Exploring Critical Business and Legal Issues across the Healthcare and Life Sciences Industries
Exploring Critical Business and Legal Issues across the Healthcare and Life Sciences Industries

Dealmaking in Life Sciences – Valuations and Partnerships that Work

By on December 27, 2018

Technology companies are pouring unprecedented capital, time and energy into the health care and life sciences industry, and are reshaping the deal landscape in the process. The top 10 US tech companies have made $4.7 billion in acquisitions in the health care space since 2012, according to CB Insights. Key market factors driving health care joint ventures and mergers and acquisitions include the merger of molecular science and computer technology, a growing focus on patient-centric care, increased mobility of consumer health products and services, and deep capital markets. In this fast-paced, proactive deals environment, traditional health players have exciting—and disruptive—new opportunities to enter into unexpected partnerships and pursue transformative innovation.

With Great Disruption Comes Great Opportunity

A helpful analogy for understanding the role of tech companies in this rapidly evolving sector is Uber’s disruption of the ride-hailing industry. When Uber came on the scene, on-demand ride-hailing was only available through taxicabs, and frequently only available in major cities. Now on-demand ride hailing is available through numerous companies and in areas that previously did not have such services available. Ride-hailing companies have also expanded their services offering to include food delivery.

Tech companies entering the health industry today are doing the same thing: reimagining and redefining the fundamentals of consumer access to health care. These companies often have deep insight into distribution and consumer purchasing behavior, and are willing to invest more capital and take on more risk than traditional health industry players in order to explore and develop creative health care offerings. Furthermore, the solutions they are developing don’t just offer incremental improvements—creating a more expensive service or drug option doesn’t cut it. Instead, they want to create dramatic solutions that make health care better overall. Tech companies in the health care space are pursuing innovation that carries value in context of the entire health ecosystem.

Even when these companies have the necessary capital and science for a potential health care solution, they often lack the industry know-how to implement it. These entrants therefore are seeking out innovative partnerships with traditional players, such as health systems, providers and payers, to provide the market expertise they lack. Health industry leaders are thus increasingly faced with a choice: take a gamble and seize the opportunity to innovate and grow, or continue business as usual and risk stagnation.

Valuation and Intellectual Property

In the current deals landscape, rising valuations can be a challenge for buyers. Increasing money from overseas, including sovereign wealth funds, contributes to this trend. Conducting thorough pre-clinical due diligence can help verify the efficacy of the outcomes and therefore help determine the real value of a potential deal. Even when there is stiff competition to close a deal as quickly as possible, taking the time to truly understand the science at issue is an important step to mitigate risk.

Intellectual property (IP) is also a key component for deal valuation. In a commercialization partnership, where one party has a product and the other has a channel, defining roles and documenting IP ownership in the partnership agreement is often fairly simple. Where it gets more complicated, however, is when parties are co-developing a solution. The partnership agreement must carefully document data sources and clearly allocate IP rights and IP property protection.

On the health care acquisition side, due diligence to prove the IP value of a deal—including what kind of IP is involved, and who owns it—is essential. Sometimes the patents involved are at the core of the solution and central to the valuation of the deal (as is the case in most life sciences deals, for example). In other instances, the IP rights issues are far more complex because the patents may not extend to cover the commercial use cases.

On the seller side, careful planning can ensure that the value of the solution is fully protected, particularly where a technology or protocol shows a dramatic benefit and costs less than the product it replaces. Legal counsel can advise on difficult questions related to protecting artificial-intelligence-based software without disclosing trade secrets in a patent application, and appropriately valuing and protecting non-patentable IP, such as employee know-how.

Elements of Successful Partnerships

Once a partnership has commenced, it needs the right people in the right roles in order to be successful. For example, a partnership needs a strong internal voice to guide the development team. The product manager usually fulfills this role, tracking what the team is building and how to get it out the door, and maintaining the value and integrity of the science being developed.

The product manager in turn needs a strong business-oriented team member(s), and that’s usually the alliance manager. The alliance manager ensures that the relationship is cordial, collaborative and progressing as planned. In innovative partnerships between tech companies and traditional health players, the alliance manager is invaluable in bridging cultural differences and managing expectations.

If a partnership has pieces working together, it has a good chance of success. Without these elements, however, it almost certainly will encounter problems, regardless of the strength of the science.

Jed Gordon
Edward (Jed) A. Gordon advises clients regarding strategic portfolio development and counsels them in relation to patent enforcement strategies and defense against threatened patent infringement litigation. He also provides transactional counseling in relation to intellectual property issues arising during the acquisition and sale of privately and publicly owned companies, including conducting due diligence, licensing negotiations and freedom to operate analyses. Click here to read Jed Gordon's full bio. 




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