The Life Sciences M&A Landscape: Collaboration Between Startups and Industry Majors

For venture capitalists, life sciences has been an attractive and fruitful sector for many years. With tax breaks for corporations and other factors that incentivize investment, such as a more accommodating regulatory environment, 2018 is expected to be a particularly active year. In fact there have been $11 billion in biotech M&A bids in the first few days alone, led by Celgene Corporation announcing its intention to acquire Impact Biomedicines and Novo Nordisk announcing its intention to acquire Belgium-based biopharma company Ablynx.

The startup boom also benefits from large companies in life sciences that had scaled down their own research and development budgets in favor of identifying promising acquisitions with de-risked investments, either to diversify portfolios or expand their presence in a core sector — as some examples demonstrate:

• Cerecor Inc., a biopharmaceutical company specializing in neurological drugs, recently acquired TRx Pharmaceuticals, in order to push into pediatric health care (TRx subsidiary Zylera specializes in established pediatric supplements already being prescribed by doctors).
• Last year, AzurRX, a company that specializes in therapies for gastrointestinal diseases, entered into a collaboration agreement to license established transition-state chemistry from TransChem, Inc. The company expects this deal to make AzurRX a significant player in the development of non-systemic therapies for gastrointestinal and infectious diseases.
• In another deal dating to 2016, Centrexion Therapeutics acquired three promising, non-habit-forming chronic-pain-treatment drug candidates from Boehringer Ingelheim, drawing from a narrow therapeutic category to strengthen its existing pipeline.

This fast-paced environment creates significant opportunity for entrepreneurs, especially those at the intersection of technology and life sciences. Entrepreneurs would be wise to take advantage of the developmental resources and collaborative opportunities to build the value of their businesses. And, prospective buyers should conduct extensive due diligence to ensure that the technology they’re buying is a good fit with their business, appropriately valued and the most promising solution to a vital life sciences need.

The Deal-Making Environment

The biggest companies are willing to pay heavily, perhaps even overpay, for de-risked assets. We continue to see later-stage deals being made on new indications and therapeutics, on the generic side, and among those utilizing the 505(b)(2) FDA pathway (allowing some studies from non-applicant sources to be included in new drug applications) paying up for de-risked assets. At the same time, because of the need for the innovations pioneered by smaller companies, we are also seeing big dollars going into investment in development at the early stages. In fact, by some accounts, one third of recent Series A investments came from corporations.

As larger companies seek to add some diversity into their portfolios, scouts and business development executives from larger firms are looking for very specific types of assets—forming new business lines and incubation networks to secure early access to them.

Particularly in pharma, some of the biggest companies have now created their own incubation networks supporting entrepreneurs at the grassroots level through use of rent-free space, wet labs and facilities, and, in some cases, a little bit of funding to try to stay ahead of the game.

In most cases, this does not require the entrepreneur to cede a stake in the company. Often the deal is for the right of first negotiation or first refusal and a first access look at the technology.

How Sellers and Buyers Can Maximize Value

Entrepreneurs have many resources available to prepare for and cultivate investor interest. Many states and municipalities have entrepreneur support programs, such as New York City’s ELabNYC. This program provides coaching and mentorship as well as the opportunity to interact face-to-face with some of the world’s leading lawyers, venture capitalists, private philanthropists, medical clinics and nonprofit foundations. These connections allow young scientists to learn how to devise a regulatory plan, make financial projections and hone presentation skills. Trade associations, such as the Biotechnology Innovation Organization (BIO) and local BIO organizations, can also be helpful resources for peer support. Executives in the life sciences industry are a cohesive community, even among competitors, as they share the goal of achieving a greater good.

Before any M&A transaction, one of private investors’ top priorities should be to ensure that they have a deep understanding not just of the target’s product, but also the science behind it. Buy-side due diligence should consider the regulatory landscape, market size and how a product can change the current standard of care. As they are having these conversations, they also need to have a solid understanding of how their intellectual property measures up in its competitive environment and what other companies are doing that is addressing similar issues. Obtaining a sense of the costs and pathway of the clinical trials and regulation is crucial.

The FDA has grown more agreeable to having earlier conversations to help companies get on the right path. This makes it all the more important for investors to assess the size and scope of the clinical trial. Questions to ask include: What will it take to get to the provable stage? Will it require a separate current procedural terminology (CPT) code? What is a reasonable expectation for reimbursement rate/profit margin? When investors look for an opportunity to unite two similar companies, they should study the culture of both organizations to see if symmetry is possible and to identify redundancies.

Growing the Industry

We often see that when corporate scouts engage with entrepreneurs they show great patience, asking to be walked through the process and offering feedback, even if it’s not a great fit for their area of focus. Being a positive, supportive member of the ecosystem is hugely important to the overall growth and success of these individual marketplaces, although they will strive to attain balanced feedback as emerging companies struggle to figure out who they are and what they are going to do.

Investors and entrepreneurs in this space will find that life sciences is a cohesive community, with many avenues to gain significant value. We expect 2018 to continue to yield significant M&A transactions, collaboration agreements, and early stage investment and development.

John Pennett

John Pennett is the Partner-in-Charge of EisnerAmper’s Life Sciences Group and Technology Group. He has 30 years of public accounting experience, with a strong emphasis on public and private life science and technology companies. Contact him at john.pennett@eisneramper.com or 732-243-7140.