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Pharmaceutical company acquisition

Americas & other jurisdictions

HKA

An acquisition involving two large, international pharmaceutical companies led to a complex multi-billion-dollar dispute raising multiple issues – from accounts payable and inventory to regulatory accruals and gross-to-net revenue reserves, as well as procedural matters. Failure to find a resolution triggered arbitration under the purchase agreement.

Brief

HKA was appointed as neutral accountant to analyze the items claimed, the supporting financial records of the target company, and the accounting methods used by both sides, before preparing an arbitration report determining the value of any losses incurred by the buyer.

What we did

Our arbitrator’s accounting and legal expertise – spanning multiple post-acquisition disputes in this and other sectors – informed HKA’s approach.  Finding common ground on the process to be followed was a priority as one of the parties considered litigation over the vexed procedural issues. 

A timetable was eventually agreed upon, allowing for three rounds of rebuttal submissions, and a hearing. As neutral accountant, we ruled on the validity of information requests and, in addition to the separate discovery process required to facilitate our analysis, compelled the buyer to disclose a large volume of information to the seller.

Other aspects of the arbitration included:

  • Reviewing the purchase agreement to gain a clear understanding of its stipulations on the disputed items and their accounting treatment. As well as generally accepted accounting principles (GAAP), this specified ‘contract accounting’ rules in several areas.
  • Appraising the valuations of accruals related to litigation and regulatory cases, most of which involved European and other national jurisdictions outside the US.
  • Analyzing contested pricing adjustments, including US reserving prices alleged not to have been properly adjusted. The large sums involved accounted for a significant proportion of the claim.

The hearing was attended by more than 40 legal, accounting, and other representatives of the parties, and included testimony by video link from staff of the target company’s subsidiaries in North America, Europe and Asia.

Outcomes

Days before the arbitration report was due to be issued, the parties settled the case, which included a parallel, high-value dispute over representations and warranties. 

Over a period of a year and a half, the accounting analysis and arbitration process – from discovery and impartial probing of contentious issues to rebuttal submissions and the hearing – had helped crystallize the companies’ respective positions, so a compromise could be reached.

HKA’s handling of this significant dispute as a neutral expert – combining international accounting expertise with the legal insights gained from numerous expert witness and arbitration assignments – has commended the firm to general counsel seeking a conflict-free alternative to the big accountancy groups.

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