Who’s Who Legal brings together two of the leading practitioners in the world to discuss key issues facing transactional specialists today.
Horn & Co Law Offices
WWL: After a “slow” year in 2012 for life sciences M&A work, many lawyers have reported greater optimism in the market over the last year with companies, particularly in the pharmaceutical and biotech fields, displaying a renewed appetite for dealmaking. Has this been the case in your jurisdiction, and do you foresee a busy year for M&A activity in 2014?
Yuval Horn: The Israeli market has provided substantial funding for emerging companies, both in the private and public markets, but also in governmental funding. “Dealmaking” for drug development companies typically includes licensing opportunities and not M&A per se, due to the relative younger stage of development and extent of required funding for their continued operations. We have been involved in several of these transactions in 2013, and foresee several more substantial ones in the first half of 2014. The pace of M&A transactions in medical device companies continued to be steady, with the highlight of the $1 billion sale of Given Imaging Ltd. The Israeli market has increased in volume and in the maturity of the technologies. We are optimistic with respect to the outlook for 2014 for our clients.
Barclay Kamb: During the extended period (from 2008 until 2013) when the capital markets were largely unavailable to biotech companies, trade sales were the primary means of liquidity and exits for these companies and their investors. Thus, during this period, we were regularly advising biotech and other life sciences companies on both “sell side” and “buy side” M&A deals. The opening in 2013 of the “public markets” window has resulted in a very significant upswing in IPOs and follow-on offerings by life sciences companies – enabling many smaller companies to obtain financing that was not previously available. Our assessment is that this renewed access to public capital will permit many companies to remain independent in 2014 and develop their technologies to higher valuations. However, M&A certainly will remain an option for companies where that exit is the appropriate route, given the state of their products and the alternatives.
WWL: How difficult is it in the current market for emerging companies in the sector to secure venture capital and IPO financing? Are life sciences funds more willing to invest in some areas than others, and in your jurisdiction have you seen more work in relation to alternative financing structures?
Yuval Horn: The Tel Aviv Stock Exchange BIOMED index increased in 2013 by approximately 45 per cent. While the primary market for biomed companies has kept the very slow pace that we have been witnessing during the past two years, public companies took advantage of increasing share prices and raised follow-on funding. Several Israeli companies returned to seek IPO funding in the US markets. The pace of funding by Israeli venture capital funds also picked up in 2013, with the major venture capital funds funding many early stage life sciences companies, typically supported also by the Office of the Chief Scientist (OCS) in the Ministry of Economy. Life science companies constituted approximately 25 per cent of the companies supported by the OCS during the past five years.
In the second half of 2013 the OCS completed the funding of many programmes that required longer processing in the past, and encouraged companies to complete additional applications due to surplus budgets, which did not exist in the past.
Innovation in funding was required, regardless of valuation or terms. Recent examples of various such models that our firm was involved with include a merger of a drug development company into a US traded company that had previous related activities, with hope to raise capital from the US secondary market; grant of options to license non-core intellectual property; the incorporation of a company that received in licences from various institutions, each technology being funded separately; funding at distressed terms (substantial discounts and liquidation preferences); and “down rounds” in private companies with carve out mechanisms to protect management.
Barclay Kamb: 2013 has seen a very significant increase in IPOs for biotech and other life sciences companies. Cooley has represented more than 20 per cent of all these deals in the US, the leading law firm for US life sciences IPOs this past year. This has been a very welcome, and long-awaited, access to traditional sources of capital, and we are seeing a very exciting continuation of the IPO trend in the beginning of 2014. Our view is that the renewed availability of public capital will likely will have an impact on several other areas in the life sciences sector: First, it likely will allow a number of life sciences companies to be much more selective when considering partnering deals or M&A exits – the greater availability of capital permits these companies to be more “choosy”. Further, the ability of these companies to provide public markets liquidity to their institutional investors likely will (over time) expand the appetite of venture investors to put venture capital to work. Cooley has certainly seen an increase in traditional private VC investing, as well as some alternative structures, such as “pre-baked” option deals involving VC funds and pharma companies.
WWL: Are there any emerging jurisdictions or growth markets in the life sciences transactional field that have caught your attention? How do you expect this to affect your work in the future?
Yuval Horn: The Israeli market, in which we have been involved for over 20 years, has become a world-renowned force in the life sciences industry. During this period, the number of companies in the sector grew from under 50 to approximately 1,000. Several dedicated venture capital funds have been set up (the first in 1994, the latest in 2013, both with government support). Management of the companies has become more experienced, with training in major pharmaceutical and device companies in the US, but also from Israeli enterprises that have grown. Throughout its evolution, the Israeli market focused on US and European funding, then on the markets for their products and drugs. Several Israeli companies have succeeded in remarkable sales of and collaboration with respect to their developed products (medical devices and drugs). During recent years, companies have begun focusing on opportunities in China for development and manufacturing, but also for funding. We foresee that the focus towards the East will continue.
Barclay Kamb: Cooley continues to see growth in China biotech activity, particularly in Chinese venture capital looking to deploy investments in the US and Europe, and in the M&A area, mostly acquisitions by Chinese companies. We also see continued growth in biotech and “specialty pharma” activity in Brazil and other Latin American emerging economies. We continue to see very significant activity – for investing, for doing partnering deals, and for M&A exits – by companies having strong oncology platforms, and we expect this trend to continue to be strong in 2014.
WWL: Looking to the year ahead, are there any key trends in the transactional field which will be of particular concern to clients and counsel?
Yuval Horn: During recent years, the Ministry of Finance, the Ministry of Health and the OCS have become more sophisticated, tightening their review and scrutiny of IP ownership issues. Upon the increase of IP related transactions, we envision additional IP ownership issues. Our firm has been busy with securing IP rights upon incorporation of companies and in rounds of investments, to reduce friction with governmental bodies during M&A. In addition, we await further resolution of the government on the issues relating to the consideration payable to employees who develop IP. Recent case law has created some ambiguity on this matter, and resolution is expected in the coming year. Until such time, we advise our clients on various forms of consideration in order to minimise issues with former employees upon sale. Finally, during the beginning of 2013 the OCS funded a new biotechnology incubator, with a competitive tender that involved several multinational pharmaceutical companies. Companies receive substantial support (approximately US$800,000 per annum for three years). Three additional tenders have been published, with respect to “standard” incubators (US$300,000 per annum for two years) to be set up during the second half of 2014. The increase in the number of drug development and medical device companies is expected to raise further the level of international attention and improve the quality of management and business opportunities.
Barclay Kamb: Our experience is that big pharma companies – traditionally the “buy side” that have supported emerging life sciences companies over the years through large corporate partnering deals and M&A transactions – have recently been, and will continue to be, much more selective and discriminating in evaluating and doing such deals, than they have been in the past. This means that life sciences companies looking to do such deals with Big Pharma will need to be very skilled in finding the right potential partner (or acquirer) and in “teeing up” the transaction appropriately. The renewed availability of public (and, it is hoped, venture) capital should enable the stronger companies to wait to do such deals until the time is right, and their products are at the appropriate stage of development. This should enable many emerging companies to select transaction structures that are better suited to their long-term business models – such as by avoiding, for the most part, the difficult “option” structures that were often seen in the “dark days” of 2008-2012, when pharma had significant leverage due to the general difficulty in obtaining VC funding and lack of a public capital market.