Biotech Exit Strategies: Delivering value to investors in a challenging funding market

Report Description:

Biotechnology ventures involve costly research and development and a 10-20 year delay in generating product revenues. The high risk nature of early stage biotech research is primarily funded through venture capital, with high risks resulting in potentially high rewards. While the biotech venture model has remained relatively unchanged over the past 30 years, the exit strategies employed by companies and venture capitalists have adapted to the market conditions prevailing over time.

There are three primary biotech exit strategies. The traditional route has been to fund a biotech venture through to a successful public floatation (IPO). However, as IPO markets have become more challenging, a second key route has emerged whereby early-to-mid-stage biotech ventures are being acquired by or merged with bigger pharmaceutical and biotechnology companies looking to secure new technologies and pipeline prospects. Alongside these two major exit strategies sits the alliance and licensing model which effectively provides a partial exit strategy for companies and venture capitalists, often involving a dilution of risks and the bringing forward of potential returns.  

Establishing the most effective route to exit for a biotech venture is critical in ensuring value is maximized for key stakeholders and the associated technology. However, more critical than selection of exit strategy is the planning and effective execution of exit. Fledgling biotech companies owe their existence to the promise of a valuable exit for the early-stage funder. As a result, each and every biotech company must be able to demonstrate that all plans and actions are effective steps towards the realization of success exit, even where the method and timing of exit are largely undecided. ‘Biotech Exit Strategies’ report provides a detailed review of current and future trends in biotech exit strategies and uses real-life case studies to illustrate the key challenges and critical success factors involved in executing an exit for biotech investors. The report provides a unique strategic analysis for successfully dealing with the prevailing challenging financial conditions facing biotech companies and investors.   

Key Findings

Establishing the most effective route to exit for a biotech venture is critical in ensuring value is maximized for key stakeholders and the associated technology. However, more critical than selection of exit strategy is the planning and effective execution of exit.

Total private and public funding for biotech companies fell by 59.1% in 2008 to a five year low of US$10.8 billion. Public companies were hardest hit, as a result of public funding markets contracting in the wake of the credit crunch and global financial crisis in the second half of 2008.

A total of 15 biotech IPOs raised more than US$100 million between 2004 and 2008. The last major biotech IPO was the floatation of nanotechnology diagnostics company Nanosphere, which raised US$112.7 million in October 2007.

Several recent biotech M&A deals have resulted from partnerships established through long-term strategic alliances. In 2008, Novartis’ US$880 million acquisition of Speedel, Sanofi-Aventis’ US$553 million acquisition of Acambis, Ipsen’s US$441 million acquisition of Tercica and Teva’s US$360 million acquisition of Bentley all followed earlier alliances between the two parties.   

Use this report to…

• Gain a full understanding of recent biotech funding and exit trends, including IPOs, M&As and licensing and alliances, and their impact on biotech company valuations and investor returns.
• Add future forecasts for funding conditions and exit conditions to the strategic planning process.
• Reference and benchmark 15 in-depth case studies outlining best practices and key learnings from recent biotech exit activity.
• Compare and contrast the key benefits and challenges associated with different routes to biotech exit.
• Audit current planning milestones and create a checklist of critical success factors associated with the three different routes to biotech exit
• Implement a detailed framework for biotech planning, combining the funding lifecycle with exit valuations and interim clinical, commercial and financial parameters 

Key issues…

IPO market is closed. Report identifies trends and proposes alternatives to an immediate IPO.

Reverse mergers. Report outlines a new trend in reverse mergers that provide an alternative route to public listing when IPO markets are closed

M&A instead of IPO. Report highlights the rise of the M&A exit, and confirms its importance in the down cycle for biotech IPOs.

Alliance buy-outs. The report details the delicate balance in pursuing alliances aimed at an eventual partner buy-out exit without limiting M&A exit opportunities with third parties.

Path to exit. The report provides a framework for planning a biotech investor exit and details the valuation objectives, milestone parameters and eventual funding to exit lifecycle.

Discover...

• What are the alternative routes to biotech investor exit and how do these approaches impact on the funding lifecycle?
• How do the current challenging funding conditions impact on biotech exit alternatives?
• What are the likely future trends in biotech funding and exit opportunities?
• With a closed IPO market, how can biotech companies realize a investor exit event?
• How do licensing and alliance agreements impact on likely future exit opportunities and their valuations?
• What are the differences between an enterprise-level and asset-level valuation, and when is each appropriate to planning an exit?
• Which clinical, commercial and financial parameters best track biotech progress towards a successful exit?

Table of Contents

• Biotech exit strategies

Executive Summary 10

• An introduction to biotech exit strategies 10
• Biotech exit trends 11
• IPO exit strategies 12
• M&A exit strategies 13
• Alliances and licensing exit strategies 14
• Building the path to exit 15
  

Chapter 1 An introduction to biotech exit strategies 18

• Summary 18
• Introduction 19
• The biotechnology funding lifecycle 20
• IPO as an exit strategy 21
• M&A as an exit strategy 21
• Alliance/licensing as an exit strategy 22
• Developing a path to exit 22

Chapter 2 Biotech exit trends 26

• Summary 26
• Introduction 27
• Biotechnology funding trends 27
• IPOs are down and will be for a while… 30
• M&A is up… 31
• Licensing is down slightly but still delivering value… 31
• Biotechnology productivity trends 34
• Biotech exit strategy trends 36
• IPO trends 37
• M&A trends 37
• Alliances/licensing trends 38
• Future exit strategy trends 41
• Reverse mergers 41
• Creative financing 42
• The quasi-public corporation 43

Chapter 3 IPO exit strategies 46

• Summary 46
• Introduction 47
• The traditional exit strategy 47
• Key benefits 49
• Key challenges 50
• Case study insights 50
• Bioheart – 2008’s only US IPO 51
• MolMed – 2008’s biggest IPO 52
• Acorda – Two rounds of follow-on offerings in 2008 52
• Talecris Biotherapeutics –IPO registration leads to acquisition 53
• Alimera Sciences – Proposed IPO withdrawn 54
• Key success factors 55
• Timing is everything… 56
• Products, products, products… 56
• Commercial validation from partners and investors… 57
• Corporate management talent… 57

Chapter 4 M&A exit strategies 60

• Summary 60
• Introduction 61
• The emerging exit strategy 61
• Key benefits 63
• Key challenges 64
• Case study insights 65
• Piramed – 2008 big pharma acquisition 65
• U3 Pharma – 2008 Japanese pharma acquisition 66
• OncoGenex Technologies – 2008 reverse merger 67
• IDM Pharma – Reverse merger at risk of delisting 68
• Protein Sciences – 2008 terminated biotech acquisition 69
• Key success factors 71
• Clinical validation… 71
• Commercial potential… 71
• Existing relationships… 72
• Committed management… 72

Chapter 5 Alliances and licensing exit strategies 74

• Summary 74
• Introduction 75
• The part exit strategy 75
• Key benefits 77
• Key challenges 78
• Case study insights 79
• Adnexus – Laying the tracks for an eventual buy-out 79
• MacroGenics – Generating a funding catalyst 81
• ChemoCentryx – Blockbuster strategic alliance, but no IPO 82
• Anacor – Key partnerships but no IPO 84
• Phenomix – Licensing instead of IPO 86
• Key success factors 87
• The right deal with the right partner at the right time… 87
• Reinforcing the long-term exit strategy… 87
• Creating, not limiting opportunities… 88

Chapter 6 Building the path to exit 90

• Summary 90
• Introduction 91
• Defining the objectives 91
• Asset-level exit 92
• Enterprise-level exit 93
• Keeping options open 93
• Setting the parameters 94
• Clinical 95
• Commercial 96
• Financial 96
• Building on success 97
• Responding to failure 98

Chapter 7 Appendix 102

• Research sources 102
• Bibliography 102

List of Figures

• Figure 1.1: The biotechnology funding lifecycle 20
• Figure 1.2: The biotechnology path to exit 23
• Figure 2.3: Global biotech funding trends (US$bn), 2004-08 28
• Figure 2.4: Global IPO trends, 2004-08 30
• Figure 2.5: Biotech M&A trends, 2004-08 31
• Figure 2.6: Biotech alliance and licensing deal trends, 2004-08 32
• Figure 2.7: Biotech alliance and licensing value trends (US$m), 2004-08 33
• Figure 2.8: New product approvals – leading biotechs versus leading pharma, 2004-08 35
• Figure 2.9: R&D productivity – leading biotechs versus leading pharma (US$bn), 2004-08 36
• Figure 2.10: Number and value (US$bn) of US biotech IPOs, 2004-08 37
• Figure 2.11: Number and value (US$bn) of M&As, 2004-08 38
• Figure 2.12: Biotech alliances and licensing trends (US$m), 2004-08 39
• Figure 2.13: Biotech alliances and licensing trends by development stage, 2004-08 40
• Figure 3.14: Average IPO exit values in US (US$m), 2004-08 48
• Figure 4.15: Average major biotech M&A exit values, 2004-08 62
• Figure 5.16: Average licensing/alliance part exit values (US$m), 2004-08 76
• Figure 6.17: Defining biotech exit objectives 92
• Figure 6.18: Setting biotech exit parameters 95

List of Tables

• Table 3.1: Leading US IPOs (US$m), 2004-08 47
• Table 3.2: Bioheart profile: 2008’s only US IPO 51
• Table 3.3: MolMed profile: 2008’s biggest IPO 52
• Table 3.4: Acorda profile: 2008’s only double follow-on offering 53
• Table 3.5: Talecris Biotherapeutics profile: 2008 proposed IPO leads to M&A 54
• Table 3.6: Alimera Sciences profile: 2008 proposed IPO withdrawn 55
• Table 4.7: Leading private biotech M&A deals, 2006-08 61
• Table 4.8: Piramed profile: 2008 big pharma M&A exit 66
• Table 4.9: U3 Pharma profile: 2008 Japanese pharma M&A exit 67
• Table 4.10: OncoGenex Technologies profile: 2008 reverse merger 68
• Table 4.11: IDM Pharma profile: reverse merger at risk of delisting 69
• Table 4.12: Protein Sciences profile: terminated 2008 biotech M&A exit 70
• Table 5.13: Leading private biotech licensing and alliance deals (US$bn), 2006-08 75
• Table 5.14: Adnexus profile: strategic alliance leading to 2007 M&A exit 80
• Table 5.15: MacroGenics profile: strategic alliance as a 2008 funding catalyst 81
• Table 5.16: ChemoCentryx profile: strategic alliance but no 2008 IPO 83
• Table 5.17: Anacor profile: two key partnerships but no 2008 IPO 85
• Table 5.18: Phenomix profile: 2008 strategic alliance instead of IPO 86