Why you should think about your exit now
The exit is a critical step in the lifetime of almost any Life Science product, in order to deliver on the company’s mission and make a big impact on the treatment and quality of life of patients around the world. While it may feel counterintuitive to think of an exit while developing an innovation, it is essential to be aware of the various options that exits provide. This will enable you to steer swiftly when you find yourself in unexpected situations that will occur over the 10-year+ development cycle of the product. In this series of articles, we discuss the different exit strategies for Life Science innovations, share key insights, and ensure you can make an informed decision to push your innovation to market.
In the realm of Life Sciences, an ‘exit’ signifies the pivotal moment when a company’s shareholders realize returns on their investments. High-profile exits make headlines; an illustrative case is the 2022 megadeal in which Amgen acquired Horizon Therapeutics for an astounding $27.8 billion. As these significant deals often grab the spotlight, it is tempting to believe that exceptional products alone guarantee success. Yet there are many more factors at play when it comes to exit strategies that can empower you to assert much greater control over your own success.
Megadeals like the one involving Horizon Therapeutics can, indeed, theoretically happen to any innovative company and sometimes unexpectedly. However, such deals are rare, exceptionally rare, and the journey to success is laden with uncertainties. At FFUND, we firmly advocate preparing for success. Rather than passively awaiting a potentially elusive megadeal, a proactive approach involves understanding the diverse exit strategies available and familiarizing yourself with different exit scenarios. By embracing strategies that enhance your odds of securing a tailored exit deal, you can steer your path towards a more favorable outcome.
Four common exit strategies in Life Sciences
Exit strategies enable you to be ready to mitigate unforeseen events associated with pioneering, high-risk innovation. Each strategy is designed to provide a level of protection and flexibility in the face of unexpected circumstances. Some elements that are usually tackled in the strategy to mitigate risks are contingency planning, to enable renegotiation of the (license) deal, and flexibility in the timing of the deal by connecting it to specific milestones and earn-out arrangements. Let’s take a look at the four most common exit strategies in Life Sciences, illuminating your path towards success amidst the unknown.
#1 Licensing deals and technology transfers
Licensing agreements and technology transfers provide an exit strategy for the technology or product to be further developed and gain access to specific markets. A licensing deal, also known as a licensing agreement, refers to a contractual arrangement between two parties in which the owner of a particular intellectual property (IP) grants permission to another party to use, exploit, or commercialize that IP in exchange for agreed-upon terms and compensation.
Licensing deals in Life Sciences practice
The first technology transfer deal in a product life cycle often already takes place in the earliest technology development phases. The IP on scientific research findings is offered by the universities or companies at which the scientific financing was made, and taken over by a (start-up) company that wants to develop the technology into a validated product.
Also, in later development stages, licensing deals form a frequent commercialization strategy for innovative companies. They allow them to hand over the technology to a larger industry player that has the (financial) resources and a strong foothold in the market to complete the development and make the product available to the healthcare system.
Today, parties most often include an anti-shelving clause in the licensing deal to ensure that when the deal partner does not invest in the product in the future, the rights return to the original owner. By regaining control over the IP, the original owner is able to close deals with new parties that can push the technology to market.
#2 Management buyout (MBO)
A management buyout (MBO) is a transaction in which the existing management team of a company purchases a controlling stake in the company from its current owners, often in collaboration with new external investors. The management team involved in the buyout becomes the new owner and assumes control of the company’s operations and strategic decision-making. The primary motivation behind an MBO is often to allow the existing management team to take direct ownership and control of the company it has been managing. The financial demands of MBOs are often significant, typically comprising a dynamic mix of debt and equity. These resources stem from the buyers themselves, financial backers, and occasionally even the seller, creating a comprehensive funding strategy.
MBOs in the Life Sciences
MBOs happen at various technology development stages and the more frequently seen forms are:
- Spin-Offs from Larger Organizations: MBOs can happen when a division or subsidiary of a larger life sciences company is separated and acquired by its existing management team. This can occur when the parent company decides to divest non-core assets or streamline its operations, and the management team sees an opportunity to acquire and continue running the business independently.
- Entrepreneurial Opportunities: In some cases, the key executives may seek to realize an MBO to gain full ownership and control of the company they have built. This can occur when founders or executives believe in the potential of the company but wish to separate from the existing ownership structure.
- Succession Planning: MBOs can be a succession planning strategy for owners of privately held life sciences companies who want to retire or exit the business. The existing management team may take the opportunity to acquire the company from the current owners, ensuring continuity and preserving the company’s mission.
- Strategic Restructuring: In certain situations, life sciences companies facing financial distress or operational challenges may consider an MBO as a means of restructuring their operations and revitalizing the business. The management team, along with external investors or private equity firms, may see potential value in exploring new growth opportunities.
- Corporate Carve-Outs: MBOs can also occur when a life sciences company’s management team, often in collaboration with external investors, acquires a distinct business unit or technology from a larger parent company through a carve-out transaction. This allows the management team to focus on and fully control a specific area of the business, potentially driving innovation and growth more effectively.
#3 Mergers & Acquisitions (M&As)
The term Mergers & Acquisitions (M&As) refers to the consolidation of two or more companies, either through a merger or an acquisition, resulting in a change in ownership and control of the involved entities. While the two terms are often used together, they represent different methods of corporate restructuring:
- Merger: A merger occurs when two or more companies combine their operations to form a new entity. The original companies cease to exist as independent entities and a new legal entity is created.
- Acquisition: An acquisition, also known as a takeover, happens when one company (the acquirer or buyer) purchases a controlling stake or all of the shares in another company (the target or seller). The acquiring company assumes control over the target company’s operations, assets, and liabilities.
M&As in the Life Sciences industry
M&As occur in various situations and are a powerful way to steer the potential of innovative products:
- Strategic Expansion of the product pipeline or technology: Companies in the life sciences often pursue M&As to expand their product portfolios, enter new therapeutic areas, or gain access to innovative technologies, platforms, or intellectual property that can enhance their research capabilities, manufacturing processes, or product offering.
- Access to Market and Distribution Channels: Acquiring a company or selling to a company with established market access in specific geographic areas, distribution channels, or marketing expertise can help expand reach, improve market penetration, and drive sales growth.
- Consolidation and Competitive Dynamics: M&As often occur because of industry consolidation and competitive pressures. Companies may merge with or acquire competitors to strengthen their market position, achieve economies of scale, or reduce costs.
- Financial Considerations: Companies may acquire or merge with another company to gain access to its cash flows, assets, or intellectual property, thereby enhancing their financial performance and shareholder value. Private equity firms and investors may also initiate M&As to optimize their investment portfolios or support the growth of their portfolio companies.
#4 Initial Public Offering (IPO)
In the context of life sciences, an IPO, or Initial Public Offering, refers to the process through which a privately held life sciences company offers its shares to the public for the first time, enabling the company to become publicly traded on a stock exchange. Going public through an IPO can offer substantial benefits, including access to public markets, increased visibility, and the potential for significant capital infusion.
Life Science IPOs
Although readiness in local markets varies by region, European life sciences companies usually consider going public via an IPO when they are at a more advanced stage of product development. This is often characterized by successful completion of clinical trials, solid financial results with clear market potential, experienced management, and a good track record.
An IPO can provide access to a larger pool of capital compared to private funding sources, allowing companies to fund their ambitious growth plans. Furthermore, the status of being a publicly traded company can enhance the company’s reputation among customers, partners, stakeholders, and institutional investors, and help attract and retain top talent.
Factors for success
When the science is solid and the business is well built, the doors to a strong exit will open. Choosing and preparing for the right exit strategy and being able to close a deal with the right exit party are crucial factors to increase the chances of large-scale impact. Read more about how an exit contributes to your chances of making an impact in the healthcare system in the next article in our series.
Would you like to learn more about exit strategies?
In our series of articles on exits, FFUND discusses the different exit strategies for Life Science entrepreneurs. Learn more about the key insights into the available exit strategies by reading the following articles:
This article is part of the series Exit Strategies for Life Science innovations cocreated by Victor Bakker and Judith Smit.