Capitalizing on the Global Surge in Life Sciences M&A...Capitalizing on the Global Surge in Life...

Capitalizing on the Global Surge in Life Sciences

M&A

November 10, 2015

Presented by: Jackie Liu

• IPO market is a key driver of M&A outcomes:

• IPO presents an alternative.

• Strong IPO activity promotes better valuations.

• M&A activity and pricing correlates positively with IPO activity.

• Dual tracking of an IPO and sell side process is a time honored strategy.

• As demonstrated by the next set of slides, M&A activity in 2014 and 1H 2015 correlates with the increased IPO activity during the same periods.

2 Morrison & Foerster LLP

M&A AS AN EXIT STRATEGY

ANNUAL TRENDS IN M&A ACTIVITIES: GLOBAL VIEW


Source: Bloomberg

• 1H2015 produced $1.8 trillion in M&A deals, 12.5% greater than the volume for the same period last year.

• The number of announced deals in the first half was over 1,800 greater than in 1H2014.

• M&A activity in Israel is shifting away from the booming high-tech sector of the past two decades – more focus on other industries.

• This has been especially evident in relation to foreign acquirors and investors.

o Acquisitions of Israeli firms outside the high-tech sector by Asian, European and U.S. investors grew to $636 million in 2014 from $73 million in 2013.

o That figure was eclipsed for 2015 by the Tnuva acquisition.

ANNUAL TRENDS IN M&A ACTIVITIES: ISRAELI COMPANIES


Sources: Reuters, PricewaterhouseCoopers

ANNUAL TRENDS IN M&A ACTIVITIES: GLOBAL LIFE SCIENCES SPACE


Source: Deloitte – “2015 Global Life Sciences Outlook”

• Life sciences companies tallied over $300 billion in completed or announced M&A transactions globally in 2014.

• Prior to 1996, Israel was home to 186 life sciences companies.

• Now it is home to around 1,000 life sciences companies.

• 40 new life sciences companies are being formed each year.

• Since 2005, approximately 62 Israeli life sciences companies have been acquired

• Aggregate value of such acquisitions nearly $8 billion.

• $2.9 billion of those acquisitions taking place in 2013-14.

GROWTH OF ISRAELI LIFE SCIENCES COMPANIES


Source: STATE OF ISRAEL, Ministry of Industry Trade and Labor Investment Promotion Center, IVC Research Center

ANNUAL TRENDS IN INVESTMENT ACTIVITIES: ISRAELI COMPANIES IN THE LIFE SCIENCES SPACE


Source: IATI, IVC Research Center

Capital Raised by Israeli Life Sciences Companies 2005-2014 ($M)


ACQUISITIONS OF ISRAELI LIFE SCIENCES COMPANIES BY SUBSECTORS

Source: IVC Research Center

2005-2014

DOMESTIC AND FOREIGN INVESTMENT IN ISRAELI LIFE SCIENCES COMPANIES


Source: IATI, IVC Research Center

Israeli vs. Foreign


CHINESE INVESTMENT IN ISRAELI COMPANIES

• Chinese investment in Israeli startup companies is rapidly growing.

• Value of financing rounds involving Chinese investors nearly tripling since 2012 to $302 million in 2014.

• 30 new Chinese investors in Israel since 2012.

• Approximately 80 Israeli companies have raised money from Chinese investors, 88% of it since 2011.

• 11 Israeli venture capital funds have raised capital from Chinese backers.


CHINESE INVESTMENT IN ISRAELI COMPANIES


• Chinese public and private expenditure on pharmaceuticals totaled US$76 billion in 2014.

• Expected to reach US$315 billion by 2020 - CAGR of 23%.

• Making China the second-largest pharmaceutical market in the world after the U.S. by 2020.

• Activity in life sciences space driven by domestic consolidation.


CHINESE INVESTMENT IN THE LIFE SCIENCES SPACE

Source: Matthews Asia


CHINESE INVESTMENT IN THE LIFE SCIENCES SPACE

Source: Pitchbook

Chinese Life Sciences Investments (2005 – 1H2015)

• Know your counterpart:

• Who are the decision makers?

• Is the Chinese entity a SOE, quasi-SOE or private company?

• Where is the location of the funds?

• REALLY understand what the Chinese buyer wants.

• Use term sheet to resolve critical issues early.

• Emphasis on downside protection.

• Earn-outs.

• Warranty and indemnity insurance – provides risk adverse buyers additional collateral and protection.


SPECIAL CONSIDERATIONS WITH CHINESE INVESTORS AND ACQUIRORS


VENTURE-BACKED VS. NON-VENTURE-BACKED CAPITAL RAISING


VC-Backed vs. Non-VC-Backed Life Science Financing Rounds

2005-2014 ($m)

• Never have just one strategic investor – need at least two to play off one another.

• Never allow veto rights or undue influence on monetization stages of the company to inhibit flexibility in financing or exit.

• Know the downside: a potential black mark in the eyes of a potential acquiror if your strategic investor(s) do not offer to acquire you.


SPECIAL CONSIDERATIONS WITH STRATEGIC INVESTORS


FINANCING OF ISRAELI LIFE SCIENCES COMPANIES BASED ON COMPANY LIFECYCLE


2005-2014


M&A EXIT FOR ISRAELI LIFE SCIENCES COMPANIES BASED ON COMPANY LIFECYCLE


2005-2014


FINANCIAL METRICS IN ACQUISITIONS OF ISRAELI LIFE SCIENCES COMPANIES


Acquisitions of Israeli Life Sciences Companies 2005-2014

• Operational:

• Research (pre-clinical)

• Development (clinical through regulatory)

• Commercialization/distribution (post approval)

• Manufacturing

• Cash flows:

• Seed financing

• Research and development

• Initial revenues

• Revenue growth/market expansion


UNDERSTAND THE MONETIZATION STAGES OF YOUR COMPANY’S LIFECYCLE

• Sequence your M&A exit in consideration of the above stages and your negotiating leverage at each stage.

• Have reasonable expectations about your company’s valuation and leverage at each stage.

• Keep in mind that potential acquirors will review your burn rate and upcoming milestones to determine valuation.


UNDERSTAND THE MONETIZATION STAGES OF YOUR COMPANY’S LIFECYCLE

• Run a thoughtful process – first impressions go a long way. • Due diligence is paramount to buyers. • Reliable audited financials can be critical to many buyers. • Conduct affirmative seller diligence – know your skeletons. • Sloppy diligence leads to loss of credibility – buyers will assume that

similar holes exist in all business processes. • Tougher R&Ws, increased escrows, survival terms and indemnity

claw-backs. • Anticipate gating items (IP transfer hurdles, third party consents and

approvals and regulatory challenges).


TAKE DILIGENCE SERIOUSLY

All rosy now….

What happens when the market turns?

How do you bridge the inevitable valuation gap?


• Key earn-out issues: • Payment timing • Triggering event(s)

• e.g., achievement of performance metrics (development or financial milestone)

• Agreed-upon measurement of performance metrics • Post-closing operating restrictions or operating commitments by buyer:

• Buyer wants to slow commercialization in favor of other drugs • Buyer wants to change commercialization strategy • Buyer wants to devote less resources to rapid commercialization • Buyer wants to exercise cost containment or discretion in overhead

allocation • What is appropriate treatment of add-on acquisitions by buyer


BRIDGING THE VALUATION GAP: EARN-OUTS

BRIDGING THE VALUATION GAP: EARN-OUTS (CONT.)

• Acceleration / vesting of earn-out payment

• e.g., change of control of acquiror; divestiture of acquired asset/business; termination of employment arrangements, failure to comply with operating covenants, etc.


• A structure to address valuation challenges associated with (i) development products or (ii) before a meaningful assessment can be made of the market for commercial products.

• An option deal is a “hybrid” between a customary license / collaboration transaction and an M&A transaction.

• Examples of an option deal: • License of one or more products for a negotiated period of time and

establishment in the license of an option (often exercisable by either licensee or licensor) upon achievement of applicable milestones to cause the conveyance of the product.

• Buyer makes an upfront payment in exchange for right to acquire company in the future.


BRIDGING THE VALUATION GAP: OPTION DEALS

• Size of upfront payment – needs to meet company’s cash flow needs for an extended period past the option period but how long past?

• Term of option – milestones or time based? • Forced exercise if there is disagreement with measurement of achievement of

milestone? • Management restrictions of the company during the option period? • Restrictions on how upfront money may be spent? • Board or observer seat for holder of the option?


CHALLENGES WITH OPTION DEALS

• A structure to address disparate views (as between a buyer and seller) regarding the value of products or development programs that are a part of a larger Company sale transaction.

• Transaction can take a number of forms, including: • Pre-closing spin-off / distribution • Pre-closing asset sale (to third party or affiliated transferee) • Post-closing collaboration / JV


BRIDGING THE VALUATION GAP: PRODUCT CARVE-OUTS

• Similar to traditional license structure but involving continuing cooperative obligations for both parties relating to technologies requiring further research and/or development.

• Typically include governance committees having scientific, business and administrative oversight and responsibilities.

• Typically include diligence obligations to conduct each party’s collaborative obligations.

• Typically, after milestone is met, one party has the obligation to further develop and/or commercialize the product/technology and/or right to buy out the other party.

• Chinese investors favor this structure.


COLLABORATIONS


THE JV AND ALLIANCE DEAL CONTINUUM

Source: PricewaterhouseCoopers


KEY FACTORS TO EXECUTING A SUCCESSFUL ALLIANCE

Source: PricewaterhouseCoopers

Capitalizing on the Global Surge in Life Sciences M&A...Capitalizing on the Global Surge in Life...

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