The world of M&A continues to feel the effects of the COVID-19 pandemic. The rise of COVID-19 and need for a medical response also seems to have spurred a corollary interest in the Life Sciences category and rise in overall deal value. M&A professionals are paying more attention to life sciences deals. M&A deal volume is increasing, and the team at SRS Acquiom has witnessed an increase of 30% since 2019 in this category alone, inclusive of Biotech and Pharmaceutical (“Bio/Pharma”) and Diagnostics and Research Technologies (“Dx/Research”). Below are key observations from our recent 2021 Life Sciences M&A Study, which highlights key effects of this extraordinary time.
The COVID-19 Pandemic Impacted the Nature of Disputes
The COVID-19 pandemic affected both regulatory and developmental work in many Bio/Pharma and Dx/Research companies. For example, many Bio/Pharma and DX/Research companies stopped or stalled medical trials to work on a COVID-19 response. Further, while enrollment in clinical trials is always a challenge, the mandatory restrictions on facility operation and in-person visits made contact with patient populations all but impossible during the pandemic. Adding all of this to the delay in the FDA’s processes and major supply-chain difficulties, you have a recipe for major disruption in contingency payments in life sciences deals.
As a result, the team at SRS Acquiom witnessed myriad impacts to the normal life cycle of a life sciences deal. Some parties stood firm and did not change their original contract. Others worked together to amend their agreements to address the issues caused by the pandemic by, for example, extending milestone deadlines or negotiating an early buyout. Still others entered protracted disputes regarding the reasonableness of the buyer’s commercial efforts.
Interestingly, despite what we experienced as an increase in buyouts and disputes, the SRS Acquiom data set shows only a minor increase in disputes over a 10-year period. Yet, the disputes associated with the pandemic period have already had enough of an impact to move the data slightly.
More and Bigger Milestones in BioPharma M&A Deals
The systemic effects of delayed clinical trials also seem to be causing a slowdown in the achievement of milestones. The SRS Acquiom data shows more development milestones trending higher at every phase for deals with upfront values of more than $100M, and that there are more pending milestones (not yet due) accumulating in Bio/ Pharma M&A deals. There is a proliferation of longer milestone tables with more added to later years. However, actual achievement of later milestones is frequently delayed. To illustrate, our data shows $55.1 billion in milestone achievements were promised, but only $4.7 billion was actually paid.
The data from our recent study also shows the average earnout potential and average number of milestone events per deal increased significantly in Bio/Pharma about six years ago and remain at elevated levels, whereas up-front values showed no distinct change over this time. No similar trends appeared in Medical Devices (“Devices”) or Dx/Research sectors.
It is difficult to find a trend in this market with respect to later-phase milestones, as each deal is negotiated separately. However, sellers seem to be getting higher milestones in deals with higher up-front values.
They (Buyers) have market leverage and are demanding larger milestones, and in particular, contingent milestones.”
The inability to predict what will happen in an uncertain market is causing buyers to want to hedge. Buyers are attempting to address the many directions research might take. They have market leverage and are demanding larger milestones, and in particular, contingent milestones. Even when a deal is negotiated, it is common to have many milestones, with the expectation that some will be missed.
In a category where forward-looking risk is often shared by buyers and sellers through earnouts, it is becoming less realistic to look at the top line owed, or possibly less relevant in today’s pandemic-infused world.
Development Cycle Phase Is Not a Big Factor in Earnout Achievement
Despite major changes in public financial markets, earnouts have consistently appeared in most private M&A deals in life sciences sectors. There has been a surge of more than $20 billion in aggregate earnout potential in our deal set over the last two years, almost entirely from Bio/Pharma.
However, the data at SRS Acquiom shows that bigger milestones (and associated payments) are no longer connected to the life stage of a start-up business. A “hot company” or topic can command a bigger milestone without regard to the development phase. A later stage, more-fully developed company does not appear to have a significant impact on the size of the milestone or frequency of milestones. Inflation also does not seem to be a factor.
Since 2008, SRS Acquiom has provided professional and financial services for life sciences M&A transactions involving Bio/Pharma, medical devices, diagnostics, and life sciences tools and technologies. Our data captures information on agreements or post-closing outcomes that are typically not available publicly.
For more information, download the 2021 Life Sciences M&A Study.
Managing Director, Professional Services Group tel:415-363-6081
Casey is a managing director at SRS Acquiom and leads the Professional Services group. His team of lawyers, accountants, and other professionals is responsible for managing post-closing escrow claims, earnouts, working capital, tax, and other disputes on behalf of the company's clients, post-closing distribution of merger proceeds, and other activities related to serving as the shareholder representative. While at SRS Acquiom, Casey has represented shareholders’ interests on hundreds of deals, including defending claims up to $400 million and administering life sciences deals with as much as $1 billion in contingent consideration.
Before joining SRS Acquiom, Casey represented Fortune 50 clients as a litigation attorney nationally and internationally in a variety of fields. He acted as outside counsel on behalf of numerous parties, including SRS Acquiom and its clients, and took multiple cases to trial and appeal.
Casey frequently presents and writes on subjects of interest to those in the M&A field and is a core contributor to SRS Acquiom’s life sciences study. He is also an Eagle Scout and volunteers with San Francisco Bay Area youth sports. He holds a J.D. from the University of California, Berkeley (Boalt Hall) and a B.S. in economics from Arizona State University’s Barrett Honors College.