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Pharmaceutical and

Life Sciences Deals


Insights Quarterly
Q3 2013
November 2013
A publication from PwCs
Deals business

At a glance
Deal value and volume
in the third quarter of
2013 increased relative
to the second quarter and
approached the levels of the
third quarter of 2012.
While economic and
industry trends are
combining in Russia to
create opportunities for
investment, considerable
challenges and risks remain.
Non-traditional
consideration, including
earn-outs, seller financing,
and structured transactions,
remains prominent in the
pharmaceutical and life
sciences industry. This
quarter, we highlight
trends and discuss practical
considerations in deal
structuring.

Welcome to PwCs Pharmaceutical and


Life Sciences Deals Insights Quarterly

This issue of Pharmaceutical and Life Sciences Deals Insights Quarterly brings you PwCs
perspective on deal activity in the industry. Each quarterly publication features
threesections:
1. M
 arket update: A summary of M&A deals and trends for the previous quarter. This issue
covers Q3 2013.
2. C
 ountry spotlight: An update on doing deals in selected geographies. This issue focuses
on Russia. While traditionally known for its natural resources, Russia has begun to shift
its focus to more effectively integrate into global trade and investment transactions and
develop its market economy. This trend has given rise to opportunities for investment
among pharmaceutical and life sciences companies. However, investors should be
mindful of the risks and challenges that remain when entering this emerging market.
3. S
 trategy corner: A feature offering tips and insight on different aspects of deal making.
Deal makers in the pharmaceutical and life sciences industry commonly rely on forms of
non-traditional consideration to reconcile differences in value. We discuss recent
trends in the use of earn-outs, seller financing, and structured transactions and spotlight
practical considerations.
Refer to our prior publications to gain insights into doing deals in other geographic markets
and to learn the aspects of successful transactions. All of our quarterly deals publications
are available at www.pwc.com/us/deals.

Q4:2012
Doing deals in China
Driving divestiture success
Five critical components

Q1:2013
Southeast Asia comes of age
Refining the price-value
equation

Q2:2013
Brazil: High growth potential
but challenges to deal making
Foreign Corrupt Practices Act

PLS Deals Insights Quarterly 1

Market update
Deal volume and value increased in the third quarter while
fundamentals and pending deals point to potential for heightened
activity in the fourth quarter of 2013
Total deal volume increased approximately 10% during the
third quarter of 2013 in comparison with the second
quarter of 2013, while declining by approximately the same
amount relative to the third quarter of 2012. Deal value
increased by nearly 50% over the previous quarter while
declining approximately 15% relative to the third quarter of
2012. The increase in the third quarter owes primarily to
two large transactions in the medical device segment.

Figure 1: Total deal value and deal volume by industry segment


(2013 Q3)

Pharmaceuticals

Biotechnology 4

Medical devices

While the fundamentals for M&A activity remain strong in


the pharmaceutical and life sciences (PLS) industry, the
deal market may continue to face challenges due to the
scarcity of assets available for sale and heightened focus
from buyers seeking to increase the likelihood of deal
success. While these factors are driving valuations and deal
timelines, several large transactions announced in the third
quarter indicate buyers remain active in the market and are
seeking opportunities for growth through acquisition.

13

Diagnostics

Services 0
0

10

12

14

16

Deal value ($B)


Source: Thomson Reuters

Figure 2: Total deal value and deal volume by industry segment


(2013 Q2)

Figure 3: Total deal value and deal volume by industry segment


(2012 Q3)

Pharmaceuticals

13

Pharmaceuticals

Biotechnology

Biotechnology

Medical devices

Diagnostics

Services 0

Medical devices

Diagnostics

Services

10

12

14

Deal value ($B)


Source: Thomson Reuters

10

12

Deal value ($B)


Source: Thomson Reuters

Note to Figures 1, 2, and 3: Numbers within bars indicate number of deals during the quarter.

PwC

Quarter in review

The volume of PLS deals closed during the third quarter of


2013 increased 8.7% compared with the second quarter of
2013, but decreased 7.4% relative to the third quarter of
2012. The value of PLS deals closed during the third quarter
of 2013 increased 50% relative to the previous quarter and
decreased 16% relative to the third quarter of 2012. On a
year to date basis, deal volume in 2013 is consistent with
2012, while deal values across the PLS industry have
decreased from $60.2 billion to $37.6 billion. Unless
otherwise noted, figures used for comparative purposes
exclude mega deals with values in excess of $20 billion.
Deal value in the pharmaceutical and biotechnology
segments decreased sharply relative to levels for the second
quarter of 2013 and third quarter of 2012, while deal
volume trends offer mixed indications. The number of
pharmaceutical deals decreased significantly relative to the
second quarter. Volumes were consistent with the third
quarter of 2012. Similarly, while the number of
biotechnology deals doubled relative to the second quarter
of 2013, only four transactions closed, representing a 43%
decline from the third quarter of 2012.
Deal activity in the medical device sector was a bright spot
within the industry, with deal volume more than doubling
relative to the second quarter of 2013 and value increasing
several-fold relative to the second quarter of 2013 and the
third quarter of 2012. These results are in part due to the
completion of the acquisitions of Gambro AB by Baxter for
$4 billion and Bausch & Lomb by Valeant for $8.7 billion,
inclusive of debt assumed, and other cash adjustments.
However, excluding these larger transactions, the sector
posted a minor decline in deal value compared to the prior
quarter and nearly 110% growth relative to the third quarter
of 2012.

Figure 4: Total deal value (2012 Q32013 Q3)


2013 Q3

18

2013 Q2

12

2013 Q1

76

2012 Q4

18

2012 Q3

22
0

10

20

30

40

70

80

Deal value ($B)


Source: Thomson Reuters

Figure 5: Total deal volume (2012 Q32013 Q3)


25

2013 Q3

23

2013 Q2

35

2013 Q1

43

2012 Q4
27

2012 Q3
0

10

20

30

40

50

Number of deals
Source: Thomson Reuters

PLS Deals Insights Quarterly 3

Trends and insights

Figure 6: Total deal value by industry segment (2012 Q32013 Q3)


1
2013 Q3 3

15
1

2013 Q2

71

12
1

2013 Q1

72 2 2

2012 Q4

12

2012 Q3

2 3
15

11

10

20

30

40

70

80

Deal value ($B)


Pharmaceuticals
Biotechnology

Medical devices
Diagnostics

Industry participants continue to evaluate their product


portfolios and seek opportunities to unlock value through
divestitures. At the end of the third quarter, there were 11
pending divestitures with deal values announced. These
deals ranged from $20 million to $1.9 billion, with an
average value of approximately $575 million. Given
current trends, divestitures are expected to remain a
significant component of deal-making activity and
continue to drive interest among both strategic and
financial acquirers.

Services

Source: Thomson Reuters

Figure 7: Total deal volume by industry segment (2012 Q32013 Q3)


7

2013 Q3

13

13

2013 Q2

16

2013 Q1

2012 Q3
0

2
7

17

2012 Q4

7
10

6
8

3
16

While third-quarter results suggest mixed results in deal


activity among industry sectors, the fundamentals for
M&A activity remain in place, including strong equity
markets, healthy balance sheets, and access to capital.
Further, several large transactions were announced in the
third quarter and are expected to close in the fourth
quarter or early 2014. These transactions indicate that
acquirers remain active in the market and deal activity
will likely continue to increase in the coming quarters.
However, a relative scarcity of quality assets available for
sale and a heightened focus by potential acquirers on
successful execution may hinder deal activity.

3 1

Consistent with recent quarters, while strategic buyers


continue to drive the majority of M&A activity in the PLS
industry, financial buyers have remained competitive in
acquisition processes and were successful in several
announced and closed transactions in the third quarter.
Further, the high-yield debt market showed strength late
in the third quarter as issuers sought to raise capital in
anticipation of continued rising interest rates. We expect
financial sponsors to remain active in transactions in the
PLS industry.

4 1
20

30

40

50

Number of deals
Pharmaceuticals
Biotechnology

Medical devices
Diagnostics

Services

Source: Thomson Reuters

PwC

Figure 8: Equity Index Returns


120%
100%
80%
60%
40%
20%
0%
Dec-30 Mar-30
2011

Jun-29 Sep-28 Dec-31 Mar-28 Jun-28 Sep-30


2012
2013

S&P 500Healthcare Sector Index


S&P 500Biotechnology Index
S&P 500Health Care Equipment & Supplies Index
S&P 500Pharmaceuticals Index
S&P 500 Index

Source: S&P CapitalQ

PLS stocks continued to perform well relative to the


overall market in the third quarter of 2013. The S&P
healthcare sector index rose by approximately 8.7%,
compared with a 6% increase for the S&P 500. These
gains were driven primarily by continued improvement
among biotechnology companies, which appreciated
38.1%, as measured by the S&P 500 biotechnology index.
Among other sectors, the healthcare equipment and
supplies sector increased 1.5%, while the pharmaceutical
sector increased 4.1%. On a year-to-date basis, the S&P
healthcare sector index has increased 30.6% relative to
20.3% for the S&P 500.

The capital markets continued to demonstrate strong


momentum in the third quarter of 2013 as the volume of
new public listings matched the previous quarter and
exceeded the third quarter of 2012, according to IPO
Watch, a quarterly survey of IPOs listed on US stock
exchanges by PwC.1 Overall IPO volume for the first nine
months of 2013 surpassed overall volume for all of 2012,
while the high yield market saw $255 billion of issuances,
exceeding 2012 issuances through three quarters. There
were a total of 63 IPOs in the third quarter of 2013. This
level was consistent with the second quarter of 2013
while representing a 110% increase, compared with 30
listings in the third quarter of 2012. The first nine months
of 2013 recorded 160 IPOs, surpassing the 108 IPOs in the
comparable period last year, and the 146 IPOs for all of
2012. The healthcare sector was home to 18 IPOs in the
third quarter of 2013, raising $3 billion. Current trends
suggest this momentum will continue through the end of
the year.
Despite continued pressure on startups seeking to raise
capital, US venture capital funding for the biotechnology
and medical devices sectors improved dramatically in the
second quarter of 2013 according to the MoneyTree
Report from PwC and the National Venture Capital
Association (NVCA).2 The biotechnology industry was the
second-largest industry in terms of dollars invested, with
$1.3 billion going into 103 deals, increasing 41% in
dollars and 4% in deals from the prior quarter. The
medical device industry received $543 million in 71
deals, representing a 1% decline in both dollars and deals
from the prior quarter. For all sectors, venture capitalists
invested $6.7 billion in 913 deals in Q2 2013, an increase
of 12% in dollars invested and an increase of 2% in the
number of deals from the first quarter of 2013, when $6
billion was invested in 896 deals. However, this was a
decline of 9% in dollars and 6% in number of deals year
over year.

1 http://www.pwc.com/us/en/press-releases/2013/q3-2013-ipo-watchpress-release.jhtml
2 http://www.pwc.com/en_US/us/health-industries/publications/assets/
pwc-biotech-boost.pdf

PLS Deals Insights Quarterly 5

Key closed transactions

Key announced transactions

On August 6, Valeant Pharmaceuticals completed its


acquisition of Bausch & Lomb, a manufacturer of
ophthalmic goods and products, pharmaceutical
preparations, optical instruments and lenses, and
electric toothbrushes, from Warburg Pincus for
approximately $8.7 billion, inclusive of debt assumed
and other cash adjustments.

On August 25, Amgen completed its tender offer to


acquire shares of Onyx Pharmaceuticals, a developer of
oncology therapies, by accepting approximately 79.2%
of Onyxs common shares outstanding. Amgen offered
$125 in cash per share, or a total value of $9.7 billion,
an increase from its previous offer of $120 in cash per
share, or a total value of $9.3 billion.

On August 19, Johnson & Johnson completed the


acquisition of Aragon Pharmaceuticals, a Californiabased manufacturer of pharmaceuticals to treat
hormonally driven cancer, for $1 billion: $650 million
in cash and up to $350 million of contingent payments.

On July 29, Perrigo agreed to merge with Elan, a


Dublin-based biotechnology company, in a stock swap
transaction valued at $8.5 billion. The combined
company will be reincorporated in Ireland in
conjunction with the transaction.

On September 6, Baxter completed its acquisition of


Sweden-based Gambro AB for $4 billion. Gambro
manufactures products for use in dialysis therapy.

On July 29, France-based Essilor International agreed


to acquire the remaining 51% interest, which it did not
already own, in Transitions Optical, a manufacturer of
photochromic lenses, from PPG Industries for
approximately $1.7 billion in cash and up to $125
million in profit-related payments. The transaction also
included Intercast, an Italian supplier of sun lenses.

Cubist Pharmaceuticals completed its tender offer to


acquire the shares of San Diego-based Trius
Therapeutics on September 19. Consideration in the
transaction consisted of $13.50 in cash and up to $2.00
in contingent value rights per share, or a total value of
$786.6 million.

Figure 9: Total deal value and deal volume by deal size and quarter
2013 Q3

2013 Q2

2012 Q3

Number of deals

Deal value ($ M)

Number of deals

Deal value ($ M)

Number of deals Deal value ($ M)

$15M to $50M

260

111

180

$50M to $100M

222

183

$100M to $250M

985

662

897

$250M to $500M

2,539

1,742

2,165

$500M to $1,000B

787

1,260

925

> $1,000B

13,722

8,135

17,423

Total

25

18,292

23

12,133

27

21,773

Source: Thomson Reuters

PwC

About the data


On July 30, Cubist Pharmaceuticals agreed to acquire
the entire share capital of Optimer Pharmaceuticals for
$10.75 in cash and up to $5.00 per share in contingent
value rights, or a total value of $775.5 million.
On September 5, Otsuka Holdings of Japan agreed to
acquire Astex Pharmaceuticals for $8.50 in cash per
share, or a total value of $886.9 million.
On September 27, a subsidiary of Kohlberg Kravis
Roberts & Co agreed to acquire an 80% interest in
Panasonic Healthcare Co., Ltd., a Tokyo-based
manufacturer of medical equipment, for approximately
$1.7 billion in cash. Panasonic Corporation will retain
the remaining 20% interest in Panasonic Healthcare.
On September 25, Stryker Corporation agreed to
acquire the shares of Mako Surgical Corporation for $30
per share at $1.65 billion. Mako develops systems for
robotic-assisted surgery in orthopedic procedures.
Market wrap-up
Fundamentals for deal making remain strong among PLS
companies, and transactions announced in prior quarters
suggest a heightened level of activity in the fourth quarter
and early 2014. Healthy balance sheets, access to financing,
and strong equity markets will allow PLS participants to
continue to seek opportunities to grow through acquisition.

We define M&A activity as mergers and acquisitions in


which targets are US-based companies acquired by either
US or foreign buyers or foreign targets acquired by US
pharmaceutical and life science companies. We define
divestitures as the sale of a portion of a company (not a
whole entity) by a US-based seller.
We have based our findings on data provided by industryrecognized sources. Specifically, values and volumes used
throughout this report are based on completion-date data
for transactions with a disclosed deal value greater than $15
million, as provided by Thomson Reuters as of September
30, 2013, and supplemented by additional independent
research. Information related to previous periods is updated
periodically based on new data collected by Thomson
Reuters for deals closed during previous periods but not
reflected in previous data sets.
Deal information was sourced from Thomson Reuters and
includes deals for which buyers or targets fall into one of the
following industry sectors: biotechnology, medical devices,
medical diagnostics, pharmaceuticals, or services (i.e.,
contract research organizations). Certain adjustments have
been made to the information to exclude transactions that
are not specific to the PLS industry. Capital market and
equity return information is sourced from S&P Capital IQ.

PLS Deals Insights Quarterly 7

Country spotlight
Russia: poised for continued economic change
but challenges remain
Russia, boasting the worlds largest land mass at 6.5 million
square miles and a population of 143 million, has begun to
shift from an internal focus on its own natural resources and
reliance on old institutions and practices to an effort to
more effectively integrate into global trade and investment
transactions and develop its market economy.
Rebounding from the global economic crisis, analysts
increasingly see Russia as an emerging market moving in
the direction of greater globalization. Russia joined the
World Trade Organization in 2011 after a nearly two-decade
effort to do so. While such changes portend an economy
becoming more welcoming to business, in 2013, the World
Bank ranked Russia as 112 out of 185 economies for ease
of doing business.
To be sure, entering the Russian market can be challenging
for outsiders. But several factors make the region attractive
to investors:
With Europe to the west and Asia to the east, Russia
serves as a ground transportation link among its 14
bordering neighbors.
Three-quarters of Russias people live in cities, towns,
and urban centers.
More than 99% of Russias population is literate, and
women are well represented in the workforce.
The education system, which replicates major
components of the old Soviet system, is capable of
creating world-class specialists in exact sciences such as
mathematics, physics, chemistry, biology, engineering,
and the like.
Several universities have introduced high-powered
socioeconomic science programs, which may drive a
talent pipeline for fields such as economics,
management, law, politics, and sociology.
Russia is poised to spur and support innovation, which may
be crucial to boosting entrepreneurship, venture capital,
and the countrys future viability as a more developed,
robust market.

As the countrys governmental authorities,


business leaders, workers, and consumers work
together to further enhance the maturity level of
Russias institutions, infrastructure, and safeguards
in line with ever-escalating global standards and
expectations, investors should equip themselves to
both understand the new market opportunities that
may arise and counter the ill effects associated with
this nascent giants evolution. They should seek to
unravel Russias changing economic landscape,
better understand the dimensions and attributes of
the markets risks, and plan accordingly. Inevitably,
this means remaining committed to robust due
diligence and anti-corruption programs.
PwC, Marketmap: The Russian evolution: How can
foreign businesses prepare to prosper? 2013 Issue 3,
Ambitious goals for pharmaceuticals
Russias aging population and increasing GDP, among other
macroeconomic factors, are driving a dramatic change in
the countrys pharmaceutical and life sciences market.
Regulatory changes and government promotion of the
industry are part of the countrys broader efforts to promote
better health for its people.
As part of that initiative, the government has established
aggressive goals for the pharmaceutical industry, promoting
local, high-quality production of medicines, along with
major research and development programs.
As a result of these efforts, the government aims for 50% of
the medicines used in Russia to be produced within the
country by 2020. Simultaneously, pharmaceutical exports
are expected to increase eight-fold.
To meet those goals, new regulations have been enacted to
drive production capability, including a federal law, On the
Circulation of Pharmaceuticals, which went into effect in
September 2010. This law aims to:
Ease administrative barriers to bringing medicines to
the domestic pharmaceutical market.
Support the Russian pharmaceutical industry and
introduce innovations in the production of
pharmaceuticals.
Integrate Russian legal regulations with international
principles and standards adopted with respect to the
circulation of pharmaceuticals.

PwC

Administrative bureaucracya regulatory


environment lacking in legal safeguards and prone to
high levels of bureaucracy and corruption, according
to PwCs Doing business and investing in the Russian
federation (2010); a relatively new tax system; and a
judiciary that is not independent.

Figure 10. Foreign direct investment in Russia ($B)


and GDP growth (%) (2003-2012)
$80M

9.0%
7.2%
5.4%
3.6%

$48M

1.8%
0.0%

$32M

-1.8%

GDP Growth (%)

Foreign Direct Investment ($B)

$64M

-3.6%
$16M

-5.4%
-7.2%

$0M

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-9.0%

Foreign Direct Investment ($B)


GDP Growth (%)
Source: The World Bank

Russia has also begun to implement stronger regulatory and


compliance measures, including limiting medical
representatives access to physicians.
Growth opportunities and risks
Russias growth is projected to slow to 1.8% in 2013, down
from 3.4% the previous year, but it is expected to increase to
3.1% in 2014, according to the World Bank.1 In 2010,
Russias annual flow of Foreign Direct Investment (FDI)
began a period of rapid acceleration, although cumulative
FDI in Russia remains comparatively low. Indeed FDI
inflows to Russia have increased dramatically in the last
decade, from nearly $8 billion in 2003 to more than
$51billion in 2012.2
Business leaders around the world have begun to pay
attention, ranking Russia among the top ten countries
for growth prospects with one-third of those surveyed
planning to invest in Russia, according to PwCs 15th Annual
Global CEO Survey.
While the opportunities for investment in Russia are
attractive, many investors are also aware of the markets
most persistent challenges, including:
1 http://www.worldbank.org/en/news/feature/2013/10/01/russia-economicupdate

Property rights riskroutine copyright infringement,


with computer software and electronic media the most
popular targets, and sophisticated, ongoing efforts at
intellectual property theft.
Supply chains strained by geographies and
infrastructurea complex and fragmented supply
chain, compounded by the countrys sheer size and
geographical diversity. Further, energy grids,
telecommunications, and other infrastructure dont
always meet increasing market requirements.
Development that varies by region, economic
segment, and institutiona reality requiring
investors to understand how location and local
traditions and culture can affect business practices and
protocols.
Corruption riskWhile Russias new corporate
leaders are beginning to address compliance functions,
which historically have been less than robust, investors
nevertheless should remain wary of corrupt influences.
Further, Russias business practices rely heavily on
intermediaries, including agents and joint venture
partners, which can complicate due diligence processes
and increase opportunities for corruption.
Conclusion
Russias large and complex market offers attractive growth
and investment opportunities for global and domestic
pharmaceutical and healthcare companies. In order to take
advantage of those opportunities, however, companies must
address regulatory challenges and other longstanding
obstacles stemming from traditionalism and corruption.
Interactions with wholesalers, government, pharmacists,
and doctors can be challenging to navigate. But the upside
long-term, substantial economic opportunities
appears to be worth the challenges.
For a more in-depth discussion of the economy and market in
Russia, please refer to our publication, Marketmap, The
Russian evolution: How can foreign businesses prepare to
prosper? PwC 2013. http://www.pwc.com/us/en/forensicservices/publications/marketmap-russia.jhtml

2 http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?order=wbapi_
data_value_2012+wbapi_data_value+wbapi_data_value-last&sort=asc
PLS Deals Insights Quarterly 9

Strategy corner
Using non-traditional consideration to close the M&A value gap
Reconciling differences in value between buyer and seller is
the art of the deal in any industry. But it is particularly
challenging in the pharmaceutical and life sciences industry
because of the uncertainty and range of potential outcomes
for products. In order to bridge the value gap, buyers and
sellers have increasingly employed a variety of alternative
deal structures, including seller financing, contingent
consideration, and other transaction forms such as
structured payments, royalty arrangements, and joint
ventures.

Keys to establishing earn-outs


What is the benchmark?
How is the consideration paid?
How is performance measured?
How is the payment calculated?
Over what period of time is the earn-out
applicable?
Who will run the business/operations?

These deal structures provide a variety of benefits to buyers


as well as sellers. Buyers are able to gain access to a market
or product category while mitigating some of the risk
associated with the initial investment and managing cash
flow. Sellers are able to bring in new capital or realize some
liquidity while oftentimes remaining involved in the
business and retaining a portion of the upside of the
transaction.
Regardless of the specifics of the arrangement, transaction
structuring requires careful consideration of several factors
to facilitate alignment of objectives and preservation of
value, while also avoiding unforeseen consequences.

10

A poorly crafted earn-out or deal structure, for example,


may cause management to boost short-term performance at
the expense of long-term results, or it may not adequately
address the specific risk from which the difference in value
arises.
Case study: Contingent consideration
Contingent consideration remains a common tool for deal
makers seeking to bridge value gaps. Contingent
consideration provides for future payments between the
buyer and the seller, based on the target company achieving
measurable performance milestones. These measurable
performance milestones can be financial, such as revenue or
EBITDA targets, or non-financial, such as regulatory
approval. In recent years, contingent value rights, or CVRs,
have also gained popularity, particularly among PLS firms.
CVRs often trade as listed securities that provide selling
shareholders with both the ability to participate in the
future upside of a company and near-term liquidity.
The graph on the next page presents data from S&P Capital
IQ for acquisitions by PLS companies for the years 2008
through 2012, and for 2013 through September 30.1 This
data suggests a significant increase in the frequency and
value of contingent consideration offered in transactions.
The value of contingent consideration offered across all
deals represented 3% of total consideration in 2008 and
increased to 10% in 2012. Several significant transactions
caused this percentage to rise further, to 17%, in 2013.
Similarly, from 2008 through September 30, 2013, the
number of deals in which contingent consideration was
offered increased from 27% to 35%, peaking in 2012 at
38%. Among deals in which contingent consideration was
exchanged, the portion represented by contingent
consideration increased from 36% in 2008 to 52% through
2012 and in the nine months ended September 30, 2013.
1 Source: S&P Capital IQ. Includes transactions in the following subindustry classifications: healthcare technology, healthcare equipment and
supplies, biotechnology, life sciences tools and services, and
pharmaceuticals.

PwC

Figure 11: Percentage of deals with contingent consideration and


contingent consideration as a percentage of deal value
(January 1, 2008 through September 30, 2013)

Alternative deal structures


Seller financing and step, or phased, acquisitions are two
additional structuring mechanisms frequently employed in
the PLS industry.

60%

Seller financing is another means for the seller to retain


an economic stake in the divested business. It can come
in the form of plain-vanilla debt or more complex
instruments, such as convertible preferred stock. The
form and the amount of seller financing depends on,
among other factors, the nature of the transaction and
the amount of risk and/or potential upside the seller
wishes to retain.

50%
40%
30%
20%
10%
0%
2008

2009

2010

2011

2012

2013

% of deals with contingent consideration


Deals with CCCC as a % of deal value
All dealsCC as a % of total deal value
Source: S&P Captial IQ

In focus: pharmaceutical and life sciences industry


The increased reliance on contingent consideration
corresponds with a period of relatively high risk and
uncertainty due to the economic crisis that began in 2008,
as well as the uncertainty within the PLS industry
specifically as a result of the Patient Protection and
Affordable Care Act.
Transactions involving contingent consideration also require
careful consideration of the accounting and tax issues. For
example, contingent consideration related to the
employment of a seller may be accounted for as
compensation, rather than purchase price. Otherwise,
contingent consideration exchanged in a business
combination is recorded at fair value as of the acquisition
date, which may require relatively complex valuation
techniques and models and may be classified as a liability or
equity. Further, liability-classified contingent consideration
is required to be re-measured at fair value in subsequent
periods. Tax considerations may also play a role in deal
structuring, particularly in the case of a closed transaction,
when a tax liability is recognized by the seller at a different
time than when the contingency is settled.

Step acquisitions provide an alternative approach to


seller financing. For example, the acquirer may purchase 80% of a target common stock and concurrently
receive a call option from, and writes a put option to,
the selling shareholders for the remaining 20%. These
transaction structures provide an incentive for the
former owners to contribute to the success of the
business post-transaction while providing flexibility to
match the objectives of the buyer and seller. However,
these structures also bring considerable tax and
accounting complexities and may have significant
financial statement impacts.
Conclusion
Due to the uncertainty and risks inherent in transactions in
the PLS industry, buyers and sellers will likely continue to
rely upon various forms of non-traditional consideration to
bridge gaps in value. Deal makers who carefully evaluate
potential deal structures and align the incentives of buyers
and sellers will be more likely to achieve deal success.

Critical success factors in deal structuring


Measurement of impact on deal value
Measurement of contingent variables posttransaction
Impact on post-deal integration
Financial reporting and tax consequences

PLS Deals Insights Quarterly 11

About PwCs Deals Practice

Our deals professionals help clients understand the risks in


transactions, so they can be confident they are making
informed strategic decisions. From their deal negotiations to
capturing synergies during integration, we help clients gain
value and, ultimately, deliver this value to stakeholders. For
companies in distressed situations, we advise on crisis
avoidance, financial and operational restructuring, and
bankruptcy.
PwCs Deals practice can advise pharmaceutical and life
science companies and PLS-focused private equity firms on
M&A decisions, from identifying acquisition or divestiture
candidates and performing detailed buy-side diligence,
through developing strategies for capturing post-deal profits,
to exiting a deal through a sale, carve-out, or IPO. With more
than 9,800 deals professionals in 75 countries, we can
deploy seasoned deals teams that combine deep
pharmaceutical and life sciences industry skills with local
market knowledge virtually anywhere and everywhere your
company operates or executes transactions.

Although every deal is unique, most will benefit from the


broad experience we bring to delivering strategic M&A
advice, due diligence, transaction structuring, M&A tax,
merger integration, valuation, and post-deal services. In
short, we offer integrated solutions tailored to your
particular deal situation and designed to help you complete
and extract peak value within your risk profile, whether your
focus is deploying capital through an acquisition or joint
venture, raising capital through an IPO or private placement,
or harvesting an investment through the divestiture process.
For more information about M&A and related services in the
pharmaceutical and life sciences industry, please visit www.
pwc.com/us/pharmadeals, www.pwc.com/us/pharma or
www.pwc.com/us/medtech.
For views on the Health Industries Sector, refer to the US
Health Services Deals Insights reports on the Deals section of
our website.

PLS Deals Insights Quarterly 12

Acknowledgments

Authors
Dimitri Drone
Partner, Deals
Deals Services Pharmaceutical
& Life Sciences Leader
973 236 4977
dimitri.b.drone@us.pwc.com
James Woods
Director, Deals
617 530 4133
james.woods@us.pwc.com
Strategy cornerUsing non-traditional
consideration to close the M&A value gap
Matthew Sabatini
Partner, Capital Markets and
Accounting Advisory Services
646 471 7450
matthew.e.sabatini@us.pwc.com
Country spotlightRussia: poised for continued
economic change but challenges remain
Harry G. Broadman
Leader, Emerging Markets Strategy Consulting,
and Chief Economist
202 312 0807
harry.g.broadman@us.pwc.com

For a deeper discussion on pharmaceutical and


life sciences deal considerations, please contact
one of our practice leaders or your local Deals partner:
Martyn Curragh
Principal, US Practice Leader, Deals
646 471 2622
martyn.curragh@us.pwc.com
Northeast
Tom Pickette
Partner, Deals
617 530 6343
thomas.r.pickette@us.pwc.com
New York Metro
Glenn Hunzinger
Partner, Deals
646 471 8764
glenn.hunzinger@us.pwc.com
Colin Wittmer
Partner, Deals
646 471 3542
colin.e.wittmer@us.pwc.com
Central
Manoj Mahenthiran
Partner, Deals
312 298 3162
manoj.c.mahenthiran@us.pwc.com
Pam Yanakopulos
Partner, Deals
312 298 3798
pamela.yanakopulos@us.pwc.com
West
Mattias Gunnarsson
Partner, Deals
213 356 6978
mattias.x.gunnarsson@us.pwc.com

PLS Deals Insights Quarterly 13

www.pwc.com/us/pharmadeals
2013 PwC. All rights reserved. PwC and PwC US refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers
International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation
with professional advisors. ST-14-0014