M&A Q&A With Wende Hutton, General Partner At Canaan Partners

Q: How Has The Deal Landscape Changed?
A: The M&A landscape has changed over the past several years. This year we’re seeing a steady flow of deals, and 2010 is shaping up to be a stronger year for venture-backed M&A exits. One trend that has become more common is an earn-out structure in which companies receive an up-front payment and then achieve additional payments as certain milestones are achieved. This is a win for pharma because it reduces risk, and there is an established team in place to continue the development pace. Investors, meanwhile, are satisfied because there is still a payout. We’re also seeing pharma select more deals for strong pipeline potential in time frames when drugs will be coming off patent. Assets that can fill their needs by 2014 when most patents will have expired have high strategic value. Assets that are taking longer in the clinic are more likely to get passed up — pharma would be more willing to turn inward and invest in-house.

Q: What Are VCs Looking For?
A: Canaan looks for therapeutics companies that have clinical data, that are capital-efficient with a series of fundable milestones, and that have a clear path to an exit. We find therapeutics for infectious disease and selected areas like glaucoma very attractive right now, both of which have manageable regulatory and clinical timelines. Altheos is a good example of a recent investment we made in the glaucoma space — the company has defined clinical endpoints. In general, VCs are making later and later stage investments, especially in pharmaceuticals. Pharma is investing less in emerging technologies because they have become more risk adverse due to increased FDA and reimbursement risk.

Q: What Is The Measure Of A Good Partner/Acquirer?
A: First and foremost, it’s important that the strategic mission of the potential acquirer overlaps with the product profile, and that there is interest all the way up the chain. High level management needs to buy in early. It’s also important that the milestones are aligned between the companies, and that a decision timeline is solidified that is 6 to 12 months out. Companies we think have exciting prospects include Liquidia Technologies and Theraclone Sciences. Both already have partnerships in place and are continuing to entertain discussions about partnering additional programs.

Q: How Do Companies Get The Attention Of Pharma?
A: We encourage our portfolio companies to engage with pharma business development and venture arms early and often. It’s important to keep key people informed of the company’s progress over time. We liken this scenario to throwing chum off the boat so they’ll start to follow, and then hooking them down the line when you’re ready. Pharma doesn’t want to be put in the situation where they have to make quick decisions. They do want to have confidence in the management team and follow the group’s track record and decision-making process.

Q: When In The Life Cycle Of A Product Should You Partner An Asset?
A: There are two distinct points in a product life cycle that are the most attractive to partners: 1.) when an asset is moving into clinical development, and 2) at the completion of Phase 2 studies when there is a high likelihood of success in Phase 3. The latter is also largely dependent on the depth of clinical data and the interest level pharma has in the therapeutic area. The higher the interest in the candidate, the more likely it is that the partnership could eventually lead to an acquisition. Two great examples of this in our own portfolio are the acquisitions of BiPar by sanofi-aventis for $500M and Calixa by Cubist for $400M. Both had Phase 2 assets at the time of acquisition.

Q: Are Venture Dollars Still At Work, Or Has The Investment Landscape Shifted Tremendously?
A: VCs who are able to drive exits will continue to raise funds that they can put back into play in the industry. Much has changed in the venture world — many firms have dried up, and many more will not be able to raise funds. A question we’re hearing a lot these days is whether there will be money available to invest. The answer from our perspective is that there will be, but on a reduced basis and from those VCs who have a solid track record.