For biotechs, success involves a several year hike through mazes of complex, cross-border, business, scientific, financial and regulatory issues. During this year’s BIO2018 conference in Boston, McDermott gathered a panel of industry leaders and McDermott practitioners and led a case study assessment of cross-border biotech M&A, linking life sciences hubs in Europe, Asia and North America. I had the opportunity to moderate our panel as we walked through the structuring and closing of an M&A transaction that involved the auction of a fictional US biotech company that has oncology platform IP/technology. While the company described in the case study was fictional as such, the company and its circumstances were a composite of McDermott’s actual deals.
Our panel’s examination of this case study yielded valuable insights into the context, cross-border dynamics, practicalities, opportunities and challenges underlying the growing volume of international life sciences M&A deals. For example, here are six takeaways.
- Take a good look in the mirror. First, differentiate between your company’s wants vs. its needs, said Greg Benning, managing director and head of financial advisory at Back Bay Life Sciences Advisors. Review your company’s access to resources, particularly its near term funding, to make sure you can accomplish your development objectives regardless of whether your M&A aspirations are achieved. Next, conduct an in-depth analysis of the company’s platform and its asset portfolio, and assess how third parties will view it. This process should yield a realistic assessment of actionable alternatives. “Having defined the playing field, we can start to look at the position of different alternatives more objectively and clearly,” Greg said.
- Map out your IP strategy early. Your IP strategy must be optimized from the very beginning, said McDermott partner Kristina Bieker-Brady. Do not wait to do this until you suddenly wish to market the company or to raise funding. And don’t be too enamored of broadly scoped patents–narrowly designed patents may generate more defensible and credible IP, and in the case of platform IP, can result in a discrete, valuable assets that you can sell and/or commercialize (and use to prosecute infringers) without jeopardizing your company’s core platform. You then optimize your ability to structure for optionality in your future–preserving the luxurious ability to postpone to the future the decision of whether it is best to sell your whole company all at once, or perhaps to sell/outlicense your IP on an asset by asset basis?McDermott partner Linda Ji also recommended that a US company’s early patent strategy should include China. This enables the US company to make the most of opportunities to sell or outlicense to Chinese life sciences investors and companies, which will not be as interested in an IP asset that lacks IP protection in China. Remember that China’s middle class market alone is roughly equal to the size of the entire USA.
- Prepare to jump through extra hoops for overseas buyers. “Investment and acquisition activity in the United States by EU and Chinese companies continues to increase year over year,” I noted. But before Chinese investors can execute international transactions in the US, they must secure exchange control approval from the Chinese government, which can take several months. Also, on the US side, EU, Chinese and other foreign buyers and investors transactions will often need approval from the Committee on Foreign Investment in the United States (CFIUS). Recently, the US government has taken a broader view of what types of transactions implicate “national security,” and there are reasons to expect dramatic expansion of the CFIUS rules. In particular, we believe that biotechnology itself will be regarded as one of the industries in which investment and acquisition will require approval. This could affect both M&A activity and also venture capital and private equity investments. In response to such examples of China and USA government regulation of deal-making, transaction parties might start to explore various risk mitigation measures, for example, a reverse break-up fee payable by the party that cannot obtain the government approval; or multi-staged closings of investment deals to permit some investors to close before other investors; or dual-level investor rights so that some investors have greater rights than certain other investors. And, it would be interesting to determine if the commercial appetite for representation and warranty insurance might also begin to extent to similar insurance be obtained to cover risks from exchange control or CFIUS non-approval.
- Parallel processing–aka, keeping options on the table. Most companies will prepare themselves for parallel paths to maximize value, be it another private financing, an IPO or an M&A deal. Even if short-term gain via M&A is a goal, preparing an S-1 for a prospectus to go public can serve as leverage to maximize private M&A bids. “The more options you can keep on the table longer, the more likely you are to have an outcome that you like,” said Henry Skinner, senior vice president at Tekla Capital Management.
- Early on, avoid the back-to-school blues. If at all possible, when a company is in its early stages of building its IP portfolio, it should avoid or amend in-licenses that grant a university or scientific institute the authority to approve all transactions (such as M&A deals). Such a license undesirably “shifts most of the leverage to the university,” said Michael Mano, lead counsel, business development, at Biogen, Inc. Also, he counsels against university licenses that contain poorly drafted exclusivity provisions that saddle a potential buyer with non-commercial restrictions that–though sensible for a really small, really young biotech–make no sense for a large pharmaceutical company bidder. For example, if a potential buyer has a competing program that runs afoul of that exclusivity, your M&A deal could face significant structuring and risk-allocation headaches before it can close.
- Don’t let your know-how walk out the door. Patents don’t leave a company, but people do, and they take their valuable know-how with them. Retaining valuable people requires being sensitive to cultural differences among staff, and also requires appropriately structured incentives, said Jeff Lu, co-founder and CEO of Engine Biosciences. A biotech company’s management can play a key role in aligning the employees’ equity incentives with the selling investors’ interests.
