2010 M&A Analytics: Some Observations

Posted March 17th, 2011 in VC-backed Biotech Returns

Our friends at HBM Partners in Switzerland have just published their 2010 Biotech M&A Survey based on a reasonably large set of deals last year.  A few observations I’ve gleaned from their analysis:

  • Acquisitions of VC-backed biotech companies were up considerably in 2009-2010 according to their data. Over 2x more deals were done than in the tough times of 2008, and its back up to 2007 levels.  Given the strong start to 2011 with Plexxikon, BioVex, and Calistoga, among others,  I’m betting we’re in for continued M&A acceleration

  • Looks like some very interesting return-on-invested-capital multiples on the aggregate deal values: Marcardia, SmartCells, AkaRx, and Respivert all raised relatively little before being taken out for what could be very nice multiples.  Several of these even had nice upfronts.  As have many of the deals in 1Q 2011, as noted above.

  • However, the average upfronts in these earnout acquisition deals have come down to an uncomfortable 1.5-2x, with 3-4x as the overall payment.  This is clearly a trend to watch as it will dramatically impact long term returns and the sector’s sustainability: startup biotech can’t sustain spending millions in drug R&D over 6-8 years only to make 1.5-2x as this is roughly only a 7-10% IRR.  Most venture LPs expect 20+% IRR from their venture asset class allocation.

  • The mix of ‘predators’ is changing. Small/Mid-Cap public drug companies are now driving 60% of the M&A volume, whereas in 2006-2007 they were less than 30%.  This trend is likely to continue given their growth rates and Big Pharma’s endless restructuring.

Good food for thought.  Thanks to Uli and his team at HBM for putting it together.

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  • Taffy

    I just posted the link to Linkedin to all groups that I am part of. Hope this helps get you some extra coverage. good review, thanks, Taffy

  • Thanks for the synopsis, Bruce. The declining upfront payments is something we’re heard about for some time now.

  • I can see this as a case for developing drugs elsewhere in the world. The whole FDA paradigm of wanting perfectly safe drugs with superior efficacy is just unrealistic with these returns. Furthermore, this criteria will drive up over cost of new drugs. Maybe 30 years from now the US will be the last market to launch a drug, after it has long-term data in other countries.

  • Gor

    Bruce – Please keep blogging. You’re doing a great job!

  • Anonymous

    Thanks for the comment. Agree, was just nice to see fresh analytics behind it. Sadly I think pharma is using the amount a company has raised, rather than an objective view of value, to set their upfront offers these days. Fortunately the Calistoga’s and Plexxikon’s this year appear to be breaking that trend.

  • Cliff Meijer

    Bruce – Great post. The other part of the equation that would make for a great future post (and something we talked about previously) is what do the VCs do with these long-tail back end payments? Many of these payments won’t come due until well after the fund’s termination.

    Obviously there is some value to these tails, and we’ve been thinking about ways to monetize “long term options”, ie. buying them from mature funds, but would love to see if there’s data showing how much of these back-end payments have actually come to fruition.

  • Anonymous

    Cliff – thx for the note. Great point about the issue of fixed fund lifetimes and the long earnout tails. I don’t think there’s enough of a track record with earnout acquisitions in biotech to know quantitatively, but the anecdotal evidence is that few ever pay out fully. Drug development attrition certainly imposes a huge discount rate, hence why the biobuck numbers can be so large.

  • Excellent information Bruce.. Really it looks very interesting return-on-invested-capital multiples on the aggregate deal values..