SuperGen Acquires Astex: The Biotech Funding Relay Race

Last week witnessed an interesting M&A deal between SuperGen and Astex. Here, we look at investor returns and wonder what could be in store for the enlarged company?

Supergen (SUPG) is a NASDAQ listed biotech with a market cap of $170 million (at time of writing). Astex Therapeutics is a private UK biotech and previously a Fierce 15 Winner (2006). In the deal, SuperGen is acquiring Astex, with Astex shareholders getting 35% equity in the new combined entity, $25 million cash up front, and $30 million cash or stock to be paid over the next 30 months. The new company will be called Astex Pharmaceuticals (with NASDAQ ticker of ASTX).

Since founding in 1999, Astex has received substantial investor support from several top-tier UK VCs. How did the investors do? A back of the envelope calculation suggests the following – As current Astex shareholders will have 35% of the post-merger entity, at SuperGen’s current valuation of around $170 million, this suggest a valuation for Astex of nearly $150 million (i.e. Combined value is $170m/ 0.65 = $262 million, hence Astex 35% shares = 262-170 = $92million. Add to that the $25million upfront cash, and $30million cash or stock to be paid over 30 months = $147million). This assumes no liquidation preference for investors.

From their website, Astex have had about £80million of investment since 1999 (equivalent to around $130-$150 million, depending on when investments were made, and a fluctuating dollar: pound exchange rate over the period). So really, at present this deal does not offer much more than just a return OF investment, rather than any upside for investors. Though, this is a way to get some liquidity now with further ability to sell down shares in a public traded company.

What is perhaps more interesting is that the combined entity now looks quite substantial and is itself much more likely to become a target for M&A in a year or two. From the press release, key facets of the new company include:

  • $120 million in cash and cash equivalents
  • A revenue stream from its product Dacogen®, marketed in North America by Eisai and in the rest of the world by Johnson & Johnson
  • A clinical pipeline with 7 drugs in development – 4 at phase II, and 3 currently partnered with big pharma
  • Validation and scalability through partnerships with big pharma including GSK, J&J, Novartis, AstraZeneca and Eisai
  • Nearly $2 billion in headline value future potential milestones plus royalties
  • A technology platform which has driven much of the partnering with big pharma
  • Operations in the US and the UK

The pipeline is not that dissimilar to Plexxikon, who were recently acquired by Daiichi Sankyo for $805 million plus up to $130 million in near-term milestones. The fact that they will have both a US and and EU base may make them particularly attractive to another Japanese group.

It will be interesting to watch. What was important for Astex is that they continued to ring the changes. They have an expensive engine that, whilst very productive, does require frequent injections of cash to sustain it whilst the phase II products progress.

Biotech funding takes many forms. As with many promising yet cash hungry biotechs, this is a cross between an endurance race and a relay race. VC investors – tired yet still hopeful – have handed the baton onto the final runner in the public markets. How will she run?

This post is by Raman Minhas and Nigel Crockett. Raman is the CEO of ATPBio, a consultancy supporting biotech funding through VC, big pharma investors and partnering. Nigel is a Director at Tukan Partners, a consultancy providing biotech business development. He is also a principal at ATPBio.

Disclaimer: Nothing in this blog post is an investment recommendation. Investors should do their own research.


2 thoughts on “SuperGen Acquires Astex: The Biotech Funding Relay Race

  1. The relay race analogy is very apt for the majority of biotechs developing therapeutics – its only the extreme cases that follow a different path: those with outstanding product candidates that are taken out early and those who fail early. For the majority it is the kind of long term funding relay you describe. And like a real relay race, there are no prizes at all for being in the lead at the end of each leg – only the ultimate, team victory counts for anything and leads to reward for each runner.
    As you point out, the SuperGen-Astex deal doesnt represent a return on the investment made to date. Things are probably even less rosy than the back-of-the-envelope calculations you present, because the $30M in cash or stock to be paid as a future milestone will come out of the combined company reducing its effective value. The combined company is probably worth nearer to $120M than $150M – which is less than the combined value of the investment (even without allowing for the negative impact of inflation on investments starting in 1999).
    So passing the baton doesnt provide a win for the current investors. Thats how it should be – the company hasnt yet delivered a product anyone is prepared to buy. If (and only if) it does, will there be a big win and the rewards will (or should) cascade down to everyone who has invested time or money in the component companies over many years.
    If things work out like that, then all well and good. The biotech funding model is working well, splitting a decade (or more) long development process into manageable chunks. But the big question (and the one hidden from our view) is just how the eventual rewards if the company achieves ultimate victory are shared among the participants. This is where the liquidation preferences can badly distort the picture. It would not be the first time that the earliest investors (who took the greatest risk) are left with an unreasonably small share of the final pot due to the operation of successive liquidation preferences applied at each hand-over of the baton.
    Over time, the ever more punitive liquidation preferences that are attached to healthcare investments are bleeding the life out of the early stage investment model. A rebalancing of the distribution of the winnings among the runners on the relay team is urgently needed. The supply of well-funded, properly run early stage companies coming through will start to dwindle unless the financial model appropriately rewards these early risk-takers.
    As they were originally conceived, liquidation preferences were harmless – a sensible protection that ensures the financial investors recoup their investment before “winnings” are paid to the original owners of a technology. But the concept grew: first to a return not only of investment but of a reasonable guaranteed minimum return before the “others” got anything. And as financial markets get tighter and tighter, punitive liquidation preferences of 3-times the amount invested AND a normal pro-rata participation in the proceeds has become a common sight. If this becomes the norm, then the biotech funding model really is broken.
    All this happens behind closed doors. We dont know what the liquidation preferences look like on the SuperGen/Astex deal. Lets hope they are fair to all parties, so the runner of the first leg of the relay isnt left out of the victory party, with the anchor leg runner taking all the glory (and all the prize money too).

  2. David, thanks, your points are well made. An interesting recent article in Forbes echoes some of the same thoughts: “Where Are Biotech’s Billionaires?” by Matthew Herper.
    This highlights that compared to other sectors, notably tech, there are far less biotech billionaires amongst the world’s richest (only 5 biotech billionaires worldwide). Suggested reasons include the long development timelines, the scientific risk element, and of course the way that companies get funded with dilution all around. Indeed, more than once I’ve advised starry-eyed start-up biotech entrepreneurs they generally shouldn’t expect to make their return from founders equity, but rather from income and options. Equity gains are icing on the cake.
    And when one also considers that VCs also have their paymasters to satisfy (in the form of limited partners) one can see the argument for things like liquidation prefs from both sides (though I agree, 3x seems severe). “Angels, Dragons and Vulture” by Simon Acland presents some fascinating insights into how these can affect an entrepreneurs ownership and upside; even a passing acquaintance with the content would likely serve any entrepreneur very well in a funding discussion.
    So, while it’s interesting to think about “a rebalancing of the distribution of the winnings” this is all dependent on supply and demand. While entrepreneurs are dependent on funding, providers of funding will get to call the shots. When biotechs begin to make reproducible returns then perhaps the balance will redress (with the risks inherent, it’s anybody’s guess if this will ever happen).
    This is not a defeatest attitude – perhaps the best advice for entrepreneurs is to follow that of Randall Kirk (one of the 5 global biotech billionaires), when considering the reasons for the success of the 5 billionaires:
    “I think it is this: Each has largely devoted himself (and his capital) to one or only a very few highly concentrated positions in companies that they developed over years of effort. In my own case, I bought my first share of Clinical Data in 1999 and kept investing in the company through 2009. Similarly, New River Pharmaceuticals was founded by me in 1996 (IPO’d in 2004 and sold to Shire in 2007). In New River’s IPO not only did I not sell shares but was the second largest purchaser of shares that were then sold.
    So why may that be a winning strategy? Aside from the more obvious advantages that naturally may flow from an intensely interested, dedicated and (I would like to think) capable shareholder, the length of the holding periods to which I refer may actually have been required in biotech because the product development cycle times have been so long.”
    Finally, we should also consider that many biotech entrepreneurs, while looking for (and deserving) financial reward, are also motivated by an altruistic drive.

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