An Insider’s Perspective on Mergers and Acquisitions
- Tuesday, 17th July 2012
- Business Bytes
Dr John Newsam is a well published materials scientist and highly successful serial entrepreneur who has co-founded a number of companies and guided several of them through exit by acquisition, including fqubed which was acquired by Nuvo Research in 2005, Integrated Discovery Sciences Corporation, acquired by Bio and Gene in 2005, and hte Aktiengesellschaft, acquired by BASF in 2008. He is currently Co-founder, Chairman and CEO of Tioga Research, Inc. Dr Newsam, a well known scientific educator, is also Adjunct Professor at the University of California, San Diego (UCSD), and Co-founder of Bio4Front which offers customised life science education to both scientists and non-scientists. In addition, he has extensive venture capital experience as Founder, President and Managing Director of Windhover Ventures LLC, and Venture Partner at NGEN partners LLC.
Dr Newsam’s many accomplishments have given him an in depth understanding of mergers and acquisitions from both sides of the coin. In this interview he gives his unique perspective on why it is becoming increasingly difficult for biotech companies to both secure early funding and to achieve an exit by acquisition. He also offers advice on how small biotechs and young scientists can best navigate these murky waters.
Q. Why are investors today hesitant to invest in early stage biotech companies?
The number of biotech companies that have achieved major business success, showing healthy year on year profitability and sustained growth, is quite limited. And the path from launch to that point of business success has typically been long and often grueling. As with most investors, including, no doubt, yourself, Leah, I look towards a return being realizable in not much more than 5 years, with the magnitude of that potential return reasonably reflecting the risk involved.
As the recent Kaufmann report (“WE HAVE MET THE ENEMY… AND HE IS US: Lessons from Twenty Years of the Kauffman Foundation’s Investments in Venture Capital Funds and The Triumph of Hope over Experience”, May 2012) has highlighted, returns of that order and in that time frame have proven elusive, particularly in biotech.
There have been short periods in which the public markets were receptive to the offerings of biotech companies that had prospective therapeutic products early in development, but outside of those periods, the ‘exit’ option for the investor is M&A, and that has gotten tougher to structure in a way that the investor realizes an attractive return; of late, when a program has been acquired, is has been less of an ‘exit’ and more of one more step along the path towards an exit.
Further, in contrast to the founder or the employee, the investor is less motivated by playing a key role in advancing a technology that she or he might have invented, or by resolving a pressing medical need.
Q. Would a fundamental change to the current funding architecture help to promote innovation?
The historical venture capital model, in the biotech context, is pretty much broken. Not only are earlier stage biotech companies struggling to raise critically needed funds, but many venture capital groups are struggling to raise new funds, on the back of multiple years of rather lackluster performance.
In every cloud there is a silver lining, though. There is, I believe, an enticing opportunity for us to devise new approaches to funding, or to fueling early company progress (and I would welcome engaging in brainstorming with others who are similarly intrigued by this opportunity and need). The new Europe-Tatarstan Cleantech Fund, for which I serve on the investment advisory committee, is an example of a recent venture fund that has adopted a somewhat different model.
Q. M&A is seen as a key path forward for many young technologies and the entrepreneurs attempting to capitalize from them. Is it limiting to think that the primary exit strategy for a new company is to be acquired by a larger company?
For myself, personally, and for many other entrepreneurs with whom I have interacted over the past few years, the predominant motivation for creating and progressing a new biotech business endeavor is not that of a major personal financial return. Sure, the prospect of realizing a substantial sum (should the company do really well, should there be an exit event – in which employees and founders can participate , and should I, as a founder or early team member, still own a meaningful equity interest at that point) can be a warming. But that thought is rarely a sufficient motivation for the commitment and the effort that one applies on a day-in, day-out basis. The risks that can chill a prospective investor are equally there of those who invest capital of other types in the endeavor, the staff, collaborators, consultants, advisors, contractors.
Rather, what is for me a more potent motivator is having the opportunity to contribute in a fulfilling way to the building of something that is special, and which is able to make a real impact (particularly when part of that impact derives from significant health benefit realized by people close to you or with whom you interact directly).
As an entrepreneur, one shoulders a responsibility and an obligation when accepting an investment. You are shepherding that investment and want to ensure that the investors who have supported the endeavor through its early phases, likely some of them quite rough, are well rewarded. This is perhaps especially the case for those non-professional investors, friends and family, who have less capacity for detailed due diligence, and less knowledge or skill in structuring the investment agreement in a way that best mitigates risk and optimizes the likelihood of a return. But the obligation certainly extends to professional investors also.
For the various classes of investor to realize a tangible return does require some form of liquidity event. The investors, though, will usually be in the minority, number-wise, of the group of people being impacted by the exit transaction. Whether it is an IPO, a merger, or being acquired, for the majority, the hope will likely be that the transaction is actually quite the opposite of an ‘exit’. The company family, collaborators, customers and providers will all hope that priorities will not be impacted, and certainly not negatively impacted, through the event. In contrast, the majority will be hoping that the ‘exit’ is rather a step towards still greater stability and successes.
Advice I have often been given, is to not focus on developing an exit strategy, but rather to focus on building a successful business endeavor, on making the best day to day, week to week, year to year decisions for the long term health and prosperity of the company. The rationale being that ‘if you build it, they will come’; that sustained business success will develop its own value realization opportunities.
Q. What makes a biotech company appealing as an acquisition target?
As we have just covered, I would hope that such appeal would derive from the company being an exciting business success, evidencing sustained >20% growth and healthy profitability. In biotech, though, as we discussed earlier, both the timeline and the investment required to reach that point can be pretty substantial.
A company might have appeal if it has an asset, for example a therapeutic program that has high commercial potential and which has evidenced strong clinical results, or at least robust proof of principle. For a specific therapeutic area, there will be a limited number of possible suitors, the appetite of each of which will vary at any given time.
In principle, should the company have more than one program at that interesting stage its market appeal will be increased. It is interesting, though, the number of times that one sees a company with a number of internal programs, a strong technology capability, and a good team being dismantled after an acquisition, by deliberate downsizing, by resource starvation, or by attrition, with perhaps only a single lead program being sustained.
To acquire capabilities can be another acquisition motivation – our own fqubed was acquired by Toronto-based Nuvo Research in large part because of fqubed’s unique capabilities for formulations research and skin permeation screening (a combination of proprietary skin permeation screening technologies, formulations development know-how, and experience).
Not too long ago, companies were being acquired for their proprietary technology stables. It is debatable how well those acquisitions worked out over the longer terms, though, and technology platform companies are generally not appealing as acquisition targets today.
In sectors other than biotech, acquisitions have been motivated by the prospect of acquiring an outstanding team, although I can’t think of an example like that in biotech, at least in recent history.
Q. How might a company prepare to be acquired?
Good question – one with dimensions both further from and closer to the acquisition event. First, to have appeal, we have the dimensions we just touched on.
Personally, I see it as a hard road to plan towards being acquired by a given company, or by one of a select set of companies. Maintaining that focus will polarize along directions that might, otherwise, not be optimal. It can be hard to foresee how those companies that you envisage as potential acquirers will develop in their thinking. Indeed, how well do you know the strategy and thought processes of those companies even at the present time? Rather, as we noted earlier, will it not make more sense to focus on making the business the best it can be and not have an eye towards a specific exit.
There is always a plus to having the house well in order – all dealings (corporate, financial, human resources, legal, contracts, assets) well documented and any skeletons cleared from the closets. Also, to repeat, an acquisition may be an exit for a subset of the company family (and even for that subset, it may not represent an immediate realization of financial return), but it is a significant change for a much larger part of the family – the staff, supporters, board, consultants, advisors, providers and contractors. It is also a potential discontinuity for customers and third party collaborators. The needs and concerns of that much larger group will, one hopes, be given ample consideration.
Q. Do you think that the current ease of acquiring new technologies is causing Pharma to lose focus on innovation, creativity and organic growth?
The individual staff at Pharma companies with whom I have interacted have in almost all cases been very competent and capable; many are innovative. Major Pharma can afford to be quite selective in whom they recruit.
One of the aspects of major pharma that is to be admired is the attention to process and procedure. This can be a real value, for example in pre-clinical or clinical development or when working to assess and value an asset.
Inevitably, though, embedding any activity in a formal process, or pursuing research subject to the requirements of a quality program entails a substantial overhead, and that must limit innovation. It is hard to see that changing.
Acquisition of an organization can be a way for Pharma to access, and perhaps be influenced by, groups with more of an entrepreneurial or innovative spirit – and innovation is this context, refers not only to a specific product concept or technology advance, but also to processes throughout the organization. I recall a VP at GSK noting that being able to learn from a fresh organization innovating in drug discovery and in drug discovery approaches was a significant consideration in one of their acquisitions.
Q. Pharma faces declining R&D productivity, expiring patents on blockbuster drugs and pressure to drive prices down – these factors force companies to look closely at the bottom line. How does M&A help these companies, and what significance does M&A have for the industry?
M&A potentially expands dramatically the slate of early or mid-phase programs that a given Pharma can access. Today, such programs can be acquired relatively inexpensively, likely even with substantial shared risk, shared future return provisions. I have not seen a financial analysis that spans a representative number of acquired programs, but I suspect that such an analysis would reveal that program acquisition today proves financially quite attractive.
Q. How can early career scientists learn to form collaborative relationships with investors?
I can see the merit of building a network that includes investors, or prospective investors, but I would question the rationale of focusing such networking efforts deliberately on professional investors, unless the goal of the early career scientist is ultimately to join such a group.
It is hard to raise funding – certainly I have never experienced, or participated in, a funding round that I would describe as easy. And, how you or your company is introduced to a professional investment group can make a massive difference in how your introduction is handled. However, before that introduction, you need to be in a position of having something to offer. Developing your endeavor to that point of investment consideration will benefit from many other types of connections.
Q. What types of things should early career scientists focus on?
Excelling at what you are currently applied to, gaining experience relative to the next career directions you plan to follow (even if in a part-time, or volunteer capacity), networking, taking pride in and enjoying what you are investing your time in.
Q. What should a young scientist working in small biotech be wary of?
The majority of small biotech companies either remain small or disappear; in your local network, you will have met a number of scientists who might have worked in a procession of companies none of which have gone on to achieve major business success. It can be hard to identify whether a company will develop well or will struggle, even when working within the company. There is quite an element of luck. Having sensible expectations about the company prospects will help avoid future frustrations.
I find that there is a strong correlation between how good I feel about a particular position (or company) and how good I feel about the people – I would be wary of working closely with people about whom you have significant reservations. Similarly, you never know when or in which capacity you will again encounter your current colleagues, or supervisor(s) or staff you supervise.
One challenge for a scientist in industry is maintain some level of presence in the scientific community at large – it may not be easy to publish your research results, in the short or even longer term, but there is a value from somehow finding the time and energy to have some visibility external to the company. Even if you stay with the company indefinitely, external scientific connections and reputation will almost always be a plus.
A small biotech company will almost certainly have no formal human resource development program, nor mentoring system. You will need then, yourself, to be able sometimes to take a longer term view of where you want to head, of what you are learning, how you are being stretched in new ways. Thinking more about that, I have often heard that it can be a real help to maintain one or two mentors, inside and outside the company, with whom you can meet and discuss concerns, frustrations, directions, off whom you can bounce thoughts and aspirations.
Thank you for your time and sharing your perspectives
Thank you – I found your questions insightful and I have enjoyed discussing with you. I am pleased to contribute to the Oxbridge Biotech Roundtable and I look forward to further interactions.
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