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Pharmaceutical and

Life Sciences Deals


Insights Quarterly
Q2 2013
August 2013
A publication from PwCs
Deals business

At a glance
The second quarter of 2013
showed a decline in deal
volume and value in the
pharmaceutical and life
sciences sector. This took
place after an uptick in
deal activity in the first
quarter of 2013 driven by
several large transactions.
A significant number of
announced transactions
in the second quarter and
strong fundamentals suggest
heightened activity in the
second half of the year.
We turn our focus to the
deal market in Brazil, which
is projected to become the
worlds fifth-largest economy
within the next decade.
We also spotlight the impact
of the Foreign Corrupt
Practices Act on deal-makers
in the Pharmaceutical and
Life Sciences industry and
leading practices related to
corruption due diligence.

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 in the previous quarter. This issue
covers Q2 2013.
2. C
 ountry spotlight: An update on deals in selected geographies. This issue focuses on
Brazil which, while poised to become the worlds fifth-largest economy within the next
decade, presents risks and challenges for deal-makers.
3. S
 trategy corner: A feature offering tips and insight on different aspects of deal-making.
This issue focuses on the Foreign Corrupt Practices Act, the risks to acquirers arising from
successor liability, and leading practices deal makers are using to identify and
mitigaterisk.
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

PLS Deals Insights Quarterly 1

Market update
Deal volume and value declined in the second quarter while
fundamentals indicate potential for heightened activity during the
remainder of 2013
Total deal volume fell approximately 40% during the
second quarter of 2013 relative to the first quarter of 2013
and the second quarter of 2012. While deal value fell by
32% year over year, deal value increased 66% from the
prior quarter. These trends signal an increase in average
deal value and heightened competition for relatively scarce
assets in the industry. Unless otherwise noted, figures used
for comparative purposes exclude mega deals with values
in excess of $20 billion.

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


(2013 Q2)

12

Pharmaceuticals

Biotechnology

11

Medical devices

Diagnostics

Services 0
0

10

Despite a generally downward trend over the last several


quarters, current trends suggest the PLS industry is
positioned for increased deal activity during the remainder
of 2013. Companies are continuing to seek avenues for
long-term growth through geographic expansion and
product innovation. These factors, combined with the level
of available assets and strong fundamentals for deal
activity, may drive increased competition and an uptick in
dealvalues.

Deal value ($B)


Source: Thomson Reuters

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


(2013 Q1)

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


(2012 Q2)

Pharmaceuticals

Pharmaceuticals

15

Biotechnology

Biotechnology

Medical devices

16

Diagnostics

Services 0
0

Medical devices

10

Diagnostics

10

Services
1

69

70

71

Deal value ($B)


Source: Thomson Reuters

10

15

20

25

30

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 second quarter of


2013 decreased 37% compared with the first quarter of
2013, and 41% relative to the second quarter of 2012.
The value of PLS deals closed during the second quarter of
2013 increased 66% relative to the previous quarter while
still decreasing 32% relative to the second quarter of 2012.
This data may indicate that relatively scarce assets are
constraining overall deal volumes while also driving
competition among buyers and higher average deal values.
Excluded from these figures are the initial public offerings
(IPOs) of AbbVie by Abbott Laboratories and Zoetis by Pfizer
in the first quarter of 2013, as well as Johnson & Johnsons
acquisition of Synthes in the second quarter of 2012.
Deal value in the pharmaceutical segment increased
approximately 164% and 90% relative to levels for the first
quarter of 2013 and the second quarter of 2012. The
average deal value increased from approximately $240
million in the first quarter of 2013 and $430 million in the
second quarter of 2012 to $680 million in the second
quarter of 2013. This trend signals a continued increase in
mid-size deals, which are prevalent in the pharmaceutical
sector, as companies seek to enhance product offerings or
innovation through tuck-in acquisitions.
The biotechnology, medical device, and diagnostics sectors
each exhibited sharp declines in deal activity in the second
quarter, while no transactions closed in the services sector
for the second consecutive quarter.

Figure 4: Total deal value (2012 Q22013 Q2)


12

2013 Q2
2013 Q1

76
18

2012 Q4

22

2012 Q3

37

2012 Q2
0

10

20

30

40

70

80

Deal value ($B)


Source: Thomson Reuters

Figure 5: Total deal volume (2012 Q22013 Q2)


22

2013 Q2
2013 Q1

35
42

2012 Q4
27

2012 Q3

37

2012 Q2
0

10

20

30

40

50

Number of deals
Source: Thomson Reuters

PLS Deals Insights Quarterly 3

While largely consistent with the prior quarter, deal


value in the biotechnology sector declined 71% from
the second quarter of 2012. Furthermore, deal volume
decreased sharply with only a single transaction closing
in the first quarter of 2013.

Figure 6: Total deal value by industry segment (2012 Q22013 Q2)


1
8

2013 Q2

71

12
1 1

72

2013 Q1
12

2012 Q4
2012 Q3

2012 Q2

Excluding mega deals, deal value in the medical device


sector decreased by approximately 64% from the second
quarter of 2012 and remained nearly flat from the first
quarter of 2013. However, deal volume in the medical
device sector softened both relative to the prior period
and year-over-year with seven closed transactions in the
second quarter relative to 10 in the first quarter of 2013
and 16 in the second quarter of 2012.

2 4
11

26

10

20

30

40

70

80

Deal value ($B)


Pharmaceuticals
Biotechnology

Medical devices
Diagnostics

Services

Source: Thomson Reuters

Figure 7: Total deal volume by industry segment (2012 Q22013 Q2)


12

2013 Q2

15

2013 Q1

17

2012 Q4
7

2012 Q3

10
5

10

2012 Q2

9
5

10

Looking forward, transaction activity in each of these


sectors is expected to increase as acquirers continue to tap
financing alternatives, despite a pullback in the debt
markets from recently high levels. As noted later in this
report, several large transactions were announced in the
second quarter across sectors. These transactions, which are
expected to close later in 2013 or 2014, indicate that
acquirers remain active and that deal activity will likely
return to historic levels in the coming quarters.

4
17

21

3 1
16

20

The deal market for diagnostics companies remained


relatively soft in the quarter with two closed transactions
in the sector representing $350 million in total value as
compared to four transactions in the first quarter of 2013
with an aggregate value of nearly $900million.

4
30

2
40

50

Number of deals
Pharmaceuticals
Biotechnology

Medical devices
Diagnostics

Services

Source: Thomson Reuters

PwC

Trends and insights

Current trends suggest the PLS industry is poised for


increased deal activity throughout the remainder of 2013
due to readily available financing, strong corporate
balance sheets and cash levels, and strong equity markets.
However, relatively scarce assets may limit overall deal
volumes, driving competition among buyers. This is
consistent with trends in deal volumes and average deal
values observed in the first and second quarter of 2013.
While several large PLS divestiture transactions were
recently completed, we expect industry participants will
continue to evaluate and rebalance their portfolios. These
activities will continue to drive interest and M&A activity
among both strategic and financial acquirers.
While financial buyers continue to compete in acquisition
processes, corporate buyers have proven victorious in
several recent auction processes. This trend may be due,
in part, to the expectation of synergies achieved by
integrating the new asset with an existing business.
However, financial investors have also increasingly sought
to access the capital and M&A markets as evidenced both
by the uptick in IPOs discussed below and by several sales
transactions announced in recent quarters involving
financial sponsors. We expect these trends to continue
with a fundamentally sound market for M&A activity.
According to IPO Watch, a quarterly survey of IPOs listed
on US stock exchanges by PwC, IPO activity surged in the
second quarter of 2013, as the volume of new public
listings far exceeded the previous quarter and the second
quarter of 2012.1 There were a total of 62 IPOs in the
second quarter of 2013, representing an increase of 82%
compared to 34 listings in the first quarter of 2013, and
there was an increase of 88% compared to 33 listings in
the second quarter of 2012. Of the 62 identified in IPO
Watch, 17 were healthcare-related companies, which
generated proceeds in excess of $2.0 billion. The volume
of activity during the second quarter may have been a
result of an increased focus by investors on high-growth
companies and those that can benefit from a potential
economic recovery.

PLS stocks continued to outperform the overall market in


the second quarter of 2013, although gains were more
modest than in prior quarters. The S&P healthcare sector
index rose by approximately 4.4%, compared with a 3.0%
increase for the S&P 500. Among industry segment
indices, biotech increased 4.9% during the first quarter,
compared with 1.2% for healthcare equipment and
supplies and 1.6% for the pharmaceutical segment. On a
year-to-date basis, the S&P healthcare sector index has
increased by 22.0% relative to 14.3% for the S&P 500.

Figure 8: Equity Index Returns


90%
70%
50%
30%
10%
-10%

Dec 2011 Mar 2012 Jun 2012 Sep 2012 Dec 2012 Mar 2013 Jun 2013
S&P 500Healthcare Sector Index (^HCX)
S&P 500Biotechnology Index
S&P 500Health Care Equipment & Supplies Index
S&P 500Pharmaceuticals Index
S&P 500 Index (^SPX)

Source: S&P CapitalQ

1 http://www.pwc.com/us/en/press-releases/2013/q2-2013-ipo-watchpress-release.jhtml

PLS Deals Insights Quarterly 5

Key closed transactions


On April 2, Biogen Idec completed its acquisition of
50% of the rights to TYSABRI from Elan Corporation for
approximately $3.3 billion in cash consideration plus
potential contingent payments. TYSABRI is used for the
treatment of patients with multiple sclerosis.

On April 26, Auxlium Pharmaceuticals announced it


completed the acquisition of Actient Pharmaceuticals, a
private urology specialty therapeutics company, from
GTCR LLC for $585 million in cash and up to $50
million in contingent payments.

On April 12, Angiotech Pharmaceuticals announced it


had agreed to sell its interventional products business
to Argon Medical Devices, Inc., a portfolio company of
RoundTable Healthcare Partners.

On June 5, Bayer announced it had acquired 100% of


the shares of Conceptus, Inc., a developer of nonsurgical, permanent birth control methods, for $31 per
share, or total consideration of approximately
$1.1billion.

On April 17, Shire completed its acquisition of SARcode


Bioscience for up to $625 million. Consideration in the
transaction included an up-front cash payment of $150
million and potential contingent payments of up to
$525 million. SARcode had developed LIFITEGRAST, a
phase 3 compound currently under development for the
signs and symptoms of dry eye disease.
On April 25, Valeant Pharmaceuticals completed its
acquisition of Obagi Medical Products, a manufacturer
of topical aesthetic and therapeutic skin-health systems,
for approximately $437 million.

On June 27, AstraZeneca completed its acquisition of


Pearl Therapeutics, a privately held company focused
on the development of inhaled small-molecule
therapeutics for respiratory disease, for $560 million in
cash and up to $590 million in potential
contingentpayments.
On June 28, Covidien completed the separation of
Mallinckrodt, its pharmaceuticals business, into a new
publicly traded, independent company. Mallinckrodt
manufactures, markets, and distributes specialty
pharmaceutical products and medical imaging agents
including branded and generic drugs, contrast media,
and nuclear imaging agents.

Figure 9: Total deal value and deal volume by deal size and quarter
2012 Q2

2013 Q1

2013 Q2

Number of deals

Deal value ($ MN) Number of deals

Deal value ($ MN)

Number of deals Deal value ($ MN)

$15M to $50M

160

125

111

$50M to $100M

271

645

222

$100M to $250M

1,452

1,347

884

$250M to $500M

2,173

3,202

1,092

$500M to $1,000M

3,525

1,721

1,260

> $1,000M

29,723

68,513

8,135

Total

37

37,305

35

75,553

22

11,704

Source: Thomson Reuters

PwC

Key announced transactions

Market wrap-up

On April 15, Thermo Fisher Scientific announced it had


agreed to acquire Life Technologies for approximately
$15.5 billion in cash and assumed debt. Life
Technologies is a global life sciences company which
provides a range products and services, including
systems, instruments, reagents and software for
research and commercial applications.

Deal value fell significantly in the second quarter of 2013


after several large transactions in the first quarter of 2013.
However, industry and deal fundamentals point to the
potential for heightened activity in the balance of the year.
Buoyed by access to financing, strong cash balances, and
strong equity markets, PLS participants will continue to
explore opportunities to grow through acquisition and
rebalance their portfolios through divestitures.

On May 10, Actavis announced it had agreed to acquire


the entire share capital of Warner Chilcott, a
manufacturer and wholesaler of pharmaceutical drugs,
for $5 billion in shares of Actavis stock. In October
2012, Watson Pharmaceuticals acquired Actavis for
approximately $6 billion. Post-acquisition, the company
is operating as Actavis, Inc.
On May 27, Valeant Pharmaceuticals announced it had
reached an agreement to acquire Bausch & Lomb, a
manufacturer of ophthalmic goods and products,
pharmaceutical preparations, optical instrument and
lenses, and electric toothbrushes, from Warburg Pincus
for approximately $8.7 billion, inclusive of debt
assumed, and other cash adjustments.
On June 17, Johnson & Johnson announced it had
agreed to acquire Aragon Pharmaceuticals, a Californiabased manufacturer of pharmaceuticals to treat
hormonally driven cancer, for $1 billion comprised of
$650 million in cash and up to $350 million of
contingent payments.
On June 30, Onyx Pharmaceuticals, a developer of
oncology therapies, confirmed it had received and
rejected an unsolicited proposal from Amgen Inc. to
acquire all of Onyxs outstanding shares for $120 per
share or a total value of $9.3 billion. Onyx further
indicated it would be contacting other potential
acquirers who may have an interest in the company.
Other previously announced transactions that had not
closed as of the end of the second quarter included:

About the data


We define M&A activity as mergers and acquisitions in
which the 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 June 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 Capital IQ.

In December 2012, Baxter announced its planned


acquisition of Lund, Sweden-based Gambro AB for $4
billion. Gambro manufactures products for use in
dialysis therapy.
On February 27, Mylan announced its agreement to
acquire Agila Specialties Private Limited, a developer of
generic injectable products, from Strides Arcolab
Limited. Consideration offered in the transaction
consisted of $1.6 billion in cash plus potential
contingent payments.

PLS Deals Insights Quarterly 7

Country spotlight
Brazil: High growth potential but challenges to deal-making
Projected to be the worlds fifth-largest economy within
the next decade, Brazil offers high growth potential for
companies that successfully penetrate the market. But
deal-making in this resource-rich country presents
significantchallenges.
Several factors set Brazil apart as an area for investment
and a source of growth. These include:

A focus on deals:
During the first quarter of 2013, Brazil showed a dramatic
drop in the number and value of healthcare deals
announced and closed (Table 1). Primary acquirers were
from Latin America or the Caribbean.2
Table 1. Brazil Healthcare Transactions
6,000

Significant increase in local capital, evident in the debt


markets and rising number of initial public offerings
Stronger corporate governance, including a mandate to
comply with the International Financial Reporting
Standards
No major cultural differences affecting businesses for
US and European investors
Immense natural resources in energy, minerals, and
rawmaterials
Opportunities created by a process of development and
social evolution, which has enabled 40 million
Brazilians to enter the middle class, strongly boosting
the consumer market

6
5,000
5
1,500

4
3

1,000

2
500
1
0

2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1

Rising focus on healthcare


Concentrated in Southeast Brazil, especially in Sao Paulo,
the middle class has grown rapidly during recent decades.
According to a 2012 World Bank report, the middle class in
Brazil has increased from 15% of the population in the
1980s to nearly a third today.1 Consistent with other
emerging markets, the rise of the middle class is expected to
raise demand for higher-quality, accessible healthcare. To
address that need, Brazil must invest heavily in its
healthcare system.
Although Brazil offers free and universal public healthcare,
private-sector healthcare spending outpaces that of the
government. Income growth, expansion of the labor market,
and a perception that the quality of private-sector services
exceeds that of the public system have boosted private
healthcare spending.
These trends also have created tremendous opportunities
for multinational pharmaceutical and life science
companies.

1
The World Bank, In Brazil, an emergent middle class takes off,
November 13, 2012, http://www.worldbank.org/en/news/
feature/2012/11/13/middle-class-in-Brazil-Latin-America-report.

Total deal value in ($M)


Number of deals

In Q4 2012, a spike in deal value primarily stemmed from


two transactions involving investments in Amil
Participacoes SA in the amounts of $1.4 billion and
$3.9billion.3
Despite the recent decline in deal value and volume,
investors expect merger and acquisition (M&A) activity to
rebound. A number of pending transactions in Brazil could
improve deal statistics. Furthermore, the fragmented nature
of the healthcare industry, the regulatory environment, and
the discrepancies often found among competitors in terms
of facilities, technology, and management are driving
consolidation within the industry. Financial investors, who
are active in more than 40% of the transactions in Brazil,
also are expected to play a significant role in
continued deal-making.

2 S&P Capital IQ.


3 Ibid.

PwC

Despite these opportunities, investors often face challenges


that could lead to broken deals. These challenges include:4

Practicalities of the market

Complex tax and labor regulations, which may lead to


exposures disproportionate to the purchase price.

Brazil requires a legal license to sell domestic or imported


products. While it is rare to lose such a license in the process
of a transaction, the acquiring company faces significant
risks, including the loss of market share, if the process of
transitioning the license is not managed appropriately.
Additionally, acquirers face compliance risks associated
with the targets preacquisition procedures.

Compliance risks associated with corruption and


anti-bribery laws, including the Foreign Corrupt
Practices Act and the UK Bribery Act.
Post-deal integration challenges, including corporate
governance, internal controls, integration of
information technology platforms, and human resource
matters. Organizing the target optimally in a timely
manner after acquisition can be complicated by
bureaucracy and the regulation of certain businesses
and industries. High employee-termination costs can
alsooccur.
A focus on tax5
Because the tax system in Brazil is complex, investors should
proceed with caution. Regardless of the transaction
structure, investors are often unable to limit successor
liability. While the statute of limitations for most taxes is five
years, in the instance of fraud, the statute of limitations
does not apply. Furthermore, federal, state and municipal
authorities may re-examine positions for previously
reviewed tax periods. As a result, the enforcement process is
often hard to predict and in instances of non-compliance,
penalties and interest charges are often relatively high.
Brazilian state taxes also figure into how a company prices
its products in the local market. Each state may levy
differing sales taxes, and import taxes may also apply. These
taxes could potentially hinder pricing competitiveness with
local producers.
Companies considering partnering with a local entity and
importing its own products may also face relatively
highlevies.

Licenses

Importance of relationships
Operating in Brazil requires an understanding of local
business practices, but knowing the right people can be even
more important. One challenge of operating in Brazil is the
concentration of the distribution network, which lies in the
hands of a few national and regional groups. Local
distributors handle 65% to 75% of pharmaceutical
distribution, while manufacturers distribute only 25%
to35%.
Customer relationships are also critical, particularly if a
company is interested in introducing new products to the
Brazilian market. If relationships with customers are not
strong, a company may lose market share to regional
competing products. Thus, local management involvement
to achieve continuity in relationships may be critical to the
success of a transaction.
Similar to other emerging markets, relationships with
regulators in Brazil are also essential to future operations.
For both domestic and foreign players, understanding how
to navigate the regulatory and legal process on a timely
basis isimperative.
Generics in the market
During the last five to ten years, the presence of generic
pharmaceutical products has increased in Brazil. Generic
competition has grown in part because of greater
government incentives to attract local production and
research centers. As a result of this heightened competition,
trademark and patent protection are significant components
to protecting market share.

4
PwC, Doing Deals in Brazil, 2011, http://www.pwc.com.br/pt_BR/br/
publicacoes/assets/doing-deals-11-final-a.pdf.
5
PwC, Doing Deals in Brazil.

PLS Deals Insights Quarterly 9

Anti-bribery
Brazil has drafted anti-bribery legislation, which is
awaiting Senate approval. Passing this legislation,
developed in consultation with OECD, the United States,
and other counterparts, may strengthen the economy and
increase foreign investment. When finalized, these
provisions could constitute dramatic changes in the
Brazilian legal system.
Key provisions in the new bill establish penalties such as
tightened sanctions and voluntary disclosures for
corporations, including employees of the company.
Furthermore, the bill will make allegations of bribery of
companies known publicly, creating potential reputational
risk tocorporations.
Foreign investors welcome this change in the Brazilian
market as it may help strengthen future deals.
Conclusion
Despite the risk, successfully executing transactions in
Brazil could yield significant benefits. Because Brazil is the
largest marketplace in Latin America and on track to
become the worlds fifth-largest economy in terms of GDP,
multinationals will likely consider the country in their
emerging market strategy. Brazil also offers political and
economic stability and strong legislation to protect
investors.
While the healthcare sector in Brazil is relatively complex,
it has undergone significant changes that make it a more
promising area for investment.

10

PwC

FCPA brings risk to mergers and acquisitions


Successor liability: Why FCPA due diligence matters
Successor liability applies to all kinds of civil and criminal
liabilities, and FCPA violations are no exception, says the
Resource Guide to the U.S. Foreign Corrupt Practices Act
(Guide), jointly authored by the Securities and Exchange
Commission (SEC) and Department of Justice (DOJ). The
Guide explains, As a general legal matter, when a company
merges with or acquires another company, the successor
company assumes the predecessor companys liabilities.1
FCPA enforcement actions brought by the SEC and DOJ
indicate that failure to identify, report, and remediate any
FCPA issues may result in successor liability. Because
heightened FCPA risk increases the acquirers exposure to
the potential for costly investigation, litigation, and
remediation, FCPA-specific risk may affect the value of the
target. Further, FCPA risk may shape the deal structure,
including indemnity and warranty clauses.

Why conduct FCPA due diligence?

What is the FCPA?


Congress enacted the FCPA in 1977 to prohibit bribery and
corruption of foreign officials and to promote fair business
practices, integrity and accountability, and equitable
distribution of economic resources.

The Statute: The FCPA is violated when


An issuer or any of its officers, directors,
employees, agents, or shareholders, a domestic
concern, or foreign national pays, offers,
promises to pay, or authorizes/approves the
payment of money or anything of value:
-To a foreign official, foreign political party,
candidate for political office, or official of a
public international organization
-In a corrupt effort to obtain, retain, or direct
business to any person or obtain an
improperadvantage

Mitigate the risk of FCPA successor liability and


penalties and fines
Improve target valuation with respect to price
adjustments for potential FCPA risk
Adapt purchase agreement with deal-specific
indemnifications or warranties, as well as the
right to audit and terminate clauses
Anticipate and manage potential litigation and
remediation costs
Address clear regulatory expectations of FCPA
due diligence (e.g., US, UK, and more)
Mitigate reputational risk
Get a jump start on assessing current state of
the compliance program to potentially
accelerateintegration

Specifically, the anti-bribery provisions of the FCPA created


criminal and civil penalties for a promise of anything of
value, including payments to a foreign official that could be
interpreted to influence the official to gain an improper
advantage. The FCPA also requires companies to meet SEC
accounting provisions, which includes books and records
and internal controls.

Provisions of the FCPA


Anti-bribery provision
Makes it a crime for a US person or company to
directly or indirectly pay or promise anything of
value to any foreign official to obtain or retain
any improper advantage.
Internal control provision
Requires companies to maintain a system of
internal controls that provides reasonable
assurance that managements control, authority,
and responsibility are carried out and that
discrepancies are detected and remediated.
Books and records provision

1
SEC & DOJ, A Resource Guide to the U.S. Foreign Corrupt Practices
Act, pg.28.

Requires companies to make and keep books,


records, and accounts that, in reasonable detail,
accurately and fairly reflect an issuers transactions
and dispositions of the issuers assets.

PLS Deals Insights Quarterly 11

In focus: Pharmaceutical and life sciences industry


In late 2009, then Assistant Attorney General Lanny Breuer
announced that the pharmaceutical industry would be an
enforcement focus area for the DOJs criminal division.1 In
2012, the chief of the SEC Enforcement Divisions Foreign
Corrupt Practices Act Unit affirmed continued focus on
thisindustry.2
This focus is apparent given the increasing entanglement
between the pharmaceutical and life sciences industry and
the DOJ and SEC. Between January 1, 2007, and May 30,
2013, 22 enforcement actions (or 12% of the 184 total
enforcement actions in this period) targeted 13
pharmaceutical and life sciences companies and involved
more than $260 million in fines and penalties.3 Much of this
activity occurred in 2012, when life sciences was the top
industry for DOJ and SEC settlements, with 10 enforcement
actions (or 43% of the 23 total enforcement actions in 2012)
settled against five companies with fines and penalties of
more than $142 million (or 49% of the total $291.7 million
in fines in 2012).4
The following chart quantifies the number of enforcement
proceedings in the pharmaceutical and life sciences industry
compared to the total enforcement actions filed from
January 1, 2007May 30, 2013:

Figure 1. Percentage of enforcement actions in the pharmaceuticals and life sciences industry

4%

4%

17%

6%

12%

43%

13%

2007

2008

2009

2010

2011

2012

2013

Count of enforcement actions in the pharma and life sciences industry


Total enforcement actions

1
Lanny Breuer, Assistant Attorney General, DOJ, Prepared Keynote
Address to the Tenth Annual Pharmaceutical Regulatory and Compliance
Congress and Best Practices Forum, November 12, 2009.
2
SEC Press Release, SEC Charges Medical Device Company Biomet
with Foreign Bribery, March 26, 2012.
3
PwC Analysis based on publicly available information.
4
PwC Analysis based on publicly available information.

12

PwC

The following chart quantifies the FCPA settlements in the


pharmaceutical and life sciences industry filed from January
1, 2007May 30, 2013:
Figure 2. FCPA enforcement actions settlement amounts, 20072013

2,000

1953

1,750

1,500

750
645
477
291

421

250
149
0

2007

18

23

2008

2009

2010

70
2011

142

2012

2013

Settlements in the pharmaceutical and life sciences industry ($M)


Total settlements ($M)

Momentum continues into 2013, with one healthcare


company settling with the SEC for disgorgement and
interest of more than $4.5 million, as of May 30, 2013.
Furthermore, according to SEC filings and/or media
reports, at least 14 companies in the pharmaceutical and life
sciences industry have ongoing FCPA investigations.1
This spotlight enforcement on the industry may be due to
the high-risk nature of business in pharmaceuticals and life
sciences. Specifically, the FCPA definition of foreign official
is broad and includes government-related doctors or those
affiliated with public hospitals, medical institutions and
providers, and clinical trials. Also, under the FCPA,
companies are liable for third-party agent actions, and
pharmaceutical and medical device companies rely heavily
on indirect channels such as distributors and agents.
Furthermore, medical conferences and sponsorships,
which are common and highly attended by representatives
of public and state-owned hospitals, extend exposure to
potential meals, travel, and entertainment expenses
provided as anything of value to obtain advantage.
1
13

Inadequate pre-acquisition due diligence and/or deficient


post-acquisition integration has been cited in 12% of FCPA
enforcement actions during the last five years. In one such
case, the government alleged that the target company had
engaged in a bribery scheme that continued post-deal. The
case settled for tens of millions of dollars at the cost of
theacquirer.2
Exposure to successor liability under the FCPA increases
with the speed and number of deals. Recently, an SEC
settlement specifically cited the speed of acquisitions as a
contributing factor to FCPA compliance problems.3 A rapid
succession of many deals may cause deal fatigue,
decreasing a companys ability to perform proper due
diligence, integrate effective anti-corruption elements, or
remediate potential FCPA issues in a timely manner
because of resource constraints.

1746

500

M&A expansion & FCPA liability

Operations in specific, high-risk regions require additional


focus, which may not be as thorough if the acquirer faces
fatigue. While FCPA risk in M&A may concentrate in the
mid-range-corruption-perception countries of Central and
South America, Asia, and Africa, it also arises in lowcorruption-perception countries, specifically in Europe.
Reducing the risks: Elements of FCPA due diligence
A company that does not perform adequate FCPA due
diligence prior to a merger or acquisition may face both
legal and business risks, according to the Guide.4
Appropriate due diligence is the first line of defense against
the legal risk of FCPA successor liability. An August 2011
letter authored by Assistant Attorney General for Legislative
Affairs Ronald H. Weich describes scenarios under which
the DOJ may decline to prosecute under the FCPA. These
scenarios include: parent company conducted extensive
pre-acquisition due diligence of potentially liable
subsidiaries, and engaged in significant remediation efforts
after acquiring the relevant subsidiaries.5

2
PwC Analysis based on publicly available information.
3
SEC, Administrative Proceeding Release No.34-64978.
4
SEC & DOJ, A Resource Guide to the U.S. Foreign Corrupt Practices
Act, pg.62.
5
DOJ, Ronald H. Weich. Letter to Congresswoman Adams, August
3,2011.

PwC Analysis based on publicly available information.


PwC

Due diligence seeks to identify anti-corruption risks that


span business, operations, geographic location, and cultural
influence. Due diligence is not a one-size-fits-all exercise and
must be tailored for each deal. A questionnaire may be
sufficient in some cases, while a more in-depth review may
be necessary in others. Regardless of the depth of diligence,
its breadth should address management, compliance
program, controls, and books andrecords.

FCPA compliance challenges in


pharmaceuticals and life sciences
Relationships
Healthcare professionals
Foreign officials

Assessment of management should include qualifications,


reputation, and professional history of top management
personnel. The tone at the top established bymanagement
should also be examined.

State-owned entities

Areas of focus for compliance program due diligence may


mirror the US Sentencing Guidelines Elements of an
Effective Compliance and Ethics Program and the DOJ
Opinion Procedure Release 04-02, which touch on the
following topics: compliance policies and procedures,
management oversight, employee and third-party due
diligence, communication and training, monitoring and
auditing, and incentives and disciplinary mechanisms.

Distributors and resellers

Due diligence may also include an internal controls and


books and records assessment via transaction testing. Any
applicable transaction-specific compliance challenges should
be identified and assessed with attention to the local
business operating environment.
Additionally, FCPA due diligence in the life sciences industry
may emphasize compliance-sensitive areas most frequently
highlighted in recent SEC enforcement actions in the life
sciences industry, including: cash payments, third-party
intermediaries and meals, and travel and entertainment
expenses.6 Other compliance-sensitive areas specific to the
industry are noted at right.

Agents and brokers


Consultants
Joint ventures and affiliates
Strategic alliances
Representative transactions
Scientific incentives and clinical trials
Studies, sales, and marketing expenses
Conferences and symposiums
Consulting fees
Government sales and tenders/bids
Sales discounts, rebates, and incentives
Licenses, patents, and permits
Travel, gifts, and entertainment
Charitable contributions and sponsorships
Import/export (customs and freight)
Finders, brokers, and success fees
Cash advances and petty cash

14

PwC Analysis based on publicly available information.

PwC

Disclosing the findings

Summing up

Voluntary self-disclosure is another factor that determines


whether and to what extent regulators prosecute FCPA
violations. The DOJ established guidance for the timely
disclosure of any due diligence findings in Opinion
Procedure Release 08-02, as follows:

Companies that identify, assess, and react to FCPA risk when


conducting a deal in the pharmaceuticals and life sciences
industry may avoid the consequences of inaction including
fines, penalties, and reputational damage to the successor as
well as the target. The Guide further summarizes the ways to
reduce FCPA risk in mergers andacquisitions.

Immediately following closing, the company will meet


with the DOJ to disclose whether information made
available pre-closing suggests any FCPA, corruption,
internal control, or accounting issues.
Within 10 days of closing, the company will present to
the DOJ a FCPA anti-corruption work plan to organize
the effort into high-risk, medium-risk, and lowriskelements.
Within 90 days of closing, the company will report to
the DOJ the results of high-risk due diligence.
Within 120 days of closing, the company will report to
the DOJ the results of the medium-risk due diligence.
Within 180 day of closing, the company will report to
the DOJ the results of the lowest-risk due diligence.
Post-deal follow-through
Protection against anti-corruption doesnt stop post-deal.
Acquirers must implement and integrate measures to detect
and deter corruption soon after acquisition.
Such measures may include1:
Regular anti-corruption messages sent from the
topdown
Rapid deployment of anti-corruption program with
rigorous training, monitoring, and
enforcementprocedures
Establishment of a call-in compliance hotline, ensuring
corruption-related issues and queries are addressed in a
timely manner
Compliance oversight and supervision of third-party
intermediary activities, including FCPA-specific audits
of books and records

The Guide: How to reduce FCPA risk in


mergers and acquisitions
Conduct thorough risk-based FCPA and
anti-corruption due diligence on potential
new-businessacquisitions.
See that the acquiring companys code of
conduct and compliance policies and
procedures regarding the FCPA and other
anti-corruption laws apply as quickly as is
practicable to newly acquired businesses or
merged entities.
Train the directors, officers, and employees of
newly acquired businesses or merged entities;
when appropriate, train agents and business
partners on the FCPA and other relevant
anti-corruption laws and the companys code
of conduct and compliance policies
andprocedures.
Conduct an FCPA-specific audit of newly
acquired or merged businesses as quickly
aspracticable.
Disclose any corrupt payments discovered as
part of due diligence of newly acquired
entities or mergedentities.
The DOJ and SEC will give meaningful credit to
companies that undertake these actions. In
appropriate circumstances, DOJ and SEC may
consequently decline to bring enforcement action.
Source: SEC & DOJ, A Resource Guide to the U.S.
Foreign Corrupt Practices Act, pg.62.

1 PwC, Cleaning Up Corruption: Why Anti-Corruption Compliance is


now on the C-Suite Radar, April 2012.
15

PwC

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,
andbankruptcy.
PwCs Deals group can advise pharmaceutical and life
sciences companies and PLS-focused private equity firms on
a variety of topics. PwC helps clients with various M&A
decisions, from identifying acquisition or divestiture
candidates and performing detailed buy-side diligence,
through to developing strategies for capturing post-deal
profits, to exiting a deal through a sale, carve-out, or IPO.
With more than 13,400 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.
Regardless of 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, we offer
integrated solutions tailored to your particular deal situation
and designed to help you complete and extract peak value
within your risk profile.
For more information about M&A and related services in the
pharmaceutical and life sciences industry, please visit www.
pwc.com/us/deals, www.pwc.com/pharma or www.pwc.
com/medtech.
For views on the Health Services sector refer to the US
Health Services Deals Insights report on the Deals section of
our website.

PLS Deals Insights Quarterly 16

Acknowledgments

Authors
Dimitri Drone
Partner, Deals
Deals Services Pharmaceuticals
& 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 cornerFCPA brings risks to mergers
and acquisitions
Patricia Etzold
Partner, Forensics
646 471 3691
patricia.a.etzold@us.pwc.com
Laura Skrief
Director, Forensics
646 471 7489
laura.m.skrief@us.pwc.com
Country spotlightBrazil: High growth potential but
challenges to deal making

For a deeper discussion on pharmaceuticals 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

Harry G. Broadman
Leader, Emerging Markets Strategy Consulting,
and Chief Economist
202 312 0807
harry.g.broadman@us.pwc.com

Central

John Cunningham
Partner, Deals (Brazil)
55 11 3674 3280
john.peter.cunningham@br.pwc.com

Pam Yanakopulos
Partner, Deals
312 298 3798
pamela.yanakopulos@us.pwc.com

Manuel Iraola
Managing Director, Deals
305 375 6396
manuel.iraola@us.pwc.com

West

Special thanks to:


Poonum D Bhagchandani, Director, Deals
Kristen Pisciotta, Director, Forensics
Katherine Meredith, Senior Associate, Forensics

Manoj Mahenthiran
Partner, Deals
312 298 3162
manoj.c.mahenthiran@us.pwc.com

Mattias Gunnarsson
Partner, Deals
213 356 6978
mattias.x.gunnarsson@us.pwc.com

PLS Deals Insights Quarterly 17

www.pwc.com/us/deals
2013 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal
entity. Please see www.pwc.com/structure for further details. This proposal is protected under the copyright laws of the United States and other countries. This proposal contains information
that is proprietary and confidential to PricewaterhouseCoopers LLP, and shall not be disclosed outside the recipients company or duplicated, used or disclosed, in whole or in part, by the
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