Pod Insights a16z Podcast What’s with All the Bio M&A in 2019?: A Quick Take About this episode M&A in the biotech industry is off to a fast start in 2019. Just this past weekend, Roche announced it is acquiring Spark Therapeutics; Ipsen announced its acquisition of Clementia Pharma; and GE announced a spinoff of its biopharma business to Danaher.
Is this all just coincidence... or are there bigger trends at play? In this a16z hallway-style quick-take on recent news, a16z partners Kouki Harasaki (in bio go-to-market) and Nate Chang (in bio corporate development) chat with a16z operating partner Frank Chen about why all this M&A activity is happening now, and what it means for the bio startup ecosystem overall.
Transcript 0:09 Speaker 3 Well,
0:09 Speaker 2 hello, YouTube. Welcome to the A16Z YouTube channel. My name is Frank Chen, and today I'm here with Koki Hirosaki and Nate Chang, members of the A16Z bio team. Koki works on what we call our market development team, which helps startups find friends in the big companies. And Nate does the same thing for our corporate development partners, which are sources of financing for our startups. And so welcome guys.
0:36 Speaker 0 Thank you.
0:37 Speaker 2 Well, 2019 looks like it is off to a fast start for bio MA. So we had Bristol Meyer Squib buying Cell Gene, we've got Takeda and Shire, we've got the GE biopharma divestiture, and so all of this has happened in the sort of early months of 2019. So let's start with this. Why all the activity all of a sudden?
0:59 Speaker 0 Yeah, so I I think looking back over the last year, there are three uh major trends that have created this perfect storm for where we find ourselves now. Um the first is uh patent cliffs, uh, the second is an excess of cash, and the third is uh a decrease in uh valuations across the board. So uh on the topic of uh patent cliffs, so a lot of the major biopharma companies in 2018 uh saw uh you know loss of exclusivity on major drugs. Uh Roche uh lost exclusivity on Zolaire and uh Rituxin. Um Pfizer lost uh exclusivity on Lyrica and GSK lost uh uh exclusivity on Advair. And so the need to replace those products, replace those revenue streams was there in 2018.
1:49 Speaker 0 And then on the topic of cash, uh, you know, the top 10 biopharma companies came into 2018 with uh about 150 billion dollars of cash on the balance sheet. So the need was there, and the the ability to fill that need uh was also there. And then um uh another interesting wrinkle is uh between January and December of 2018, uh the NASDAQ biotechnology index uh went down uh seven percent. And so uh there's this general trend of biotechnology companies across the board uh decreasing in valuations, and so suddenly uh companies became more attractive or more vulnerable to to acquisition.
2:33 Speaker 2 So I need new assets, I have the money. Things look like they got a little cheaper. Do you agree? This is what's happening? I think
2:39 Speaker 1 the biopsy changed too, specifically in the fourth quarter where across all sectors of the market saw a downturn in uh trading, but I think the buyer universe actually strengthened across pharma. If you look at pharma stocks, how they close it at the end of 18, they were in much better position. So I think the buyer psychic changed in terms of well, we should certainly change your aperture and and re-reexamine some of the key targets that we've been looking at.
3:08 Speaker 2 And what do you think drove that? Like the psychology change. Why are now, why is now the right time, whereas you know, mid-last year it wasn't the right time.
3:15 Speaker 1 Um I think part of it is data driven. If you look at um Spark, which got announced yesterday, they had a lot of nice tailwinds in the hemophilia franchise, and Roche really looked at their HEMA program as a catalyst for stepping in that transaction. Um with respect to Locso, um, they got through their regulatory filings and are about to launch a drug, so I think part of it also is uh buyers want to control the launch and control of the commercial message.
3:43 Speaker 2 Take me into the psychology of a corporate buyer, right? Which is there's a couple strategies that you might be trying to implement, like look, I need a new asset, I need to double down on sort of my areas of core competence, or maybe I need to get rid of things that aren't my core competence. So talk to me a little bit about what might drive uh the decision to buy or sell.
4:06 Speaker 1 Yeah, I think part of it, a lot of it is just growth and the TAM and what what the patient populations and the uh revenue I'm trying to capture with this new product. But it's also um if you actually think about gene therapy and new technologies, they they are creating the moat, meaning, for example, Avexis and SMA, they are the probably the leading gene therapy program out there, and they want to continue building that franchise and have not only FASIC patent clip, but with a new modality, they could actually have more sustained cash flows. So with Avexis emerging in gene therapy with Luxerna and the other Spark programs emerging in Hemophila, I think those two buyers really felt that those are going to be the leading platforms in those in in gene therapy. Granted, they're two different disease areas, but they felt you know we could build pretty strong franchises here.
4:57 Speaker 0 Yeah, and I I think the the operative word here is is platform. So you know, the the industry in general uh saw the gene therapy uh field maturing and um you know uh relatively uh synchronously started making uh investments. And so uh, you know, when we had Voss do the podcast for us um uh earlier this year, he talked about um the investment uh sorry, this is CEO Voss Narson of Novartis. Um he talked a lot about uh Avexis um and how he saw that as uh a real platform play. So um the the uh lead uh asset uh AXBS 101 uh uh it you know certainly is going to be probably best in class for SMA, but uh it also gave Novartis um uh an AAV uh 9 vector platform uh that it could use to deliver other gene therapies.
5:57 Speaker 0 And then uh with the Spark uh uh acquisition um same thing, uh BMS, or I'm sorry, uh Roche was a laggard in the space and um now suddenly leaped ahead with not only uh a marketed gene therapy, but um this uh AAV platform that it could use for delivering other gene therapies.
6:20 Speaker 2 Talk to me more about platforms, because especially for our software viewers, platforms mean something like Linux or the Win32 API or these days AWS. What is a bio platform? Why all the interest?
6:32 Speaker 0 Yeah, so uh I think the most common platform is uh a drug discovery platform. And I think this is one of the existential kind of questions a lot of biopharma you know, early stage companies have to go through. Um there are many companies that have uh proprietary uh drug discovery uh uh platform uh methodology uh with the promise of um discovering multiple new drugs. But oftentimes uh those companies will you know uh have to focus on a few select programs uh to partner. And so uh the existential question is is really around hey, you know, do we try to go it alone, preserve the platform and hopefully have it realize kind of the the full kind of uh breadth of discoveries we can make, or um do we uh get acquired by a company, they develop the lead assets, and then you know the platform itself gets shelved.
7:33 Speaker 2 So the platform is sort of shared RD, shared know-how that could potentially lead to different assets. Is that sort of the way to think about platform?
7:41 Speaker 1 I think the terms also changed a little bit. Um if you actually look at Spark, it's uh definitely has its anchor in gene therapy. But I think the thing that gets underappreciated in uh biopharma is downstream capabilities, and so they have a manufacturing facility on Market Street in Philadelphia.
8:00 Speaker 0 And I
8:00 Speaker 1 think that was a key strategic asset. I think other gene therapy companies have done the same unicured manufacturing facility, Odentis has done the same too. So I think the platform is not just an enabling technology to source and discover new drugs, but it's also the breadth of end-to-end solutions for modality.
8:20 Speaker 0 Yeah, and I uh that's I think that's spot on. So uh when we met with Voss, he he talked about um Avexis, you know, again being a platform, but but also giving Novartis uh scalable manufacturing in the gene therapy space. So you're right. I mean, there uh you know specialized fields like gene therapy carry with it, you know, very specific uh functional know-how um that they they need, you know, big companies need to bring on board wholesale.
8:48 Speaker 1 Correct. And just on Voss, he made two acquisitions in the radio labeled uh uh target oncology space. So with triple A and Endosite and Endosite being the most recent acquisition, uh they were able to secure that supply chain for that specific um radioisotope. So I think that in itself is a sort of an enablement platform for that uh company.
9:11 Speaker 2 Yep. And Nate, zooming up a level, maybe talk about how much MA has already happened this year. We're just uh about to hit March and compare that to last year.
9:21 Speaker 1 How many dollars are we talking about? So in 2018, they uh the industry announced 123 billion of um MA transactions. This year we're at 94 billion. Wow. We just hit March. All right, fast start. Yeah, it's fast start. Um we'll hopefully see continued pace uh throughout 2019. Uh part of it's also capital markets driven. Um you know, I think we're gonna continue to see uh sl slightly slower pace in terms of um IPO exits, but there's certainly a lot of companies that that that were eye in the capital markets in in 2019, and we'll see if that Yeah.
10:01 Speaker 2 Now imagine you're sitting in the seat where you're in a corporation and you're trying to figure out how do I deploy my dollars, right? And at one end of the spectrum, we have these sort of massive blockbuster deals, right? And we're off to a fast start this year with them. On the other end of the spectrum, I could take, you know, 100, 200, 500 million dollars and sort of invest early in companies alongside investors like us, right? Like the biofund, and sort of what's your general advice? How should I think about deploying capital late versus deploying capital early?
10:32 Speaker 1 Yeah, I think CellGene had a great playbook. They were very active in looking at um earlier stage companies in terms of licensing, licensing with equity or also licensing with the option of buy. They had all those structures uh laid out for a lot of their early stage investments. Um I'd say from the strategic perspective, I think there are multiple inputs that go into this for early stage companies is going to be an RD decision, and they're gonna be the ones that catalyze the decision in terms of make you know going all in on a on a platform or early stage company. So I think um most companies will want to be more risk-averse and rent versus buying technology to enable their RD productivity in the in the short term.
11:20 Speaker 1 Um I think most acquisitions that you see in in biotech are late-stage to marketed um uh stage companies. So they are I think uh pharma companies are still very conservative in terms of making big bets on early stage platforms for acquisition.
11:37 Speaker 2 Say more about this sort of rent versus buy, which means it it's gonna be a licensing agreement of some sort rather than an outright acquisition.
11:44 Speaker 0 Yeah, so so uh you know, just on the early stage uh, you know, uh the I think this is also very common with platform technologies, especially very new uh differentiated ones. Um you see uh big pharma companies uh you know either use their corporate venture arm to invest early, which is a good way of looking under the hood. Um and then you know, a later stage uh setting up uh potentially some kind of partnership agreement, uh co-development agreement where it's basically a handoff with the the big pharma company taking over at a later development stage. Um so uh option agreements are um pretty common. Uh option agreements uh effectively allow a big pharma company to um outsource RD, not have it appear on their RD line on the PL and decide it at a later date whether they want to continue or not.
12:43 Speaker 0 Um and so I I think deals like that around platforms will continue on. Um in terms of acquisitions, um, you know, we saw uh Clementia get uh acquired by uh Ibsen, and and that's a classic uh single asset company. Um you know, it it's common to see single asset companies um really kind of get further along in development because it's it's really a binary bet that you're making. And so you want drug
13:12 Speaker 2 works or not. It exactly.
13:14 Speaker 0 So, you know, it's it's typical to see pharma companies wait for um proof of concept, you know, phase two A data that shows safety and some efficacy before uh doubling down. Now there are some uh areas of clear exception. Um so very competitive hot areas uh like oncology, immunology over the last few years, you've seen this shift uh in acquisitions um earlier on uh in in phase one and and actually even earlier um just because it was so competitive. And that was a very strange phenomenon because people were really making large bets in absence of any human data.
13:55 Speaker 2 Let's sort of switch hats. So we talked about it from the point of view of sort of the large corporate buyer, how should I be thinking about it? Let's think about it from the point of view of a startup executive, which is you know, I just finished my PhD or my postdoc, and I've got some miraculous way to build a diagnostic or build a therapeutic. And then I start down the path, and at some point I'm gonna need to engage with the existing incumbents who have all of the distribution. How should I be thinking about those conversations and what are some best practices that you would sort of have for people in that boat who are starting those conversations?
14:29 Speaker 0 Sure. So I think um, you know, early on it's uh you know a mistake that happens all too often is to think about big pharma as this kind of nebulous, you know, uh hole that that you'll kind of deal with later. Uh it's it's actually quite important to look at the landscape, um, understand uh what therapeutic areas are high priorities for uh uh the major biopharma companies, start thinking about who you want to partner with and uh you know engage them at the at the right time. And so uh that and that that that timing is is you know uh dependent on a lot of factors. Um but uh you know the I think uh sharing the same vision is is really the most important thing.
15:14 Speaker 0 Um some of the most successful partnerships I've seen, even early stage, uh the head of RD uh just absolutely loved the science, love the technology, um, and was committed as uh you know an internal champion. Um and then you know, uh deals that are more transactional, you know, tend to happen later where companies kind of look at a late-stage um asset as just a revenue stream that's going to come online in two years or three years. Um and so uh you know, another another you know really important consideration is you know, what kind of uh partnership or merger do you want in the future and and what capabilities do you want to contribute and what do you want your partner to contribute?
16:01 Speaker 0 So again, you know, anybody can kind of do some research, understand the landscape, and and really uh hone in on uh ideal partners for them. Um and then you know, there are other considerations later on where uh some big pharma companies will just tend to fully integrate uh the company uh whereas others will uh like Roche and Spark will uh allow the the acquired companies to um operate semi-autonomously.
16:30 Speaker 1 I think articulating the total adjustable market and where you're gonna be in that treatment paradigm is pretty key for the therapeutics companies because some they kind of paint a broad stroke, I'm gonna be an oncology company, I'm gonna target X, but you're gonna be fifth line or fourth line, how does that move the needle meaningfully meaningfully for a physician, but also then for the partner in terms of how they think about uh their commercial strategy in a sort of a five to ten year horizon.
17:01 Speaker 2 And
17:01 Speaker 1 kind of understanding that and and you may not have all the numbers and where all the chips will fall because it's a very fluid field because there are probably a hundred oncology companies that are development stage or targeting the same tumor type. So I think having that context and being um uh thoughtful about that would is it lends a lot of credibility to your story.
17:24 Speaker 0 Yeah, and I I think that's that's a very fair point because you know, at the end of the day, if you're uh an operator, a founder, you've really put your blood, sweat, and tears, and and your life on the line to create something, and it's your baby. And if you're going to pass it on to somebody else, you want to make sure that your baby is well taken care of. Um so you know, in negotiations, I think the tone really uh reveals you know whether you're a high priority or not for the company. Uh and um, you know, just in the extreme cases, um, I can tell you that big companies that really want an asset that really want to show commitment to that program will uh fly you know a big uh portion of their executive committee out uh in final negotiations to say, hey, uh we're committed. And um you know that that's that's kind of the strongest vote of confidence that you can see.
18:14 Speaker 2 If you don't see the busload of executives unload at your front door,
18:18 Speaker 0 yeah,
18:18 Speaker 2 you're probably not gonna get the premium price. Exactly. Yeah. Um, Koki, I know that you brought some uh props for us today. And um why don't we use the props as a way to talk about this sort of age-old sort of battle between startups and the incumbents, and the age-old battle is look, the startups have the innovation.
18:38 Speaker 0 They're
18:38 Speaker 2 going to be inventing the new therapies, creating the new assets,
18:41 Speaker 0 but
18:41 Speaker 2 the incumbents have all the distribution. They know how to sell, they know how to get reimbursements, and so on and so forth. And there's been a lot of change in the way that you can sell. So talk talk to us a little bit about that.
18:51 Speaker 0 Yeah, so uh so exactly. I mean, the traditional kind of partnering model, um, a co-development model, um, was you know, the the company would do the discovery and early stage development, and then at some point pass it on to uh the the big pharma partner to develop and uh get approvals and um get distribution. Um I think what you've what we've seen uh really over the last 10 years is um a lot of boards want the companies to be able to uh be standalone. And so what you see are uh in this fairly typical uh and actually Spark is a good example where um the company will keep uh commercial rights for the US and you know uh uh outlicense X US rights.
19:44 Speaker 0 So in the case of uh Luxterno with Spark, uh they uh kept the US rights and um uh outlicense the X US rights to Novartis, which is actually a weird entanglement now because uh the the two uh Basel. based rivals uh are sharing an asset. So I I think that that's that's been a a change. Companies do want a chance to be standalone in many cases. And you know in terms of again this goes back to the conversation about what the company hopes to contribute versus what the the partner, the big pharma partner hopes to contribute. And again, you know it's it's it comes down to a level of commitment.
20:33 Speaker 0 If the asset is very critical to the business the pharma company will in all likelihood want to control the manufacturing and distribution unless it is a very niche specialized product like gene therapies and AAVs which require specialized know how. And and it's it it's understandable if uh you know it's mission critical to get the quality manufacturing CMC right.
21:03 Speaker 2 Yep. Great. Fantastic. Well thanks guys for joining me on this hot take of all the MA news and if you liked what you saw go ahead and subscribe to our channel and we will see you in the next episode. Bye now.
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