A guide to scientific due diligence: How to set up an efficient process Part 1

1.Initial screen stage:

During this stage, a high-level screening of the incoming opportunities is performed towards strategic fit with the overall company strategy. The goal is to quickly eliminate opportunities with a poor match to leave more time for in-depth assessment of better matching opportunities.

2. High-level evaluation:

During this stage, a small, dedicated core team is being assembled to assess key criteria of the asset including the business case. If this is positive, the process can progress to stage 3.

3. Set up a full due diligence team:

During this stage, the core team of the due diligence is extended to all relevant functions needed for a full due diligence. Roles and responsibilities are defined and initial findings during the high-level evaluation are shared to provide guidance for further assessment. For a structured process, it is essential to define clear lines of communications. Ideally, the internal process and communication with the party offering the opportunity is steered by a dedicated project lead.

4. Data review:

The data provided by the party offering the opportunity is being assessed by the full due diligence team of the potential buyer. Typically, the asset related data are shared in a virtual data room organized by discipline, e.g. manufacturing/control, nonclinical, clinical, safety, regulatory, business/commercial, legal and intellectual property. Dedicated access rights can be assigned as appropriate.

5. On-site visit:

Though on-site visits are optional, they are incredibly useful to discuss initial findings and potential solutions to it. In addition, this will allow to test the cultural fit of the teams, who, depending on the deal structure, would work together after closing.

6. Reporting:

After review of data provided in the data room and discussions during the on-site visit, formal due diligence reports are prepared. These reports comprise the assessment of data, potential solutions to issues as well as questions that need further consideration before decision making. Different formats are possible depending on the buyer’s preference. Reports can include for example an easy-to-read traffic light system, where green lights indicate areas that are fine, yellow lights indicate areas needing further consideration or red lights pointing towards potential show-stoppers.

7. Additional Q&A round:

Depending on outstanding needs for discussion or clarification, additional Q&A rounds are possible, either at team or management level or both. We recommend staying focused on the Q&A approach and limit the number of Q&A rounds. Too many Q&A rounds can lead to an inefficient process eating up resources of both the buyer and the seller. In addition, if the process runs on a non-exclusive basis, an overly extended process may lead to a situation where a competing buyer takes away the opportunity.

8. Management presentation:

During this stage, all important findings including strengths and weaknesses are brought forward to the management for discussion and decision making. The presentation should contain clear recommendations, i.e. (1) sign the deal, (2) sign the deal with defined provisions, or (3) do not sign including justification. Ideally the reporting process (see stage 6) is set up to facilitate preparation of a tailored management presentation in addition to a more comprehensive report including the Q&A process for internal documentation purposes.

9. Sign the deal: Congratulations! Now it is time to make it work.

If you would like to learn more about the capabilities of the Biopharma Excellence team to support due diligence processes, both from a buyer’s and seller’s perspective, please contact us.

Diane Seimetz teaches on efficient due diligence approaches as invited lecturer to the Pharma MBA at Goethe Business School, Frankfurt, Germany.