Worldwide: Highlights From McDermott's 2016 Pharmaceutical/Medtech Dealmaking Symposium

Summary

On October 25, 2016, McDermott Will & Emery held its fifth annual Pharmaceutical/Medtech Dealmaking Symposium in Cambridge, Massachusetts. The day consisted of a series of thought-provoking panels with leading dealmakers in the biotechnology, pharmaceutical, medical device and digital health sectors who spoke to the current dynamics, challenges and emerging opportunities in the life sciences industry. This piece describes the key takeaways from the event.

In Depth

On October 25, 2016, McDermott Will & Emery held its fifth annual Pharmaceutical/Medtech Dealmaking Symposium in Cambridge, Massachusetts. The day consisted of a series of thought-provoking panels with leading dealmakers in the biotechnology, pharmaceutical, medical device and digital health sectors who spoke to the current dynamics, challenges and emerging opportunities in the life sciences industry. Here are the key takeaways from the event:

Convergence is driving innovation through cross-industry collaboration.

Innovators have turned to "convergence"—the confluence of pharmaceuticals, devices, information technology, big data, materials science and other industries to develop innovative health care solutions—in search of new ways to approach medical treatment, engage patients, improve outcomes, change behavior and deliver a higher value to patients, health care providers and insurers. Emerging as a main theme at the symposium, experienced professionals across industries spoke at length about the trend of convergent solutions, and all agreed convergence is a game-changer for health care. Harry Greenspun, MD, chief medical officer and managing director of KF Health Solutions, shared his thoughts on convergence in a keynote address, observing that shifts in today's health care market toward sharing and analyzing information, coordinating care and engaging consumers, combined with the transition to value-based care, are key drivers for convergence. Consumers—who have traditionally been charged with coordinating their own care—are now demanding increased access to information for themselves and their providers, both to inform the quality of care they are receiving across all of their health care providers and to personally make lifestyle choices that improve health.

The industry is racing to adapt to these demands, however, Dr. Greenspun argued that many changes are needed to develop solutions that will dramatically transform health care. A shift to a value-based payment structures rises to the top of the list as critical to increasing innovation in the care delivery space because it will align incentives for the development of tools that inform and deliver quality outcomes. Further, the industry will need to be smarter in collecting data and analyzing it in a meaningful way in order to extract the right data for digital health solutions to thrive.

Cross-industry panelists speaking on convergence in health care agreed that patient-centric care and increased access to data and information are crucial elements to improving health outcomes, and elaborated on the unique challenges that companies developing convergent solutions will need to overcome. As one example, while the US Food and Drug Administration (FDA) has issued some helpful guidance, it can be challenging to companies—particularly technology companies with limited exposure to the FDA—to understand what is required to market digital health tools. More guidance and increased transparency will decrease the regulatory barriers to entry. Another challenge is the lack of standards for interoperability, which is necessary to provide broad access to data; access that is key for data-driven health care solutions such as population health management. While some companies are offering technology solutions to increase interoperability, the panelists welcome policy changes to bridge current interoperability gaps.

The panelists expressed excitement about the potential for life-altering solutions emerging from partnerships across industry sectors. There are cultural challenges to overcome when working across industries, but those challenges are small in light of the potential rewards. Working with a cross-industry partner—and coming out of a distinct technology vertical—offers invaluable perspective and allows focus on clinical outcomes as a common goal. The result: shrinking time for bringing therapeutics to market, going "beyond the pill" to deliver effective solutions into the market, empowering consumers, and endless possibilities for improving treatment outcomes and delivering high-quality care to patients.

Consolidation and fundraising continues, but has slowed significantly when compared to 2015.

M&A activity has continued in 2016 where there is strategic fit to balance out a company's strengths and weaknesses, but business development professionals and C-suite executives agreed that the pace is significantly slower than 2015. Likewise, some initial public offerings (IPOs) are moving forward, but are much less active than 2015. The panelists opined that the slowdown was due to several factors. First, external forces such as Brexit and the impact of the US elections have injected uncertainty into the environment. With the Affordable Care Act and drug pricing at the center of the debate during the US election season, it is difficult to value assets that depend on reimbursement for revenue. As a result, companies on both the buy and sell side, as well as the public markets, are reluctant to take on the added risk of such uncertainty. Second, pharma companies continue to look to biotech to fill in gaps in their product pipelines will not purchase any type of asset, but are not sensitive to price when encountering the right assets. Consequentially, assets in sought-after therapeutics areas are very competitive and make for expensive acquisitions, while assets in less attractive therapeutic categories are left to partner their early stage assets or seek help from venture capital or debt markets. Finally, access to capital from the debt markets and cross-over investors are changing the game. Companies – including later-stage and even public companies – now have access to other sources of capital to get products to market, which changes the calculation when considering an acquisition.

What M&A deals are getting done in 2016? It is all about de-risking the deal (more on that topic below). Later stage deals in biotech/pharma acquisitions – where the future is more certain – are still active. And, of course, some deals just make strategic sense in that they lower risk generally, such as where the product portfolios balance out each other's strengths and weaknesses, or where the target's assets replace a lost revenue source or grow an existing product pipeline. Companies are overall more willing to pay a higher price to get to a de-risking point, but this makes deals more selective and slower to close.

Speakers throughout the day were optimistic for 2017. Regardless of the outcome of US elections, they expected to see increased M&A activity moving into 2017. They caution, however, that there may be some scars from a volatile political climate that will take time to stabilize before activity will pick up considerably. Further, companies with previously active M&A portfolios looking for alternatives may seek to take more of a corporate venture capital role, recognizing that some opportunities may not quite be ripe for acquisition but there is value in being at the table where such opportunities may be a long-term strategic fit. Taking a corporate venture capital role is a particularly attractive opportunity for medtech companies where traditional venture capital funding is not as abundant. Finally, convergence may be an alluring investment opportunity in 2017 as the trend to value-based payment drives treatment that goes beyond a particular drug or device.

Corporate venture capital is the new big man on campus.

The investment arms of certain pharmaceutical companies—so-called corporate venture capital funds (CVCs)—have become increasingly prevalent in recent years. This growth is likely attributable to companies incentivized by slow recovery from the economic downturn seeking alternatives to internal research and development to access new technology and fill in product pipelines. CVCs vary widely in their investment approaches: while certain CVCs take a more traditional venture capital approach and make investments in companies primarily for financial gain, others take a more strategic approach and make investments in companies that align with the corporate parents' product strategy with the hope of access to new products and technologies. However, regardless of the financing approach and rationale, it was a consistent theme during the symposium that CVC funding is becoming more important as a funding vehicle for early-stage companies in need of capital and strategic relationships.

Some commentators have voiced some concern that CVC investment in an early-stage company may have a chilling effect on a company's ability to attract external (i.e., other than the CVC parent) collaboration partners and acquirers. However, experienced CVC investors and companies funded with CVC capital agreed that they are not seeing this concern play out in practice. In fact, the consensus among the panelists is that the opposite is true—that CVC investment actually helps drive downstream deals—in part because the CVC investment serves as a validation of the company's promise as well as assurance that the company will have access to high-level industry resources and advice. Further, the CVCs are well aware of the potential deterrent effect the CVC having a seat on the board or corporate control can have on attracting outside partners and take active steps to counter this effect, including strictly preserving confidentiality by implementing firewalls between the CVC and its corporate parent, excluding themselves from board discussions relating to potential transactions and not taking large or controlling interests in the companies. It is important to note, however, that there remains an element of concern among early-stage companies that CVCs are spreading capital across the field and may leave a company high and dry if investment in a competitor is showing more promise.

What is the attraction to corporate venture capital? CVCs are viewed by early-stage companies as adding more value than traditional VCs, with access to lab space, scientific expertise and services that will allow the company to get a product through the clinical phase more quickly. Second, CVCs generally take a less active role in managing the company than traditional VCs, opting only for a board observer seat to understand direction of the company and monitor its investment. Finally, panelists on the company side of a CVC investment expressed that they view CVCs as partners, and were concerned that traditional venture capitalists are solely concerned with their return on investment. This discussion provided interesting alignment with panelist observations on physician entrepreneurship: noting that physician innovators, both in academic institutions and in early-stage companies, often initially lack the hard business and operational expertise necessary to bring products to market. CVC funding may provide a means for physician entrepreneurs to access the personnel and expertise they need to harness the economic potential of a technology.

It's all about de-risking.

As mentioned above, the M&A deals that are getting done in 2016 involve de-risking components. A common theme across panels was what companies are doing to de-risk investments in M&A and other strategic deals.

Many of the trends discussed above contribute to the complexity in how risk in an M&A transaction is assessed, including increased globalization, shifting to value-based payment structures and convergence. In addition, many life sciences companies have a complex array of in-licenses and supplier arrangements that make diligence particularly challenging. How should companies doing acquisitions contend with these challenges? Panelists suggested doing a diligence deep dive, but bracing for the reality that issues will arise, and being prepared to focus on remedying these issues in a manner that will enable successful integration of the target with minimized risk following acquisition. While rare, diligence can and sometimes does uncover some deal-killer issues. The top deal-killers noted by the panelists include supply chain gaps or irregularities, discovery that a large percentage of revenue is coming from off-label uses and issues relating to patient safety or criminal activity.

Beyond diligence, since contingent payments can also be a major source of disputes, negotiation of contingent payments requires particular attention to minimize risk. On the one hand, contingent payments in the form of earn-outs or milestone payments are a common means of bridging the value gap in M&A and collaboration transactions with pre-commercial assets. On the other hand, the data shared by the panelists indicated that contingent payments are frequently not paid because the triggering events are not met, even when parties often have easily agreed to the events and timing of contingent payments. Because the pre-commercial assets' potential for success is often in the hands of the acquirer, sellers commonly question whether the buyer has used the appropriate level of efforts to reach the milestone. Panelists discussed strategies for avoiding disputes and litigation relating to contingent payments, agreeing that setting forth specific expectations of the acquirer/licensee and frequent communication with respect to the progress of those expectations can be the best path to avoiding disputes. Knowing the deal and benchmarking against similar deals can provide valuable perspective in setting the milestones, or it can offer information that may lead the parties to choose a different deal structure and avoid the contingent payment approach altogether.

Lastly, the panelists noted that it is important to remember that in any strategic transaction a comprehensive set of representations and warranties is critical to protect the buyer against the unknown and to fill any gaps in diligence. However, the panelists agreed that when the parties are stuck in negotiation on this point, representation and warranty insurance can be a cost-effective means of preserving deal value and keeping everyone at the bargaining table.

Brexit's impact on the life sciences industry in Europe and beyond remains uncertain.

Without a doubt, the life sciences industry is ever-increasingly global and major events in any country that is an innovation center are likely to have an impact that extends beyond its borders. Discussions at the symposium regarding deals and funding opportunities included cross-border transactions and consideration of the impact of recent events; most notably Brexit and Theresa May's signal of a hard departure of the United Kingdom (UK) from the European Union (EU) and the single common market, including the fact that the UK will not guarantee the perpetuation of residency rights to citizens of other EU countries currently residing in the UK. Panelists from the United States (US), the UK and Germany agreed that it is difficult to exactly predict the ultimate impact of this turn of events, but that it will impact the UK's position in the life sciences industry, including EU funding, life sciences dealmaking in Europe generally, as well as the regulation of medical devices and pharmaceuticals in the UK specifically. Panelists throughout the day discussed several considerations with regard to the current landscape in the EU in these areas in general, and for the UK in particular once it has left the EU. 

Over the last years, the EU continuously formed one of the two (or in terms of purchase power parity, three) largest economies of the world, slightly ahead or behind the US, and in terms of purchase power parity, China. For pharmaceutical products and medical devices, the EU has a uniform market authorization system being managed by the European Medical Agency (EMA), based in London but contemplating where to relocate in Europe. In addition to this uniform market authorization system, all member states also still have their own market authorization system (although under common rules) allowing companies to first only get access to individual European member states markets. These national structures are, however, increasingly losing importance as most companies opt to get access to the entire EU market under EMA proceedings.

Having opted to leave the EU and its common market, the UK will lose access to the uniform market authorization system and EMA will be relocated to a remaining EU member state. Thus, unless the UK wants to accept future market authorizations granted to products under rules and structures then beyond any influence of the UK, the UK will have to establish its own market authorization system. In view of the relatively modest size of the UK health market compared to the US, the remaining EU and Japan, several panelists expressed doubts as to whether a UK market authorization would in future be first priority of globally active producers of pharmaceutical products. However, panelists also argued that a small market like the UK might be attractive for market authorization test runs before ascending to larger markets. The national UK market authorization authority is globally well-regarded for its quality, and this might help the UK entertain test run market authorization structures. Further, reimbursement for pharmaceutical products might be more in appealing in the UK than in some smaller EU member states since reimbursement by public payers is still governed nationally by each member state individually without any EU-harmonization.

Following the Brexit vote, the British pound dropped significantly and panelists broadly agreed that following its vote to leave the EU, the economic outlook of the UK looks humble; however, panelists expressed optimism that this might not apply to the pharmaceutical and medical device market. Rather, the weak British currency has the potential for appealing investment opportunities for foreign investors as products in the industries were mostly marketed globally and only to a tiny extent within the UK itself. In particular, the panelists noted that they were not surprised that stocks of globally active UK pharma companies had developed considerably better after Brexit than most other UK stocks.

The panelists did express concern that much funding for fundamental research by UK companies has traditionally come through funding sources in the EU, and going forward UK companies will need to look for alternative funding sources following departure from the EU; a task made more difficult by many elements, including the UK's uncertain position on trade, licensing regimes and political constraints. Practices such as aligning itself with the regulatory standards of the EU and liberalizing use of the UK's national patient database may assist in keeping the UK an attractive location for researchers. 

In connection with securing funding for research, the panelists noted that, compared to the US, there is a lack of private funding in Europe to get product to the proof of concept phase. Some countries, like France, are offering government funding to fill the gap in capital funding. However, public funding is spread thin over many companies and the strategy behind the funding allocation can be uncertain. Several private investors in the EU investors are also looking to fund US companies because the time to deploy a company in the US is shorter than in Europe (80 percent invested by year four; 100 percent invested by year five or six). The panelists did not foresee that Brexit or any other European policies are likely to change this in the near-term.

Brian M. Bunn, Byron S. Kalogerou, Richard B. Smith and Krist Werling also contributed to this On the Subject. 

Highlights from McDermott's 2016 Pharmaceutical/Medtech Dealmaking Symposium

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.