The Science Of M&A: Making The Most Of Your Financial Resources
By Ed Miseta, Chief Editor, Clinical Leader
As CEO for France-based biotech Onxeo, CEO Judith Greciet is always looking for new opportunities to bring complementary products on board to expand her company’s pipeline. Onxeo currently has three compounds in clinical development, with one at the end of its Phase 3 trial. In Q1 2016, the company acquired a company called DNA Therapeutics, a spinoff of the Institut Curie and three major academic units in France. The technology Onxeo was interested in is a DNA repair inhibitor product called AsiDNA.
That compound had already gone through comprehensive pre-clinical research. An initial Phase 1 study had been performed with local (intratumoral or peritumoral) administration for metastatic melanoma. The goal of Onxeo is to move AsiDNA into a new Phase 1 study in orphan oncology indications using the IV route to administer the drug.
“External development is a key path in our strategy to grow the company,” says Greciet. “Whether you refer to this as an acquisition or inlicensing, we knew we would require additional, innovative assets to widen our pipeline and increase the value of the company. We are also convinced we can create additional value by applying our expertise to new compounds.”
You Can’t Eliminate All Risk
In going through the acquisition process, Greciet states her first step is finding the most innovative new compounds that have the potential to enhance her company’s existing pipeline. While that might be the first step for most companies, being a small company means Greciet must look for compounds where her company can best create value and where it also has the proper resources to move it forward. Her focus is generally on pre-clinical assets or those in Phase 1. Acquiring assets that are early in the development cycle adds more risk, since there is little data to review. Therefore, internal personnel need to not only find the right compounds, but must also have the right expertise to determine if the potential for success is high.
Greciet also spends a lot of time trying to fully understand the goals of the product being acquired, and having a firm belief the compound can hit its intended targets. But even when you have the best data possible, she notes you will never be 100 percent certain about the viability of a compound.
“There are always gray areas in the data,” she says. “When considering the acquisition of a compound, I like to identify and prioritize what I believe to be the key issues, and then see if the data gathered allows us to assess various scenarios and how they might impact the project. There is always risk involved in the process. Part of the risk analysis process includes looking at every possible scenario in a very honest manner and deciding whether or not your company can support the amount of risk each entails. The type of deal and above all deal terms are also key in the game to assess risk taken and overall company exposure in case the asset is not delivering as expected.”
In the AsiDNA acquisition, Greciet states she did not have all of the answers she would want from a preclinical/phase I stage compound. “We took the information available from the animal models and the Phase I study and looked at it with a critical but open mind,” she says. “That is the best a company can do, and it is true of any due diligence effort. On AsiDNA, even with the uncertainty that existed, we were able to build up our conviction that the compound would work.”
Perform Proper Due Diligence
Greciet likes the due diligence process to be a company-wide endeavor, involving key internal experts from the top-down. The science is the first thing examined, including the data and the intellectual property. When acquiring the entire company, there are additional areas that must also be examined.
“If you are getting employees, you will want to see how that will impact your company,” she says. “You also have to prepare a business plan detailing how the integration will take place, what will have to happen on the HR side of the house, and obviously the financial and legal aspects of the integration. The science and the data always drive the decision, but when acquiring a company you also acquire everything within the company.”
Greciet tries to make this as much of a controlled process as possible. First, everyone on the due diligence team will raise every risk they can imagine. Then a discussion takes place on how these risks can impact the project and the best ways to mitigate them. Finally, a go/no-go vote is conducted. She describes this process as a balancing of what you know (the proof you have in the data) versus what you don’t know (the risks). After a final review of all risks and benefits, the team will discuss various methods of acquiring the asset.
Use Cash For Development, Not Growth
Along with this due diligence process, discussion on legal and financial terms is started, to ensure the feasibility of such transactions for the company. Indeed, Onxeo faces the same challenge all too common for many small- to medium-sized biotech companies: Acquiring assets can be an expensive proposition, especially when your company does not have large financial reserves.
“Companies our size will often see new technologies or molecules that are attractive and would complement existing assets,” states Greciet. “Figuring out how to strike a deal by using as little cash as possible is the challenge we face. We prefer to utilize our cash for development, as opposed to using it upfront to acquire products. Getting new assets is nice, but once we acquire the molecule or compound, we will need that cash to put it through the development process.”
That problem can be compounded by other companies having an interest in the same product, especially those sitting on greater cash reserves. But Greciet believes smaller companies can still come out the winner in these battles by taking a more creative approach.
One way to acquire an asset without handing over cash is to acquire the entire company, as Onxeo did in the case of DNA Therapeutics. Working out a deal where stakeholders in the acquired company get shares of stock in Onxeo is certainly one option.
But Greciet notes another way to retain cash and also reduce risk is by working out a risk-sharing arrangement. She states this approach can also create win-win situations. “It’s a way to meet the expectations of both parties,” she says. “One example is agreeing to take on an asset only if it produces a positive result in a previous stage. That is a valuable lesson we have learned and is something that has worked very well for us in our last two transactions.”
With the DNA Therapeutics acquisition, Onxeo was approached with the opportunity, which Greciet attributes to the company’s growing reputation in France for acquiring and developing compounds. The company has been developing its communication networks, letting others in the industry know of their desire to acquire new drugs, leading to regular contacts from other companies proactively reaching out to Onxeo.
Every transaction is different, and no one model can be applied to each situation. There could be situations where an acquisition entails offering a company a mix of both cash and shares. And adapting and adjusting to what the other party wants is also important. Since transactions are always a two-party decision, negotiation requires finding a deal that makes both parties happy.
“If you want 100 percent proven and approved compounds, then the only thing you can do is buy an already registered product,” adds Greciet. “That is not what we are doing. We are looking for early stage assets that we can add value to. There will always be things that we don’t know, and questions that we don’t have answers to. But even when the compound is something you have been developing from the very beginning, you discover things you did not expect. That is what makes drug development fun and exciting. Every day you have the potential to discover something new.”