Venture-backed buyouts hold their own in a moribund M&A market

Biopharma acquisitions slump in 2017, but venture capital-backed buyouts provide hope.

Buyouts of private drug developers dipped to a five-year low in 2017, EvaluatePharma data reveal, echoing a slowdown in M&A activity across the board.

But venture investors, for whom a clean exit is extremely desirable, have reasons to remain cheerful. VC-backed companies accounted for 28% of last year’s biopharma takeovers – a five-year high (see charts below). It seems that the private sphere is not only incubating increasingly desirable targets, it is also still managing to get the deals done.

The graph below shows that private companies backed by venture capital have been taking a growing share of the sector’s takeover deals since 2014. This analysis looks at full company takeovers, tracked globally by EvaluatePharma, and includes only those groups involved in developing human therapeutics. Medtech and diagnostics companies are excluded, for example.

The combined value of these private deals as a proportion of the sector’s total M&A bill has also climbed over this period. As a note, the figure for 2016 excludes Stemcentrx, a deal so large that it skews the underlying trends.

The chart below suggests a way the venture capital world managed to keep its share of the deals so high last year, even as overall activity tumbled. The amount handed over in up-front payments, as a proportion of total deal values, dropped substantially in 2017. Perhaps a willingness to grease the deal wheels kept buyers at the table, even in areas where valuations are sky-high. 

For a complete picture, however, this apparent winning streak must be placed in the context of a broadly retrenching M&A market since 2015’s peak. The graph below shows how takeouts of VC-backed companies have fallen with the rest of the market in the past couple of years.

In the analysis below, the takeout values are based on the up-front portions of these deals, where this structure existed. Private takeovers more frequently involve an initial payment to seal the deal; the headline value in many cases is unlikely to be fully realised. As such, the graph below shows more clearly the actual sums of money that changed hands each year.

For example, while Abbvie committed to the huge sum of $9.8bn for Stemcentrx, it initially paid “only” $5.8bn up front – still a record-breaking amount, as the ranking tables further down show.

Of course, the healthy state of the IPO market proves that VCs are able to pass these start-ups into public hands, where there is need. The fourth quarter of 2017 was the strongest three-month period for biotech IPOs since 2015, with $1.4bn raised (Tide turns as 2017 IPOs ramp up, January 15, 2018).

Top venture-backed takeouts since 2012 - by up-front payment
Date Target Acquirer Up-front value ($m) Total deal value ($m) VC investment ($m)
Apr 2016 Stemcentrx Abbvie 5,800 9,800 274
Sep 2014 Alios Biopharma Johnson & Johnson 1,750 1,750 73
Feb 2015 Flexus Biosciences Bristol-Myers Squibb 800 1,250 38
Jul 2014 Seragon Pharmaceuticals Roche 725 1,725 30
Nov 2016 Selexys Pharmaceuticals Novartis 665 665 23
Source: EvaluatePharma.

With venture funding at a record high, these company creators will be under pressure to keep the deals flowing this year. And, even though valuations are at eye-watering levels in certain red-hot areas, the VCs' own investors will not want to see takeover activity in the private sphere stall.

Top venture-backed takeouts since 2012 - by total deal value
Date Target Acquirer Total deal value ($m) Up-front value ($m) VC investment ($m)
Apr 2016 Stemcentrx AbbVie 9,800 5,800 274
Mar 2016 Boston Biomedical Sumitomo Dainippon Pharma 2,630 200 2
Aug 2017 IFM Therapeutics Bristol-Myers Squibb 2,320 300 27
Nov 2015 Cardioxyl Pharmaceuticals Bristol-Myers Squibb 2,075 300 58
Sep 2014 Alios Biopharma Johnson & Johnson 1,750 1,750 73
Source: EvaluatePharma.

To contact the writer of this story email Amy Brown in London at AmyB@epvantage.com or follow @ByAmyBrown on Twitter

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