Navigating the Life Science M&A Savannah

Daniel Wolf

Still recovering from a market correction two years ago, and with a scarcity of attractive targets and ongoing macroeconomic uncertainty, the life sciences dealmaking space is in a state of flux. As big pharmaceutical companies more narrowly tailor their business models and hedge fund activists become more active in the space, M&A lawyers working in it must be ready to deal with the unexpected.

Daniel Wolf, a partner at Kirkland & Ellis — recently named one of the top deal firms in the latest update to the Life Sciences Law Firm Index from Lake Whillans, Above the Law, and MedCity News — has seen it all in his 22 years of practice, from 11-figure deals to private equity transactions to the increasingly common hostile bid, experience he and the Kirkland team bring to bear during a complex period in the space. He recently spoke with us and shared his perspective on life sciences mergers and acquisitions.

Hostile bids used to be comparatively rare in the life sciences M&A arena, but in recent years have become more common. What is driving that change, and how can it be dealt with?

Historically, there’s been a certain amount of reluctance to pursue hostile transactions in the space, particularly when the companies were smaller targets, given the view that there was a significant importance to the people who were developing the drug candidates. With the maturing of the biotech industry, and because a lot of the big pharmas have retooled themselves to be more like biotech companies, they feel they have the infrastructure and in-house skills to develop the compounds better, and, therefore, they’re a little less reluctant to pursue it. Activists have also clearly played a significant role in generating unsolicited activity.

We think about life sciences as a very important subset of our transactional practice, where we bring a broad set of M&A skills to bear on a market segment. If all you are is a life sciences deal person, when that hostile deal presents itself, you probably don’t have the special skills to do that type of transaction. When a client calls us up and says they’re launching a hostile bid for a rival, or says, “We’ve received a hostile bid from a large pharma,” being able to say, “We’ve done those types of transactions,” is invaluable to the client.

What does the market for life sciences M&A look like right now?

Two years ago, the market saw a crazy flourish of deals. Last year was a more measured pace. I think it’s going to continue to be that way until we get more clarity or resolution around the tax policies and whether overseas capital is going to be able to be accessed on attractive terms. Another overhang on the whole industry is the environment for drug pricing. All of those are limitations on deal motivation among the various players in the market, and the smaller number of assets that are left sometimes are relatively overpriced from a true-value perspective. When the number of move-the-needle targets goes down, the ones that are left — even if they aren’t the juiciest steaks — may look better than they are because of that scarcity value. It creates a cycle where no one wants to buy some of them because they end up being overpriced.

Why are there so many fewer targets today than in recent years?

If you look back about five years, there were a few dozen companies in the $5 billion to $10 billion range, which tend to be the type of targets that attract both buyers and activists. That category of company has dwindled to a handful. A significant number of those companies have been bought or fallen in value. Within pharma, the practice of developing compounds from scratch in house has been partially displaced by going out and buying or partnering with smaller independent companies to build the pipeline. Pharma companies are looking to replace drugs going off patent and really have scoured the landscape, buying those companies that fell into that sweet spot because those targets are big enough to make an impression and move the needle, but are not bet-your-company type deals. So, for a big pharma, a $2 billion or $4 billion deal shows you’re doing something and can add a meaningful Phase II-B or III compound, but it doesn’t break the bank if it fails. The carnivores surrounding the savannah have picked off many of the juicy-looking meals, and what you’re left with are often less-attractive zebras.

There has been a concentration of specialization, where each pharma company is choosing its areas of expertise. That means a more concentrated competition for assets with a greater desire to win. Ten years ago, when an oncology asset went up for sale, everyone looked at it, but not one of them viewed it as a must-have. Now, you probably have five or so companies looking at it, but they’re companies that are all-in on oncology — a more concentrated group of buyers who are much more motivated.

The weakness in the IPO market is another factor that’s going to continue to drive M&A activity because you’re getting less fresh targets in the market. There’s a lot more private deal-making going on, a lot more collaborations and collaborations with options to buy. Those are structured transactions that are tougher to do once the company’s public. You’re seeing a lot more of those because a lot of companies that would have gone public 10 years ago when biotech IPOs were the rage are not seeing the same receptivity in the market for a public offering.

Collaboration at Fenwick & West Steers Firm through complex deals

Matthew Rossiter

After a relatively slow 2016 for life sciences deals, Fenwick & West’s corporate group is gearing up for a busy one. And it’s not just the firm’s corporate team that’s preparing for a more active period.

Michael Shuster

Michael Shuster

One of the top deal firms in the latest update to the Life Sciences Law Firm Index from Lake Whillans, Above the Law and MedCity News, Fenwick’s Michael Shuster—the co-chair of its life sciences practice and an intellectual property partner—and Matthew Rossiter, a partner in its corporate practice, credit the firm’s collaborative efforts for its success as a dealmaking firm and as a major player in the life sciences legal space generally.

Shuster and Rossiter spoke about the current environment, the pipeline for deals and some key recent transactions.

What does the market for life sciences companies look like right now?

Matthew Rossiter: I think people are optimistic this year. The IPO market is likely to be good this year; in my view, it’s gotten off to a decent start. We were operating under a bit more uncertainty last year; I think we can all attest that it felt like a very choppy election cycle, so that added to the drag in the market. For better or worse—whichever side of the election you were on—that’s behind us.

Michael Shuster: We’re seeing informatics components in a lot of our clients. PACT Pharma is a new client of ours. They are working on T-cell receptors; large informatics component there. We’re seeing heavy application of informatics (including machine learning) technologies by companies that are in the diagnostic space, as well. We’re creating teams that pair members from the life sciences and high-tech sides of our patent practice to bring deep and sophisticated expertise to support these efforts.

Rossiter: As a group and as a firm, by culture and how we designed and organized ourselves internally, we do a very good job of collaborating. I work with and talk to Michael regularly. He’s a patent lawyer and I’m a corporate lawyer, and we talk with each other and coordinate. For deals, particularly in a complex space like life sciences, that ability to collaborate is critical.

Denali Therapeutics is a company with a growing profile in the Alzheimer’s and CNS drug development space. Last year, we worked with them on a partnership with a company in the U.K. called F-Star, which has a technology that Denali believes will help them get drugs across the blood-brain barrier. We had to understand the IP issues associated with the technology that Denali wanted to license, and that was IP analysis by Michael and his colleagues. We had to negotiate a collaboration agreement, which my partner Jake Handy worked closely on. And the collaboration agreement had a corporate aspect: F-Star structures its collaborations by putting assets into separate companies and giving the partner the opportunity to buy those companies. So there was a corporate acquisition element to the transaction. And, last but not least, there was a tax element, because this is a U.K.-based company and we had to make sure that the tax impact was understood and optimized. So, we had four groups in Fenwick involved in aspects of the transaction. Our ability to work together effectively was critical to make what the folks at Denali described as one of the more complicated transactions they’ve worked on in their careers come off successfully.

What has been driving some of the recent deals in the space, and what do you expect to see going forward?

Rossiter: My client AnaptysBio, which completed an IPO earlier this year, really waited for their opportunity and had a very successful IPO, because they were willing and able to be patient. I believe our first public filing was in 2015, and at that point it was shortly before a downdraft in the market. AnaptysBio chose not to go out because the market was not favorable; instead, they kept their heads down, did the science and moved products that were preclinical into the clinic. By the time they chose to complete the public offering, they had gone from being a preclinical company to one that was ready to start trials. I think that profile is replicated across a lot of companies doing good, interesting science, trying to solve problems and develop new drugs. There’s a crop of companies that have had time while the markets been less accessible to move products along to proof points that are important.

Shuster: I would point to the large amount of money being raised in venture rounds, which provides an economic buffer against relatively short-term transitions that could result from the new administration. The Trump administration has telegraphed, through actual and proposed appointment of outsiders to regulatory agencies, that it will reduce regulatory hurdles as part of its strategy to increase American competitiveness. I point out, without comment on the merits of this strategy, that there could be a shift in the FDA more toward efficacy with less specific concerns toward safety. Who knows how that will actually play out, but to the extent that’s what happens you might expect it to be favorable for the industry.

Rossiter: If we take the Affordable Care Act as a model, it shook up the landscape of the healthcare system in general, and that shakeup created a lot of opportunities for companies. There will be a shakeup of some sort in the landscape again that will create some dislocation. There will be winners and losers, but there will be opportunities to come in and figure out how to best navigate that new landscap