Critical Success Factors in Pharmaceutical Due Diligence

Key Success Factors for Effective Pharmaceutical Due Diligence and Risk Mitigation

Due diligence is defined as the process by which buyers conduct the evaluation of investment opportunities. Several factors are critical to the success of pharmaceutical due diligence and broader life sciences due diligence. Among various types of due diligence, due diligence focusing on commercial aspects is critical as it seeks to investigate the future revenue-generating potential (and ensuing cash flow) of the asset or business. For healthcare and life sciences investors, one could argue for a case of thorough due diligence. The rationale is that- the pharmaceutical sector inherently has a high risk when compared with other sectors. Rigorous due diligence helps to mitigate risks and in some instances, conducting objective due diligence might be a fiduciary requirement.

Pharmaceutical due diligence addressing commercial issues involves extensive ‘external analysis’ and often comprises an assessment of the market, competitive landscapes, and customers. We briefly describe each of these elements here. The objectives of the market assessment are to establish the market size – current, future market size, and expected growth. As a best practice, BiopharmaVantage emphasizes the ‘forward-looking’ metrics and understanding of the fundamental drivers of the market. It is also vital to know which ‘market segment’ would the target compete in. Subsequent research and analysis should focus on ‘deep-diving’ into this market segment. We have seen numerous examples of ‘inappropriate segments’ where the targets refer to the attractiveness of the entire market but in reality, only have the potential to compete in a sub-segment of it.

Assessment of the competitive landscape is another critical element of the pharmaceutical due diligence exercise. A good practice is to assess both – the current landscape as well as the future landscape. This is important for assets and businesses as pharmaceutical and biotechnology-based assets usually have a longer gestation period, i.e., it takes a long time to get the asset to the market. The focus of competitive landscapes should be the target market segment, but one should be aware of the competition from other markets and segments. Our broader definition of competition is simple – any business asset/entity that has the potential to erode revenue.

Stakeholder assessment is an integral component of the pharmaceutical due diligence process. In pharmaceutical due diligence exercises, several stakeholders are at play – the key ones are payors, prescribers, and patients. All stakeholders’ needs should be addressed based on the target market segments. Interviewing stakeholders allows one to gain insights into their preferences, key asset attributes, and prescribing behavior. This also enables assessment of the asset’s offerings to address unmet or under-met needs, ability to deal with evolving needs, value proposition and its sustainability. Sources of information include market reports, databases, government resources, competitors, interviews with KOLs and other key stakeholders.

BiopharmaVantage is a specialist consulting firm that provides life sciences and pharmaceutical due diligence services to private equity and venture capital investors and corporate clients. If you would like to explore how we can assist, then please contact us.