Archive | June, 2013

Alternative Exit Models: Strategic Acquisitions by Earnout

27 Jun

By Max Klietmann, VP of Research, LSN

We are all aware that the IPO market has been less than stellar in recent history. This lack of exit opportunities has been particularly troubling for companies in the life sciences space due to the long time to market and considerable regulatory risk associated with drug development. Logically, M&A exits via strategic buyers has become the predominant exit route for many emerging biotech and medtech companies. M&A is of course not a new phenomeneon, however there is a significant trend in how these deals are being structured. Increasingly, M&A activity in the industry has been characterized by “acquisition via earn-out.”

Earn-outs are essentially pre-defined payments based on specific milestones. As an example, a strategic buyer would buy out an early-stage company (or asset) at phase IIa for a relatively small amount. Then, as the asset hits specific milestones (typically regulatory milestones), payments are triggered. One can think of it almost as a risk-adjusted buyout over time.

The advantage to this deal structure of course is that strategic buyers can afford to engage in more buyouts without putting too much capital at risk in the event of a failed trial. This is good for entrepreneurs and corporate buyers alike, who can diversify their bets on a myriad of assets.

This has overwhelmingly become the model for buyouts in recent time, and will likely become the standard. Moreover, the proportion of money in the upfront payment-versus-milestone payments is shifting as well. This means that entrepreneurs in the space seeking to exit via a strategic partner are likely to see an uptick in exit opportunities via this type of deal model. In turn, patients will see more drugs make it to market, and investors will see a significantly less volatile industry. All-in-all, this is a trend that is bound to solidify its position as an industry standard.

Hot Life Science Investor Mandate 1: European VC Interested in Wide Range of Biotech & Medtech Opportunities – June 27, 2013

26 Jun
A venture capital fund based in Europe has over €700 million in total assets under management, and has raised three funds. The firm is currently deploying assets from its third fund. The third fund’s portfolio currently consists of four companies. They are unsure of how many transactions they will execute in 2013, but aim to have ten to twelve companies in their portfolio for their third fund, and thus would invest in a firm over the next few quarters if a compelling opportunity is identified. Their typical equity check ranges from €6-10 million.

The firm is looking for companies in the biotech therapeutics & diagnostics space, and the medtech space. The fund invests in both therapeutics & diagnostics, and will consider the full gamut of subsectors and indications within the biotech therapeutics and diagnostics, as well as in the medtech space.

The VC invests in pre-revenue, early stage companies. With that being said, they are solely looking for companies that do not currently have a product on the market. In the biotech therapeutics and diagnostics space, the firm typically prefers to invest in companies one year prior to the firm starting their phase I clinical trials. In the medtech space, the firm looks for companies that have a prototype of their device.

Hot Life Science Investor Mandate 2: VC Creates Relationships with Universities for Spinoff Concepts – June 27, 2013

26 Jun
A venture capital fund that has relationships with nearly 50 university partnerships has around $100M in assets, and acts very opportunistically within the life science space. The firm also acquires participation rights for university spinout companies.

About 70% of the VC’s life sciences investments are in therapeutics, 30% of which are distributed between devices, diagnostics, and discovery platforms. Currently, the firm is most interested in therapeutics, and is avoiding med-tech opportunities due to an internal perspective of unpredictability of the FDA’s activities in the med-tech space.

Though they do not have a strict mandate in terms of subsector or indication, therapeutics for oncology, cardiovascular, anti-inflammatories, and ophthalmology drugs have historically done well, and are favored by, the investment team.

The VC does not have a specific timeline for allocation, and will make investments as opportunities arise. Typically, they will invest $500K – $1.5MM initially and reserve 1-3x initial invested capital for follow-on rounds, however the firm is comfortable investing broadly across stage, from seed to late stage, and will selectively invest $100K – $250K in angel rounds on an opportunistic basis. The firm prefers to be a co-investor alongside other firms or syndicates, and lays significant value on investing alongside notable “top-tier” firms.

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