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Maximizing Due Diligence - Think Horses AND Zebras

Kate Lumpkin

Medical students are taught, “When you hear hoofbeats, think horses, not zebras.” When performing due diligence, think horses AND zebras. It is vital to discover, and evaluate, both the obvious and the obscure.

Pharmaceutical and Biotech companies today routinely purchase other companies or products to create a stronger commercial position. They make the determination whether or not to do so through a process known as due diligence. Maximizing due diligence requires continuous rigor to uncover the unexpected, an open mind, corporate honesty regarding business need and potential, involving the correct people, and the willingness to walk away should the opportunity not prove a potential business success.

I once served on a small advisory committee for a major pharmaceutical company. The group was convened to assess the commercial viability of a recently purchased, expensive Rx drug product. The advisors met for a full day in a small room with the company commercial, advertising/promotional regulatory, clinical and medical professionals, as well as internal ad/promo attorneys. The mood was “crisis.” Commercial and clinical/regulatory had made the decision to purchase the approved product, with the advice of the internal due diligence team, composed of commercial, clinical, regulatory professionals and M&A attorneys. Those disciplines are essential to any such due diligence. However, the deal was consummated based on monetary projections ultimately determined to be unrealistic. The decision to purchase was made without conferring with potential purchasers or with the internal medical, compliance, advertising/promotional regulatory professionals, or ad/promo attorneys.

After purchasing the product, the regulatory and legal ad/promo and medical professionals reviewed the desired promotional claims and the supporting data and determined the data would not support the proposed commercial campaign. The payers had not adopted the product, as they perceived it offered no material advantages over current, less expensive products. Clearly, the commercial team identified this as a critical development. They promptly convened our small advisory group, which substantiated the opinions of the internal professionals. The product could not be legally promoted in a manner that would meet commercial projections and needs. Additionally, the payers represented in the group confirmed their unwillingness to purchase the product.

The company determined to abandon the product. Instead of this product adding to the commercial bottom line, the entire purchase was written off as a loss – a small catastrophe to this company – a potential major catastrophe for other companies.

Here are four lessons this experience, and others, have taught me about due diligence. Clearly, there are many additional considerations, but I believe these to be essential. 

Successful due diligence is a MINDSET

 The asset assessment must be unbiased, thorough, and dispassionate. The team must be willing to decide “no.” In fact, the default should be “no”, unless entirely convinced the decision to purchase is a smart one. And, the team must work together to determine the best possible outcome through uncompromising questioning, listening, and evaluating. This mindset emanates from enlightened leadership throughout the organization.

Involve the right people, at the right time, in the evaluation process 

Maximize the due diligence project by involving the appropriate internal professionals from the beginning, which routinely should include: Regulatory ad/promo, medical, ad/promo attorneys, and compliance professionals – in addition to commercial, clinical and M&A attorneys. It is also an imperative to identify critical external stakeholders, as appropriate and possible, and honestly listen to them. Create a highly- effective working team, thoroughly evaluate all information, and carefully consider, all opinions.

Ask the right questions and for the “right,” complete data

Rigorously identify all relevant business questions, based on potential purchase, and meticulously evaluate those questions in an open, unbiased way. If the outcome is predetermined, due diligence, by definition, is unnecessary. As with honest, transparent drug development, it is more commercially beneficial to abort a likely unsuccessful purchase as early as possible. And, demand the complete data necessary for an unbiased, thorough review by all professional disciplines to determine viability and realistic commercial projections. Ask questions such as, “what will our marketing strategy be?” Do the data support that strategy? Do the laws and regulations permit that approach? The team MUST ask the hard questions, and seek the unexpected. They must discover and evaluate both the horses and the zebras. 

Make an honest and smart business decision

Make an objective and smart business decision based on data-driven, appropriate projections. Judiciously pressure test all decisions against a foundation of the legal/regulatory viability of the projected marketing strategy, the competitive intelligence, the compliance environment, the viability of payer purchase, etc.

Effective due diligence teams are excellent at finding horses. The best due diligence teams are also exceptional at discovering, and evaluating the possible impact of, zebras. The most valuable team members are the ones who identify the most insightful and important questions and provide an unbiased, comprehensive evaluation.