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Digg It - An Intelligent Technology Company Acquisiton - A Case Study
In our M&A practice we strive to align the right buyer with the seller and combine that with the appropriate deal structure. If we can do that while keeping the deal process flowing in a smooth and positive way, the outcome can be rewarding for both
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
buyer and seller. PER-SE Technologies, one of the largest healthcare information technology and business services companies recently completed the acquisition of Flexestaff, a Web based staffing, scheduling, and shift bidding software company.
PE
PE
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
R-SE's Hospital Resource Management Solutions division provides a workforce management solution. That solution is installed in approximately 1100 hospitals. Flexestaff, on the other hand, was a two-year-old company with a cutting edge, high value so
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
ution, and a limited install base. The founders made one of the most difficult decisions that Entrepreneurs can make - to no longer go it alone.
Several factors contributed to this decision. First, the market discovered the value of this solution
Several factors contributed to this decision. First, the market discovered the value of this solution
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
and several large players were beginning to focus resources on this space. A race for market share was beginning. Hospitals are generally risk adverse in their IT decision making - preferring an enterprise giant to an edgy start-up. That fact had Fl
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
exestaff stuck between the early adapters and broad market acceptance. After some encouraging initial success, the sales cycle began to lengthen.
Integration Risk - Another sales inhibitor was the customer's desire for this product to integrate wit
Integration Risk - Another sales inhibitor was the customer's desire for this product to integrate wit
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
their existing resource management system. With scarce resources, that became a major hurdle for this young company. The founders used objective situational analysis and made the difficult, but correct decision to seek a strategic buyer.
Enter PER
Enter PER
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
-SE Technologies. PER-SE was involved in a systems enhancement effort and their clients were responding favorably. Prior to this effort, product updates had lagged, limiting new account activity. This acquisition sent a clear message to the market
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
place - we are committed to providing the best IT tools available and will acquire them when necessary. The sales force now has a new exciting product to offer to their installed accounts. They also have injected new energy into their prospecting ef
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
orts.
PER-SE management made a critical decision to buy rather than build. This is an enlightened attitude and in this case should pay huge dividends. Many large technology companies eliminate this key successful strategy by invoking the “not inven
PER-SE management made a critical decision to buy rather than build. This is an enlightened attitude and in this case should pay huge dividends. Many large technology companies eliminate this key successful strategy by invoking the “not inven
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
ted here” mantra.
PER-SE Senior Management simply viewed the situation analytically rather than emotionally. A key factor that influenced this decision was the time to market issue. Of course, PER-SE could have developed the product themselves, but
PER-SE Senior Management simply viewed the situation analytically rather than emotionally. A key factor that influenced this decision was the time to market issue. Of course, PER-SE could have developed the product themselves, but
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
the time to market was estimated to be between 12 and 18 months. That simply was not acceptable to them given the current surge in the marketplace from their major competitors and a well-funded venture backed start-up. They weighed the opportunity
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
ost of lost sales and perhaps some customer defections against the acquisition cost. Conclusion: getting this product to market now was imperative.
A second factor was that the cost to internally develop this offering was in the same range as the c
A second factor was that the cost to internally develop this offering was in the same range as the c
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
ost of the acquisition. The final determining factor for PER-SE was that they wanted the acquisition to be cash flow accretive. What that means is that PER-SE wanted the cash outflows comprising the transaction value to be offset by the gross profit
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
margin produced by the new product sales.
Therefore, the deal structure became an important issue. If Flexestaff had insisted on an all cash at close deal, they would have limited their transaction value. By agreeing to a structure where a portio
Therefore, the deal structure became an important issue. If Flexestaff had insisted on an all cash at close deal, they would have limited their transaction value. By agreeing to a structure where a portio
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
of the value was in cash at close and a meaningful portion was a generous earn out tied to future revenues, we dramatically improved the effective selling price. There is certainly risk associated with this approach for the seller, but the buyer w
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
as willing to compensate them for this risk. This allowed the buyer to meet their accretive acquisition requirement.
Let's project how the seller will fare. Over the next several years he will have one of the largest providers of Healthcare IT sell
Let's project how the seller will fare. Over the next several years he will have one of the largest providers of Healthcare IT sell
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
ing the product. Now 15 sales reps from the PER-SE division will be representing the product instead of the 2 sales reps pre-acquisition. Not only will these sales reps be calling on new accounts, but will also be calling on 1100 installed accounts
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
sing their product that fits beautifully with their acquired new product. It will be a relatively easy process to get existing customers to add on this new valuable capability.
Because the seller agreed to this risk sharing structure and the eleme
Because the seller agreed to this risk sharing structure and the eleme
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
nts were favorable for explosive sales growth, the seller will most likely achieve a transaction value 70-100% above the original guaranteed transaction value. With a well-written contract, the seller will achieve outstanding total transaction value
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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