Some history of the Process
Probably the term “due diligence” has been used in 1598 for the first time officially, but due diligence may be as old as transactions themselves – with the transaction itself creating a need to know more about the other side.
It wasn’t until the 20th century that due diligence took on the more structured form that we know today. The first time that due diligence is mentioned in SEC documents was 1933, but it is fair to assume that the arrival of more sophisticated management accounting methods in the second decade of the twentieth century, saw the first tentative steps in modern due diligence.
Types of Due Diligence
In mergers and acquisitions, we typically think of four major types of due diligence:
– Financial due diligence: Focusing on the financial performance of the company until the present date and ensuring that the numbers presented in the financial statements are accurate and sustainable.
– Legal due diligence: Focusing on all legal aspects of the company and its relationships with its stakeholders. Areas typically analyzed include licenses, regulatory issues, contracts, and any legal liabilities that may be pending.
– Operational due diligence: Focusing on the company’s operations – essentially looking at how the company turns inputs into outputs. This is generally considered to be the most forward looking type of due diligence.
– Tax due diligence: Focusing on all of the company’s tax affairs and ensuring that its tax liabilities are paid in full to date. Due diligence in tax also looks at how a merger would affect the tax liabilities of the new entity created by the transaction.
Due Diligence in Life Science companies
When talking about Due Diligence in the Life Sciences companies one has to consider the following:
– Research and Development: Focusing on open projects and assessing the probability of success of the developments and products’ fit to our strategic goals
– Sales and Marketing: Analyzing synergies within the therapeutical groups and markets – we need to assess synergies on the markets and within therapeutic groups
– Information Systems: Focusing on Data Integrity and Patient Safety – we need to be assured that the data in all parts of the system are identical. It can be compared to the requirements toward drugs where we know, that a drug contains certain amount of active ingredient no matter where in the world we purchase it.
Sharing sensitive IP data requires safety measures preventing unauthorized access.
How to organize the effective DD
We can easily imagine, that the workload is immense and the staff involved in the process must leave the daily activities to other team members. Successful DD requires deep experience and high-level expertise in multiple functional areas focused in an often narrow window of time and often under tight deadline pressure.
Review of a clinical trial protocol and clinical trial data really needs experienced industry physicians who have done this sort of thing many times before and who have personally experienced both success and failure in clinical trials programs.
In-depth analysis of the market potentials requires people knowing markets and their development directions.
Information technology review needs tools and experts in the field to properly evaluate the strengths and weaknesses of the computer systems.
Hiring M&A professionals such as investment banks and consultants make the due diligence process more efficient. Deal teams have experience with conducting diligence and know the necessary steps to take.
Northern Life Sciences’ experts can support you in the process by taking a high level (CxO) control of the Due Diligence processes and leaving the space for CxOs to run the daily operations of the company.
In Person or Virtual
Direct access to key management provides a much richer input and usually unearths more issues than a data room review alone. Timing, geographies and budget often do not permit the luxury of a site visit, but a videoconference or telephone call can be an effective substitute.
Conclusion
Due diligence is not for the faint-hearted. It requires sufficient expertise and experience and a manageable process and timeline. Expert practitioners will, by virtue of all of the prior DD exercises they have undertaken, yield a superior result.