Operational Due Diligence

The Biotech and Pharma industry is unique. Not only because it is the most complex industry in the world, with multiple technological, commercial, organizational or regulatory intricacies, but also because this industry has been holding record levels of capital deployment and fundraisings for a decade. Which is also true for profit margin...

The Biotech and Pharma industry has become increasingly competitive for buyers - PE firms and strategic buyers. At all level, buyers are fighting to acquire the next gem, whether it is a CDMO, an equipment manufacturer and provider or an innovative pharma company.

Yet, many organizations remain poorly equipped to face the next BioPharma industry generation. A new era of amplified economic volatility has come, and BioPharma companies, Contract Services Providers - CRO, CDMO, CMO - and suppliers, are facing rapidly changing markets: new modalities, new technologies, new processes, new equipment. Innovative players are emerging. Competition is evolving, faster and stronger. Value chain and supply chain is getting dramatically more complex. New market opportunities are popping-up. Threats as well.

While most of these organizations have built their business within a period of reliable, steady, and predictable context, they are now evolving in a rapidly changing environment. They should implement adaptable, flexible, agile and innovative operating model in face of this rapidly changing environment. Operations must be streamlined, and organization redesigned. Capacity utilization and Overall Equipment Effectiveness optimized. Marketing and Sales structure aligned with market opportunities and competition intensity. Capital and resources allocated to future and real value creating engines.

Margin improvement and value creation are directly connected to operations and organizational design, so buyers must be attuned to Target's operating performances in order to avoid post acquisition disillusionment.

Consequently, the practical route to assess and transform margin expansion opportunity starts with Operational Due-Diligence. Operational Due-Diligence provides bidders with a realistic view of the target's margin improvement potential and capabilities to convert this potential into results.

We have observed over the last decade that Operational Due-Diligence had an increasing prominence in Private Equity industry and M&A deal. Certainly because most target companies have not reached full potential to improve operations or to enhance the top line.

Indeed, within all deals where Larka was involved with Operational Due-Diligence, we have found opportunities and detected operational and organizational value creating levers - but also identified red flags.

We focus on operating cost, organization structure and capabilities and capital expenditure. We assess historical and current operating performance of the sellers - people, process, equipment, systems and technologies - and test against industry standards. We identify potential synergies that might be achieved as a result of the considered transaction. We also spot operating bottlenecks, analyse capabilities of current and planned operations and compare with the sellers' projected goals - top line or cost reduction - and capital expenditure requirements.

Below are examples of major value drivers, along with key considerations that we commonly investigate to support upside estimates, assess downside risks, better inform value creation plans and put together more compelling bids to compete on price:

• Revenue growth: Salesforce effectiveness, Price strategy, Inbound marketing, Market intelligence, Commercial agreement structure
• Growth opportunity: Adjacent market or technologies, New customers, New geographies, New channels, Market intelligence
• Operational excellence: Capacity utilization and OEE, R&D and manufacturing, Analytical work, Quality systems, People cost optimization, Procurement and supply chain, Contracts structure, IT systems, Risk assessment plan
• Organization design: decision-making process, agility, people cost optimization, reward and incentives, resources and capital allocation, marketing & sales, digital strategy, IT systems, Data integrity, Risk assessment plan

As a fact, our Operational Due-Diligence teams go far beyond shedding light on the current state of operations or refining the cost baseline. Rather than being simply reactive to sellers' perspectives, we trigger the value creation process from due-diligence's day one, thanks to proprietary benchmarks, in-depth expertise in the fields of Operational Excellence and Organizational Design and nearly 30 years dedicated to the Biotech and Pharma industry.

Furthermore, banks are also increasingly looking for the operational aspects of a transaction by looking more critically at the business plan, the operating performance and the robustness of assumed synergies.

For decades, we have helped our clients capture and quantify the synergies and value creation hypotheses achievable through post-close operational improvements or integration. This way, PE firms can properly strategize competitive purchase prices and formulate sustainable strategy to sellers and bankers.

Larka has become the leading Operational Due-Diligence advisor to the private equity firms within the pharma and biopharma industry.

But Operational Due-Diligence is halfway of target's full potential assessment. It should be combined with Commercial Due-Diligence and Technical Due-Diligence. Value creation within the Biotech and Pharma Industry is, more than in any other industry, interlinked to Operational, Commercial and Technical Operations.

Whereas operational and technical due diligences assess capabilities for the target to expand margins and capture growth opportunities, the combination with commercial due diligence provides a perspective on how fast the target company's market will grow and whether the target could increase revenue faster or slower than the market and the competition.

With nearly 30 years of experience in this industry and an unrivalled network of senior-level experts, we bring our clients unparalleled insights on the three streams - Operational , Commercial and Technical -, incorporating extensive proprietary benchmarks, advanced analytics and deep understanding of all the BioPharma industry's intricacies.

Our Integrated Due-Diligence solution provides PE firms with both, a full appreciation of the organization capabilities, synergies and risks involved and a full-potential vision for the business, along with the CapEx, time and resources it will take to run the optimal post-acquisition plan.

At Larka, we make sure every deal achieve its full potential. Our track record in the field is unrivaled, so does our clients' deal success rate.