First, to get what should be obvious out of the way, potential acquirers interest are driven internally—strategy, corporate priorities, M&A appetite, more than externally—target company’s technology or pre-commercial products. While this should be straight forward, Boards, stockholders, and management teams can spend too much time just polishing the sell-side story, as they have envisioned it, rather than also view it from the position of named, specific potential acquirers.
Moreover, timing is also relevant. It may be that a selling company is ideal for an acquirer, but if that acquirer is limited by the capacity of its corporate development team, digesting recent acquisitions, or dealing with other real or political corporate issues, it won’t be possible for the target company to get considered. As relative timing is so critical to being able to match acquirers’ appetites, once the decision is made, the start of a process to sell a pre-commercial firm needs to immediate, or there needs to be a realization that more funds may be needed to keep the process going long enough to fit acquirers’ own timing. Based on interviews with boutique investment banks, one should expect pre-commercial diagnostic and life science company sales to take upwards of 11 months.
How has interest in pre-commercial companies evolved, and where does it stand?
Since 2007, it has been particularly challenging to sell pre-commercial diagnostic or life science firms. Contrast this with 2000, when about five dozen companies were able to get public financing or sell themselves, based on pre-commercial technology or in some cases just very early-stage technology. That period was followed a couple years later by a more stringent phase, when to be a successful target, companies needed to have a commercial product line. Then in 2007 at the start of the last recession, the general criterion was moved much more stringently to be profitable business. There were some exceptions, such as sequencing technologies, and a few acquisitions by Becton, Dickinson. Recently, this criterion has somewhat started to relax to be a commercial business, or even product line, with growing revenues, and or which one can forecast profitability within the acquiring company’s structure.
What does this mean if a pre-commercial company wants to be acquired?
Revenues. Recently, most potential life science acquirers, and many diagnostic acquirers, expressed that they would require revenues with an upward revenue ramp. Some pre-commercial firms have interpreted this as indicating the need to focus on time to revenue. This is for the most part a good viewpoint. However, life science acquirers view most subsequent revenue declines as indicating that there is an insufficient market, at least standalone. Therefore, before a company rushes to sales, it needs to be committed to that product line. While it may be advisable to pivot, e.g., from life sciences to diagnostics, if resources are then withdrawn from the revenue generating business and sales decline, this could create a real barrier to selling the company.
Early adopters or collaborators. Proof of commercial potential, on both the life science and diagnostic sides, should be provided by early-access customers, or at least independent academicians. Building these along the way during technology development helps with commercial due diligence, which is otherwise hard. As in the push to revenue, if these references do not have conviction in the technology, and demand for it, they can be more of a barrier rather than an aid to being acquired.
A company selling itself should consider the following feasibility, product development and technology due diligence discussions in light of specific and potentially realistic acquirers.
Feasibility depth. Technologies should be stretched or pressure tested to see how deeply they can be applied in their domain. If a technology is for protein biomarkers, then a number of widely divergent proteins should be evaluated, likewise with DNA or RNA. Relevant different matrices should investigated, e.g., whole blood, plasma, serum, urine, tissue (different preparations), and other in vitro fluids. The more narrow a technology’s capabilities are assessed, the fewer the potential acquirers. It could even get to the point where the feasibility depth is so insufficient that no commercial product could be contemplated. For example, most diagnostic products require a minimum menu. Anything less is meaningless.
Feasibility breadth. Some technologies are only relevant to a particular type of molecule, e.g., DNA, protein, or procedure, e.g., nucleic acid extraction, PCR, enrichment, purification. However, a growing number of technologies, or their close combination with others, can make them more broadly applicable. One such area of current interest is the ability to do both molecular diagnostics and protein biomarkers. While in-depth feasibility and full product development are in general more attractive, feasibility across type of molecule or procedure should be assessed and even planned for in order to expand the list of potential acquirers. This is especially true if the research effort is modest to show feasibility.
Technical due diligence and a fully developed, albeit pre-commercial product. During a company sales process, much of the technical due diligence can resemble a more typical business development process. In fact, business development processes are a way that acquisitions often occur, and can be used as strategy for them. The difference is the explicit understanding that the end game isn’t a collaboration, but an acquisition. One of the differences, however, is that many acquirers have no to little interest in funding next-step research, rather than working towards an actual product. If the target company has already taken the technology to completion in a relevant pre-commercial product, this may be in and of itself a justification for an acquisition. However, often there needs to be product development feasibility, often to a point just shy of completion. As there can be a wide difference between feasibility and the nitty-gritty of a developed product, companies wishing to be acquired, should if possible, go far down a tangible product development path.