Dealing with risk and giving diligence its due


John Easton, Martin Cadman and Carl Jessop

John Easton Head of Business Operations, AstraZeneca

Martin Cadman

Martin Cadman Due Diligence Director, AstraZeneca

Carl Jessop

Carl Jessop Due Diligence Director, AstraZeneca

Pharmaceutical R&D is an inherently risky business, as any glance at attrition rates between phase I and product launch quickly confirms.

Risk is also an inevitable part of striking a deal. When you bring the two together, whether for a collaboration on a single development-stage asset, a partnership for a portfolio of compounds or even the acquisition of another company, uncertainty is unavoidable.

What is within our command is how we assess, interpret and mitigate these risks when conducting due diligence on a potential deal.

Know your appetite for risk

One of the first factors that comes into play is a company’s appetite for risk. If risk is inevitable, how much risk is acceptable within your company?

Some will want to throw the book at it when it comes to scrutinising a deal, while others will be prepared to pay a strategic premium for an asset and only want to look at the ‘big ticket’ risks.

The nature of the process can also be an influence. A competitive auction and a one-to-one courtship each have their own demands. With competitive processes time is often an overlay to the assessment of risk and requires you to prioritise even more than usual.

Understand the value drivers

Once you know how much risk is acceptable, the planning and preparation process moves to assessing an asset’s strategic premise, value-drivers and the risks to these.

The role of due diligence is to really test the business case for a deal. We do this by looking at our assumptions around risks and value drivers and ensuring we’ve understood them.

But without a business case for a deal it’s next to impossible to conduct due diligence on it, because you’re left with nothing to test and can’t know what questions to ask.

Pursue clarity

When it comes to the questions you ask of potential partners, a frequent pitfall is to pull out a 50-question template script (or rely on your advisors to provide one) and dogmatically stick to it, when only 10 of the questions actually matter. All that does is distract the seller, so training your team to ask the right questions and pursue clarity in the answers given is key.

The early stages of the process will almost always see you receive a nice shiny deck that tells you how great the opportunity is. In due diligence we’re going to find out the less shiny attributes of the deal, so it’s also important for partners to be up front with us about the full profile of the opportunity.

Define a risk’s impact and chance of occurring

Everyone has an idea of what risk is. It’s quite another thing to be able to define it in terms of the likelihood of it materialising, and the specific impact if it does, and how this all relates to the business case. Clearly, when it comes to ‘high impact’ risks, such as a delay to launch date or data that does not support the claims needed to hit peak-year sales assumptions, these will be things that must be communicated to those at the top.

It all comes down to understanding the risks in the context of the transaction at hand and the assumptions that underpin your approach to deal-making. With those in place you’ll be well equipped to relay a deal’s risks back to internal stakeholders and decision-makers.