Beyond integration: Value creation from bolt-on life sciences deals

2. Diligence

Many of the companies we work with have an ongoing flow of diligence activities. While these companies can crank through internal functional diligence (e.g., finance and accounting, HR, IT), our recommendation is to confirm you are performing thorough analysis against the expected outcomes from the deal. Employee engagement and retention rank first, according to the latest EY-Parthenon CEO Outlook Survey. For life sciences companies acquiring bolt-ons where the target might only employ 50 to 200 people:

• It is critical that a thorough diligence is conducted regarding people, including key executives, managers and employees that need to be retained, through financial and nonfinancial means.

• We recommend buyers work with legal teams and conduct third-party clean team diligence to get ahead of customer retention and operations optimization. Key questions include “what is the risk of losing key customers post-close under our operations?” and “what is our mitigation strategy?”

3. Governance and integration management

We know that life sciences companies have been doing bolt-ons for many years and often have playbooks or steps to an overall process. One aspect of effective governance that can help ensure value creation from multiple bolt-ons happening in parallel is to establish an effective executive steering committee (ESC) process to review multiple deals when needed.

Our recommendation is to pull in the integration team as soon as legally possible while avoiding “having an army” on diligence calls and overwhelming the buyer. Make sure your bolt-on is being led by integration leaders who know the bolt-on integration playbook and have the commercial, scientific and/or R&D capabilities that align with the secret sauce of the target.

4. Operating model and organizational design

Buyers should not be shy about sharing deal rationale and integration strategy with the target’s employees. If the deal is a bolt-on, it is likely that the degree of integration will be full and the timing will be fast. These guiding principles should expedite the development of the Day 1 and future state operating model that aligns with the buyer’s current state operating model.

5. Day 1 readiness

Conduct typical transaction closing and Day 1 readiness activities, such as readiness workshops, workplans and checklists. Get to know each other beyond any joint calls conducted during diligence.

Mobilize an effective “hypercare” environment. Cutover or commence integration execution for the functional areas you are fully bolting-on to achieve rapid synergies (e.g., enterprise resource management, human capital management).

6. Culture, communications and change management

This is often an area where bolt-ons can fail.

• Obtain a cultural baseline through surveys and discussions as soon as possible, so you know what landmines to avoid — or how to mitigate them if they are unavoidable.
• Focus on effective communications through multiple channels.
• Manage the change proactively — this is critical when a huge life sciences company is buying a company with 50 or a few hundred people. Think ahead about what could go wrong, such as people with critical knowledge associated with drug development for a pre-commercial asset leaving the company and implement mitigation strategies and tools.

7. Value creation and synergies

While EY research shows that more than 70% of life sciences deals are likely to achieve their cost synergy targets, it is important to note that there are many bolt-on transactions where deal size and associated synergies are not reported publicly.

Our experience working with life sciences companies is that challenges exist in meeting the financial expectations for bolt-ons. To overcome these challenges, the deal model and associated value creation baseline should be locked down at signing and not relitigated. This deal model is the goalpost for the expected synergies and associated costs to achieve for the bolt-on.

Successful serial bolt-on companies have a core competency around making sure the acquisition is accretive to earnings and cash flow early and earns cost of capital within the first few years.

Our recommendation is to have a disciplined top-down and bottom-up value creation approach that starts during modeling and negotiation and runs through the integration. For pre-commercial bolt-on deals, it is important that the commercial sizing and launch strategy are part of the value creation approach. Focus on the R&D and commercial investments that are necessary to realize the synergies.

8. Business and functional integration

While bolt-ons are more common than scale, strategic growth and transformation deals, the blocking and tackling associated with the business and functional integration are not without challenges.

We recommend deploying a planning and integration approach enabled by effective tools, such as EY Capital Edge, so life sciences companies can capture the value and meet the expected outcomes in the deal thesis.