Expertise Beyond the Numbers

Pharma Executives: Consider Contract Compliance Audits at Four Key Times in M&A Transactions

Pharmaceutical executives face numerous revenue-growth challenges, from global regulatory issues and scrutiny to increased competition and outsourcing risk. As a result, many are exploring mergers and acquisitions as a way to boost revenue and growth.

Further, many executives are conducting contract compliance audits during and after a merger and acquisition process, helping them to improve third-party transparency, enhance internal controls, and maximize return on investment.

Facing Regulatory and Competitive Pressures

As the pharmaceutical industry evolves, executives are facing pricing pressures from healthcare reform, and increased scrutiny from potential regulatory noncompliance. Additionally, pressure is mounting due to a lack of visibility, transparency, and communication in the supply chain.

Pharmaceutical companies are also encountering greater competition from branded and lower-priced generic drugs. As a result, they are losing revenue in the costly cycle of research and development, innovation of new products, and expiration of patented drugs.

In fact, MedCityNews reports that $194 billion in brand-name pharmaceutical sales are at risk during the 2017-2022 period, with an anticipated loss of $31 billion due to patent expirations in 2018 alone.

Rising Merger and Acquisition Activity

To help counteract these pressures, many pharmaceutical companies continue to explore strategic mergers and acquisitions to spur growth and revenue.

Pharmaceutical merger and acquisition activity has skyrocketed in recent years, with signs that 2018 could be another record-breaking year. Acquisitions from drug makers Celgene and Sanofi total more than $26 billion alone. These deals, along with others that have been announced, have led to the sector’s strongest start for dealmaking in more than a decade.

Smaller acquisitions have also been frequent due to a growing number of new and non-traditional companies entering the healthcare ecosystem. And, life sciences companies are looking to partner with these companies to access data, technology, and retail connections.

Four Times to Consider a Contract Compliance Audit

To help maximize transparency and the return on investment of their mergers or acquisitions, many pharmaceutical executives are strategically conducting contract compliance audits.

For instance, if a company has recently been involved in a business combination, chances are that the new organization inherited conflicting or redundant contracts with third-parties. Managing those transitions is difficult for third-parties that previously worked with each company before the business combination. An audit can validate that the third-parties have accurately applied the most favorable pricing terms, and identify any transactions occurring outside of the existing agreements.

In particular, pharmaceutical companies should consider completing contract compliance audits at four essential times during and after a business combination:

  1. During Significant Personnel Change:Audits are vital to ensure continuity and efficiency, minimizing the potential for risks by verifying that procedures are continuing to align with contract provisions. Stakeholders that are inheriting ownership of a contract may not be familiar with all of the nuances within the customer / third-party relationship.  An in-depth examination of the activities between the parties versus their respective contracts will provide valuable insights and transparency while accelerating the incoming stakeholder’s learning curve.
  2. Prior to Ending Third-Party Contracts:Companies should perform contract compliance audits to identify any non-compliant charges prior to the conclusion of the relationship.  Issues identified during an audit becoming increasingly difficult to remediate after the contract terminates and a final payment for services has been issued. Conducting audits prior to transitioning the business also allows for learnings to be applied to the relationship with the incoming third-party.
  3. Prior to Contract Renegotiations or Sourcing Events: It’s not uncommon for mergers and acquisitions to result in overlapping contracts with the same third-party or a number of different third-parties performing the same services. If the combined organization is renegotiating their current contract with a third party or putting the business out to bid to consolidate the third-party population and corresponding spend, audits performed prior to negotiations or sourcing events can produce significant insights and leverage resulting in more favorable terms going forward.
  4. Throughout Long-Term Supplier Contracts: Companies should perform contract compliance audits on long-term third-party contracts to strengthen every stage of the relationship and avoid losses due to non-compliance which can compound significantly over an extended period of time.

As mergers and acquisitions continue in the pharmaceutical industry as a way to rise above various revenue-growth hurdles, contract compliance audits can act as a strategic tool bringing clarity to third-party relationships during complex business combinations.

A well-executed examination of third-party contracts and their corresponding transactions—during and after a merger or acquisition—can create greater transparency and alignment, strengthen relationships, enhance existing processes and maximize the return on the relationship.

To learn more about how to develop greater transparency, accountability, and trust with key third-parties, click here for more insights from SC&H Group’s Contract Compliance Audit team.