Managing transactional risk in healthcare & life sciences M&A
March 2025 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
March 2025 Issue
FW discusses managing transactional risk in healthcare & life sciences M&A with Vip Patel at Aon.
FW: Could you provide an overview of M&A activity across the healthcare and life sciences industry in recent years? What factors are driving deals?
Patel: Like other industries, M&A activity has been subdued in recent years due to macro-level factors. Uncertainty around inflation and interest rates as well as increased regulatory oversight, especially on healthcare provider and services deals, has had a negative impact on deal activity. Historical drivers of M&A within the healthcare providers and services sectors have been significant industry fragmentation and consolidation strategies, long tailwinds such as ageing populations and chronic diseases, rates of technology adoption, shifting revenue models and substantial cash to invest. In life sciences, drivers include investments into novel therapies for growth, divestments to focus on core businesses, and similar long tailwinds.
FW: What are some of the key risks in transactions and investment opportunities in these industries? From a legal perspective, for example, what complexities are likely to arise due to regulatory requirements and compliance risks?
Patel: There are similar risks across all industries when it comes to deals, with breaches of representations and warranties a frequent occurrence. Breaches of financial statements are the most common and also tend to be the most severe due to the potential for these types of claims to have a valuation-based component. Regulatory risks are higher for healthcare and life sciences industries compared to less regulated industries. Government payors can be a material source of revenue for many healthcare providers and with that source of revenue comes increased regulatory risks around compliance with Medicare and Medicaid related regulations. Compliance with Food and Drug Administration regulations and international equivalents, intellectual property laws, manufacturing and product liability are key risks within life sciences deals.
FW: What steps can dealmakers take to manage and mitigate risks? How should they be identified, evaluated, quantified and addressed?
Patel: Fulsome diligence is the most effective way to manage risks and uncover material issues at the target. A broad diligence exercise covering financial, regulatory compliance, tax, and functional and operational areas should be implemented to allow the buyer to both uncover risks and support an effective approach to mitigating those risks under the purchase agreement or with the placement of a representations and warranties insurance (RWI) policy. Diligence materiality thresholds typically depend on the size of the deal and lower thresholds allow the buyer to conduct a more granular diligence exercise. This directly impacts coverage under RWI policies as insurers expect to see a broad scope of diligence with appropriate materiality thresholds in relation to the deal size. Buyers are expected to conduct a diligence process that matches the scope of the R&W they are seeking from the seller to independently verify the accuracy of such statements.
“The advantages of using RWI in a deal is it allows the seller to potentially receive a clean exit and all sale proceeds at closing, with the buyer having protection under an RWI policy.”
FW: To what extent are you seeing increased adoption of M&A insurance to help healthcare and life sciences companies manage risks and see transactions through to completion?
Patel: We have seen increased adoption rates of M&A insurance in these industries over the past few years. Adoption in healthcare and life sciences deals was initially slower than adoption in other industries as the market for these deals was much smaller and the breadth of coverage did not meet buyer needs. The market has expanded for these deals and we have seen a concurrent increase in adoption rates. Private equity (PE) investors were the first adopters but we have seen a noticeable increase in usage rates among corporate buyers. The prevalence of RWI in life sciences has lagged healthcare given the nature of M&A in life sciences and the buyer universe consisting mainly of corporate buyers, though usage and adoption has recently increased.
FW: Could you outline the role insurance has to play in transferring risks, protecting buyers and sellers, and ensuring a smoother deal process?
Patel: RWI is a proven tool that can allow deal professionals to bridge gaps around risk mitigation and allocation between transacting parties and help improve deal outcomes. RWI allows parties to shift the risk of loss arising from a seller’s breach of a representation or warranty to an insurance policy. The advantages of using RWI in a deal is it allows the seller to potentially receive a clean exit and all sale proceeds at closing, with the buyer having protection under an RWI policy. It enhances the buyer’s protection, streamlines purchase agreement negotiations, protects key management relationships and increases the seller’s cash at closing.
FW: What essential advice would you offer to healthcare and life sciences companies looking to assess their insurance options, understand which risk transfer methods are right for a particular deal, and assess potential insurers accordingly?
Patel: It is essential to establish a relationship with a sophisticated brokerage team for RWI. Very few brokers have a dedicated, standalone team to assist clients on M&A transactions and RWI placements. Brokers with significant healthcare and life sciences expertise is also essential. A sophisticated broker can provide guidance on the potential usage of RWI on a transaction before a buyer agrees to it and forgoes a seller indemnity. Healthcare and life sciences RWI placements are also more challenging due to the regulatory risks, and RWI market appetite is constantly evolving. There is a subset of insurers that will underwrite transactions in these industries, and a sophisticated broker will have the most accurate market intelligence. Insights into underwriting approach and claims handling is critical when choosing the right carrier for a specific transaction.
FW: What are your predictions for dealmaking in these industries over the months ahead? Do you expect M&A insurance to remain a key component of deals, with rising adoption rates?
Patel: I expect dealmaking across industries and healthcare and life sciences will be stronger this year than the last couple. Regulatory approvals should be less challenging with the change in administration. While the market had expected a more significant drop in interest rates and inflation, both appear to be more stable than before. Acquirers – both PE and corporations – also have substantial amounts of cash to invest in M&A and valuation expectations continue to stabilise. We continue to see increased adoption rates for M&A insurance across healthcare and life sciences. While PE investors have adopted its usage, corporate acquirers are still in earlier stages of the adoption process.
Vip Patel is a managing director in Aon’s M&A and transaction solutions practice brokering, structuring and negotiating representations and warranties insurance policies in connection with mergers and acquisitions by private equity firms and corporations with expertise in healthcare and life sciences transactions. Prior to joining Aon in January 2016, he was a healthcare and life sciences investment banker where he focused on mergers, acquisitions and capital raising transactions across the healthcare and life sciences sector. He can be contacted on +1 (312) 381 7196 or by email: vipul.patel@aon.com.
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