On May 27th, Andy Pasternak, Executive Vice President, Chief Strategy Officer at Horizon Therapeutics and Eric Tokat, a partner in the healthcare practice at Centerview Partners joined Cooley M&A co-chair, Barbara Borden for a discussion of the life sciences M&A market, with a focus on business development. As part of Cooley’s M&A Dealmakers Roundtable series, Andy and Eric provided invaluable insight from a buyer’s and banker’s perspective. Some of the key highlights from their discussion are summarized below. Please note that the views expressed by Andy and Eric are their own and are not the views of Horizon Therapeutics or Centerview Partners, respectively.
Key areas of interest for buyers and investors
The panel kicked off with a discussion about what types of assets pharmaceutical buyers tend to gravitate toward – both from a general market perspective and from the more specific view of Horizon. Andy noted that Horizon has a set area of focus, which includes rare diseases generally and a subset of therapeutic areas (i.e., rheumatology, nephrology, ophthalmology and endocrinology) and diseases within those areas. Andy noted that Horizon’s business development group makes it a point to follow rare disease-focused companies. Horizon’s business development focus appears to be consistent with the market more generally, as Eric indicated that that there has been a major shift over the past several years away from primary care areas to more specialty care areas – with oncology and rare diseases being the primary focus of recent deal activity. For buyers focused in the rare disease space, Eric noted that gene therapy has become a major modality. In response to buyers’ demands, it is probably unsurprising that there has been a surge of investments (both public and private) in therapies in the oncology and rare disease space.
Credibility is key
The panelists dedicated a fair amount of time, often in response to audience questions, discussing common mistakes companies make that can cause them to lose credibility with buyers. At the most basic level, a buyer wants to understand two things: (1) is there an unmet medical need such that the company’s development-stage product will substantially improve the quality of care, and (2) is there sufficient exclusivity to allow commercialization of the product. Andy suggested that it would behoove companies to do the basic homework necessary to answer these questions. For example, if you are going into a market that is going to genericize, be prepared to discuss how reimbursement will work. Basic homework does not mean that companies need to have detailed assumptions and forecasts available, but it does mean having a clear thesis of how this opportunity will meet buyers’ most basic objectives.
Transparency is also critical to developing credibility with buyers. Andy cautioned companies to remember that buyers will eventually see all relevant information in the diligence process, and at least for Horizon, there is never a point in the process when they are unwilling to walk away. He encouraged companies to be upfront about any potential limitations or concerns relating to the company’s development plan, clinical data or other matters as early in the process as possible. Companies should not oversell clinical data. In addition to gaining credibility, a buyer may also be better positioned to help a company work through concerns or rethink the approach on limitations that the company is facing. The buyer may be considering an alternative development plan or even an alternative therapeutic target from what the company has been pursuing, and companies should be open-minded when considering these alternatives.
Initial outreach timing
Ideal timing for an initial outreach to potential buyers/partners was another area of interest to the audience. As part of that discussion, Andy reiterated the importance of having a clear thesis – be able to explain the need for the product and the path to commercialization. Horizon is certainly interested in hearing about opportunities in advance of major development milestones, as it allows them to learn more about the opportunity and do their own external research, but there needs to be enough information available (i.e., clinical data from a very limited number of patients) to have a substantive discussion. Eric offered similar advice, cautioning companies not to prematurely reach out to prospective buyers and to wait until they have at least some data and excitement around their product. Audience members also asked about the impact of the cancellation of biotechnology and medical conferences due to COVID-19 on business development, and Andy indicated that companies were finding ways to have discussions through video calls.
Marketing the opportunity and other process considerations
Over the past several years, broad auctions have largely fallen out of favor. While there is no one-size-fits-all playbook, Eric noted that several of the successful transactions he’s worked on recently evolved around an anchor bid, rather than an initiated sales process. Not surprisingly, companies are often better situated to receive an anchor bid and create a competitive process around that bid if they have adhered to the foregoing guidance regarding the timing and nature of the initial outreach to buyers. Prior conversations with potential buyers will help inform which parties are realistic bidders, leading to a more efficient process than you may otherwise have with a broad auction. Andy also cautioned that a larger process may scare off potential bidders that may not be interested in getting into a 10-way auction.
In response to audience questions, Andy indicated that he doesn’t view opportunities that come from a company directly any differently from those opportunities that come from a banker. Furthermore, Eric felt that some of the most successful transactions are those that have the banker in the background, noting that there is no one better suited to make an initial pitch for the opportunity than the company itself. Once interest has been generated, bankers can help maximize value by negotiating on a company’s behalf and/or creating competition around the process.
The panel also addressed the stage at which a product should be marketed. From Andy’s perspective, the product doesn’t need to be at a certain stage of development for Horizon to consider a transaction, but the company should have a clear thesis of why now is the time to do a transaction, whether a partnership opportunity or an acquisition transaction. From a market perspective, Eric noted that buyers are generally more willing to do a transaction in the earlier stages of a product’s development if the product is broadly transformative, as opposed to a product with more marginal benefits, where there is already a reasonable standard of care.
Diligence from a buyer’s perspective
Keeping in mind that transparency is key during the diligence process, Andy gave an overview of how Horizon tends to evaluate an opportunity. He analogized it to peeling an onion, with the first layer being whether the product is on strategy for the buyer – something that can be determined quickly, often within minutes. Potential partners should refer to the partnering overview presentation on Horizon’s website, which describes the types of pipeline products that Horizon is interested in acquiring or licensing. Horizon often looks at publicly available information for companies that are on strategy in advance of any company outreach and may decide to pass on transactions where the information is not sufficiently robust. If the product is on strategy and the buyer is interested, the next layer typically involves a high-level review, focusing on the commercial strategy and any red flags from a data or manufacturing perspective. In this phase, Horizon will likely review any external research that the company has commissioned and conduct its own research. If that second layer is clear, Horizon will do more in-depth due diligence. Horizon can typically conduct diligence quickly and efficiently, but they are unwilling to compromise their overall quality standards to meet an unrealistic timeline.
Acquisition transaction vs. partnership opportunity
In determining whether an asset is better suited for a partnership transaction, as opposed to an acquisition transaction, Horizon’s key focus is on which party is best suited to move the program forward and get the product on the market. Eric stressed the importance of companies having a standalone strategy, as opposed to a strategy that depends on selling the company. If your sole focus is to sell the company, you will likely leave money on the table. Your standalone strategy should inform whether a partnership or acquisition transaction makes sense. Given the ease of access to capital markets over the past several years, partnering transactions have become less about capital infusion and more about what the partner can bring to the table to accelerate value creation for the product. Often times, a partnership opportunity turns into an M&A transaction at a later stage in the discussions or a partnership process transforms into an M&A process due to competition for the asset.
We are immensely grateful to Andy and Eric for their insight and to our audience for helping to create a dynamic discussion through their submission of thoughtful questions.