What is Due Diligence in Life Sciences?

Due Diligence in Life Sciences is typically a thorough appraisal of the condition of the company or business being acquired. This gathering and evaluation of information is carried out by the buyer’s advisers and relevant people from within its own organization.

The information obtained from the due diligence will help the buyer:

• evaluate what it is buying and where the weaknesses lie;
• decide whether to go ahead with the purchase;
• establish the right price and the strength of its bargaining position;
• identify any liabilities or risks which may affect how the deal is structured;
• identify areas where it requires protection in the contractual documents through warranties and indemnities;
• identify any third party consents which may be required, for example, consents from customers, suppliers or landlords;
• identify areas which may need action following the acquisition, for example, to streamline operational matters with the systems and processes of the buyer’s group.

Traditionally the buyer’s lawyers/ due diligence specialists send a detailed information request to the sellers or their lawyers, designed to acquire as much useful information as possible. These enquiries usually cover all aspects of the target company or business being acquired.

The sellers and their team gather the information requested and make it available to the buyer’s lawyers/ due diligence specialists in the electronic data room. The buyer’s lawyers/ due diligence team will evaluate the information provided and usually produce due diligence reports for the buyer which will highlight issues of concern and suggest protective measures where appropriate. The focus and degree of detail in this report will vary from deal to deal depending on the buyer’s particular needs (or, where bank or other external funding is involved, the funder’s requirements).

Due diligence can be a lengthy process. Whilst it is started early on in negotiations, it can often continue well into the deal process and overlap with the disclosure process. In the disclosures process information may be received through disclosure which was not previously identified during due diligence and may extend or re-open negotiations. To the extent the buyer needs additional protection as a result of any disclosures, this will be reflected in the deal documentation (to be discussed in Part IV – Transaction documentation).

Financial due diligence

The buyer’s financial due diligence team will analyze the financial statements and accounting procedures of the target company or business and back up this review by conducting interviews with its accountants and management. Financial due diligence will focus on assessing the historic trading performance of the company or business to check that the assumptions the buyer is making about its future are supported.

Tax due diligence

The buyer’s tax lawyers will review the tax history of the target and focus on identifying (potential) liabilities and/ or any issues which could be disputed by the local tax authorities. Generally, the tax due diligence team also conducts interview with the responsible representatives of the company and its tax advisors. Depending on the complexity of the company/ business, the tax due diligence report will contain recommendations about protective measures, such as warranties and indemnities, to include in the transaction documentation (subject to negotiations between involved parties).

Legal due diligence

Where a company is being acquired this will include everything from its constitution to its employees, contracts, licenses, property, financing arrangements, intellectual property rights and IT systems. The degree of focus on any particular area will depend on the nature of the target business or company, where the buyer perceives the risks lie or what it considers the target’s main business assets to be.

Commercial diligence

The commercial due diligence may identify issues of a commercial or strategic nature which the buyer may want to investigate further. In many cases a specialist due diligence consultancy firm may be involved to carry out a more detailed analysis of the company or business being acquired, looking at its reputation in the marketplace, unique selling points and market opportunities in the context of the buyer’s plans for the future.

Other specialist reports may also be required as part of the wider due diligence process, for example, property surveys, environmental audits, health and safety investigations or actuarial valuations.