When should biotech platform companies choose to remain independent and grow to become the next big pharma, versus exit via M&A? To answer this, we should first ask: Why do biotechs typically position themselves for M&A rather than long term independent growth? Biopharma M&A is the preferred route of exit for most founders and investors for two key reasons: 1) Rapid, lump sum cash liquidity for shareholders. 2) Hand off risk to partners. Sell assets to big pharma to leverage their capabilities in navigating the long, expensive and risky path to commercialization (e.g., FDA approval, payer negotiations, manufacturing, marketing, sales and distribution) One downside of this is that, post M&A, the hard-earned platform capabilities (the people, knowledge, technology and practices that constitute a biotech) are stripped for parts and largely lost. In the choice between independent growth vs. M&A for biotechs, I propose a simple heuristic for identifying "platform escape velocity". When the risk adjusted return yielded by a (continuously compounding) biotech platform outweighs the value of a wholesale M&A exit for the same timeframe, then the balance tips in favor of independent growth over acquisition. Factors to consider: (1) Time frame to exit. Weighing a sizable M&A in 3 years versus a theoretically larger public market cap in 10 years can be challenging. (2) Sharpe Ratio. What is the projected delta in profit between independent vs. M&A commercialization? (3) Platform rate of compounding. How much does compounding economies of scale in your platform bend your PoS/RAR for each incremental asset? (4) Cost of Commercialization. Are you capitalized, equipped, and staffed as an independent biotech to commercialize? H/T David K. Yang
Adrian Rubstein
1mo
Great piece Eric Dai , maybe we can add another factor 6) how correlated are the potential assets? High correlation on a negative safety data for the first asset might be deleterious.
Sumaya Ali
1mo
Leadership and vision makes a big difference.. thinking Vertex .. Josh Boger and the determination to bring the company to the forefront, stand the test of time, through recessions and downturns .. there remains Vertex.
Gary L.
1mo
Awesome piece
Chengwei Luo
1mo
Insightful. This is a question that I have been asked frequently and I don’t think all platforms are the same. Having a system to properly assess and quantify the value of a platform is important, for both the founders and VCs
dad / husband / co-founder & CEO of iuvantium / Believer in the Infinite Game
1moRefreshing perspective Eric Dai. Could you define your platfrom definition? i.e. is platform offering individual solutions for multiple indications OR multiple solutions for limited number of indications? Usually M&A is driven by a single asset and interest in platform capabilities is muted.