases/2023/10/amgen-completes-acquisition-of-horizon-therapeutics-plc

3. Hamory, W. Post-Acquisition Insurance & M&A Risk Management Guide. Founder Shield. September 22, 2024. https://foundershield.com/blog/post-acquisition/

4. Saraceno, N. Consequences of Non-Compliance. Pharmaceutical Commerce. December 5, 2024. https://www.pharmaceuticalcommerce.com/view/consequences-non-compliance