Due diligence in life sciences M&A: navigating risk in complex transactions

Jonathan Steele
Stevens & Bolton, Guildford
jonathan.steele@stevens-bolton.com

Charlotte Tillett
Stevens & Bolton, Guildford
charlotte.tillett@stevens-bolton.com

Charlotte Fagan
Stevens & Bolton, Guildford
charlotte.fagan@stevens-bolton.com

The purpose and structure of due diligence

Due diligence involves a structured review of key elements of the target business, typically led by the buyer’s legal and financial advisers. It includes reviewing corporate documents, conducting legal and regulatory checks, analysing financials, and engaging in Q&A sessions with the target.

This typically takes the form of an initial request list from each set of buyer’s advisers and, while led by financial and legal, due diligence will often also focus on tax and operational matters. Following a review of the responses to the initial request lists, advisers will report to the buyer and raise supplemental questions aimed at either clarifying responses or delving into further detail where risks are identified.

Nearly all M&A deals will use a virtual data room (VDR) to share information. Given due diligence exercises will involve multiple advisers needing access to the information supplied by the sellers, it is important that the VDR is well managed, structured and maintained, with easy functionality. This will greatly assist the review process, help keep track of new uploads and index documents for other stages of the M&A process, including disclosure or a warranties and indemnities (W&I) underwriting process.

As well as identifying risks, one of the key purposes of due diligence is to discuss and determine remedial action that can be taken to address identified issues, before the transaction closes so that the buyer inherits as ‘clean’ a position as possible.

From the seller’s perspective, due diligence can be a daunting task when faced with numerous questions arriving from different sources. As much as possible, while continuing to run the business, sellers should look to prepare for due diligence by engaging advisers at an early stage and ensuring there is a dedicated team in place to respond to queries. Taking the time to provide proper responses can shorten the due diligence process considerably and alleviate deal fatigue, albeit requiring significant upfront effort.

Regulatory compliance

In life sciences M&A, regulatory compliance is a key area of focus. Buyers should verify that the target holds valid and subsisting licences, marketing authorisations, clinical trial approvals, and pricing and reimbursement clearances for its products, as relevant. Any gaps or inconsistencies in these areas can significantly impact the deal’s value and delay post-acquisition operations. At the outset, checks should also be made to ensure compliance with anti-trust regulations and direct foreign investment rules.

Product liability risks

Product liability presents another major challenge. Life sciences products – such as pharmaceuticals, biotech therapies and medical devices – carry inherent risks and regulatory oversight. As a result, buyers must assess the safety profile of the target’s products, including any history of litigation, complications or recalls. This could require a detailed review of clinical trial data, post-marketing surveillance, and regulatory correspondence.

Insurance arrangements, particularly product liability coverage, should also be carefully evaluated. With insurance, close attention should be paid to any exclusions that could significantly limit protection in the event of adverse product outcomes or regulatory enforcement.

Where products are still in development, the uncertainty of future claims adds further complexity to the due diligence process. Additionally, liability risks may arise from third-party contracts with manufacturers, distributors or collaborators, which can shift or share responsibility for product-related issues. This needs to be carefully investigated by the buyers before completion.

Data integrity and documentation

Data integrity is also critical in life sciences M&A. The reliability of scientific, clinical and regulatory data directly affects the transaction’s value. Buyers should ensure that all data – especially clinical trial results, manufacturing records and regulatory submissions – is completed, recorded and accurate. Poor documentation and inconsistent datasets can signal deeper compliance issues and jeopardise future regulatory approvals, particularly in early-stage or rapidly scaling companies. Cross-border deals can introduce an additional layer of risk here due to differing data privacy laws and standards.

Intellectual property

Underlying the products brought to market in the life sciences industry there is typically know-how and other confidential information, as well as patents. There may also be trade marks and other branding aspects to be considered. Certain elements might be licensed into a company or it may itself licence out its own technology to others – these licences will be subject to the due diligence process alongside other commercial agreements.

It is vital to know that all rights in relation to the relevant product are in place to avoid future disputes and to be sure that, particularly where IP is owned, the appropriate value is being attributed to it. Proper due diligence may also involve:

• an analysis of the validity of the IP rights;
• reviewing the information available from the relevant intellectual property offices for registered rights;
• freedom to operate reviews; and
• detailed consideration of licences in/out of IP rights to check for termination, change of control provisions, sublicensing and assignment rights.

Conclusion

Due diligence in life sciences M&A is not just standard procedure: it is a strategic safeguard. With heightened risks around regulatory compliance, product liability and data integrity, buyers should approach the process of due diligence pragmatically (to maintain relations with the target), but also methodically and with specialist insight.

A robust due diligence process not only protects against hidden liabilities but also strengthens the foundation for a successful and sustainable merger or acquisition.