Alacrita has established itself as an industry specialist in due diligence (DD), conducting over 25 DD assignments per year, across therapeutic areas and technologies. Sometimes a prospective clients enquires if it’s possible to limit a due diligence assessment and conduct what is called “DD light” or a “red flag analysis”, which is something more than a pre-DD but less than a full DD. Many times, this question is driven by cost, with the client hopeful that a lighter due diligence can still identify all the major risks. While there are avenues to reduce the scope of any assignment and potentially reduce cost, this generally contradicts the objective of the exercise.
Pre-DD
A triage analysis or pre-DD is designed to assess whether a full due diligence is justifiable. Alacrita is able to conduct truncated due diligence analysis by drawing on the deep technical experience of our consultants, which not only provides a specialist and on-the-ground assessment for a technology, but also reduces time spent on background reading. The depth of analysis for a pre-DD is often dependent on the openness of a company during initial communications with investors/licensors/acquirers but is primarily limited to the information provided in a confidential slide deck, possibly a small number of key documents plus secondary research looking at the scientific rationale, feasibility of the development plan, high level safety risks, commercial potential and the competitive landscape. We welcome the opportunity, though not always feasible, to interview the target’s management team to test and refine our findings. The overall depth of our pre-DD analysis is often driven by the agreed commitment of hours to the task – more hours allow for more secondary research. This is clearly never enough to remove all uncertainty in an investment decision, but in our experience, it weeds out 80% of the transactions which are unattractive from a risk-reward perspective. It also acts as a scoping assignment should a follow-up full DD be completed by us; highlighting the key areas of concern and the most important documents that should be focused on during any deeper analysis. This saves the substantial budget which is required for a full technical and commercial due diligence and releases resources from what could have turned out to be dead end projects.
Full DD
Full DD is a comprehensive analysis of a target’s dataroom supplemented by rigorous secondary, and if time/budget permits, primary research to validate the opportunity, identify risks and develop detailed risk mitigation approaches. We deploy a multi-disciplinary team of industry experts to examine all aspects of a development project including preclinical, clinical, regulatory, CMC and commercial potential. The later stage the project, the more time and resource needed to conduct the diligence as the primary driver of effort is the volume of information in the dataroom. The analysis is conducted at a granular level, for example a CMC assessment may drill down into individual manufacturing batch records and even entail onsite capability and compliance visits. A clinical data assessment would enlist an experienced physician scientist to assess not only clinical outcomes, but also the overall design, power, and patient backgrounds. As such, by necessity, the team is composed of highly specialized individuals with deep experience and this requires a commensurate budget. The additional time and effort afforded allows for continued back-and-forth communication with the target company to ensure our teams gain full access to all relevant documentation and can understand directly company positions as we progress through the analysis. The value of a full DD is clear: aside from the identification of dealbreakers, identification of inherent risks and potential mitigation strategies, it will inform the acquiror/licensor about what to expect and what to focus on in the post-transaction phase. It will also highlight the temperament, transparency, and underlying knowledge and awareness of key personnel within the company; an important driver for delivering agreed milestones.
Red Flag Analysis or DD Light
On occasion, we are asked for something more than a pre-DD but not as extensive as a full DD. For example, we are asked “can you just perform a red flag analysis?” or a light touch due diligence. Here lies the complication, it is essential to understand that it is not possible to read a document in a dataroom and only identify major risks (red flags) while ignoring other important (amber flag) issues; the document is either read and analyzed or it is not – you cannot half-read its contents. If you say why not just document the major risks (implying saving time in reporting), then (a) the time and budget saving is immaterial and (b) the combination of several individually non-critical risks can amount to a critical risk. Either you limit efforts to assessing summary information e.g., a confidential slide deck, or you dive into the company dataroom and assess all available documents in detail. There is no alternative: a DD assessment is binary – either you do it, or you don’t.
The only way to reduce time and budget whilst providing a deep enough analysis to support an investment decision is to restrict the technical assessment to a subset of issues/dataroom contents. For example, as mentioned above, a pre-DD can be an invaluable tool to highlight risks in certain key areas, and it is legitimate then to focus a deep DD onto documents within those areas alone, accepting that it is possible that issues in other areas will go unanalyzed. This is entirely the sponsor’s choice and is driven by the level of uncertainty they are prepared to accept.
In Summary
No DD is perfect; there are many examples of red flag risks identified in DDs that turned out to be easily solved, and conversely, of major issues that were never uncovered. Once you accept that DD can only provide a less than 100% degree of confidence, it is justifiable to reduce that threshold in the interests of time and/or economy by narrowing the scope of the DD exercise. Indeed, some major transactions have extremely short windows of DD opportunity – we have been asked to conduct a diligence of a phase 3 gene therapy in under two weeks – and compromises on the breadth of work must be made. What’s essential is to be conscious of what is being asked and what risks that entails. A "DD light" may be quicker and cheaper than a full DD, but always consider that what you might save in cost, you gain in risk.
About Alacrita
Alacrita's multidisciplinary team is well positioned to provide solutions to the multifaceted challenges often faced by biotech and pharma organizations. In addition to our core team, Alacrita has at its disposition a broad network of specialized consultants who can be engaged as necessary when additional, specialized expertise is required. With an established presence in Europe and the United States, our core capabilities and knowledge span both of these regions, as well as those that are adjacent. For information on our services please click here or contact us.