Walker Downey & Associates, Inc.

Due Diligence

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 In today’s competitive marketplace the in-licensing of pharmaceutical candidates and medical devices has become commonplace, thus the increasing emphasis and requirement for due diligence. Due diligence is the detailed investigation of the affairs of a business, with the aim to identify problems within the business, particularly any issues which may give rise to unexpected liabilities in the future. Due diligence involves a number of different areas of investigation. As it may relate specifically to healthcare products and companies, due diligence of product proof-of-concept testing and regulated testing should be investigated by a qualified team of scientists.

There are three main situations in which a bioscience company, for example, is likely to be subjected to due diligence:

• M&A: by a potential purchaser or investor prior to a merger or an acquisition of all or part of the company’s business
• Commercial transactions: by a potential partner prior to entering into a significant collaboration or licensing arrangement
• IPO: by the business itself prior to an initial public offering (or ‘IPO’) or subsequent listing of shares on the stock market

Before buying or making a significant investment in a business, a potential purchaser will want to know as much as possible about what it is getting. For this reason, acquisitions are invariably preceded by extensive due diligence by the purchaser. In a typical transaction, as a first step the potential purchaser will send out a questionnaire to the target company, requesting full details of the business’s patents and patent applications, licenses and collaboration agreements, IT systems, confidentiality agreements, employment contracts and a whole host of other information. Alternatively, if the business wishes to attract a purchaser, it will compile this information itself. The documentation will generally be assembled in a ‘data room’, to which the purchaser and its advisers will have access.

Before entering into a major commercial agreement such as a license, joint venture or other collaboration with a bioscience company, for example, a collaboration partner will want to carry out a certain amount of due diligence. This is particularly likely to be the case where a major pharmaceutical company is forming a relationship for the first time with a relatively small start-up biotech company. While the due diligence is unlikely to be as extensive as for an acquisition, the larger company will be seeking comfort that its investment will be secure and the biotech company has the intellectual property rights, personnel, expertise and resources to perform its obligations. In addition, where a biotech company is licensing a third party to use a product candidate or platform technology, it may be required to give warranties as to validity, non-infringement of third-party rights and so on.

A buyer may not bring a claim for breach of warranty if the seller discloses information which qualifies the warranties. This means that the seller must carry out a due diligence exercise of its own, to ensure that it discloses all matters which might otherwise result in a warranty claim at a later date. Of course, identification of major problems in the course of due diligence may cause the purchaser to rethink its valuation of the business, seek an indemnity from the sellers or even in severe cases to withdraw from the transaction. However, it is always preferable for both parties to be aware of all the potential pitfalls at the outset, rather than bear the risk of unexpected and unquantified liabilities in the future.

Walker Downey & Associates specializes in product safety and development activities, thus our team of selected scientists can provide the due diligence that an in-licensed product “is what it is said to be”.  Please contact us for your specific due diligence needs.

Case Study  (May 2003) – Dr. McLain conducted preclinical due-diligence for a client interested in partnering with a smaller company with patent rights to a novel and proprietary hormone dependent prostate cancer vaccine. His due diligence report expressed “in favor” of the collaboration after minor selected issues were addressed. The client moved forward with the partnership based on this due diligence report and provided first-round financing. Unfortunately, the client was acquired by a larger company the following year and this particular partnership opportunity was dissolved. Subsequently, the smaller company established a partnership with an even larger international pharmaceutical company and expects to obtain clinical proof of principle for this product in the first half of 2007. Notably, prostate cancer is a serious condition that affects increasing numbers of men worldwide and is the most frequently diagnosed cancer in males. About one-third of all men have at least some cancerous prostatic cells at the age of 50, with the incidence increasing to as many as 90 percent at the age of 90. In the United States and Europe alone, about 80,000 men die each year from prostate cancer. The commercial opportunity for therapeutics targeting this market is predicted to reach $3.5 billion by 2007.