Biotech M&A by Slow Simmer: An Inside Look at the Build to Buy Deal


Xconomy New York — 

Here’s a question for consideration: What does it mean to acquire a virtual, single asset biotech that was ‘built’ for the sole purpose of being bought? The answer is much more complex than you might think.

In this post I’ll explain by peeking under the hood at The Medicines Co.’s recent acquisition of Annovation Biopharma, a small company founded to advance novel anesthetics invented at Massachusetts General Hospital. In 2012, Atlas Ventures led an $8 million Series A round alongside Medco (NASDAQ: MDCO) and Partners Innovation Fund. In that round, Medco (which I work for) also bought an exclusive option to acquire the company on pre-negotiated terms. It exercised that option a few weeks ago.

Once the terms are all hammered out, this deal seems straightforward and fairly simple–Medco buys an option, waits for data, and pounces when the story comes together and all of the pre-defined metrics of success are met. The reality, however, is a bit more nuanced. There’s much more to “build-to-buy” biotech M&A than just simply ‘negotiate, wire money, and wait.’ These kinds of deals bring with them a unique set of challenges that are often overlooked.

The Simmer

Nurtured and supported by Atlas and led by CEO David Grayzel (an Atlas Partner), Annovation was an example of a single asset company that was “built for purpose”—an eventual acquisition by Medco. Atlas, like other firms, has done this type of deal a few times. Its team finds an interesting idea, shepherds it towards a clearly outlined proof-of-concept stage, and the buyer eventually exercises its option to buy the asset if all of the proof-of-concept criteria have been satisfied.

Atlas’ investment thesis here is simple and elegant, and this type of deal structure offers both parties a number of benefits. For Atlas, locking in a partner at the beginning helps reduce the financing and exit risk in these types of early-stage companies. For Medco, we get strategic proximity to a very interesting approach to drug development, a really talented team, and a small-company entrepreneurial culture with minimal capital at risk, low stress on our balance sheet, and at least early on, almost no impact on our human capital and management bandwidth. The end result is a de-risked asset that is served up warm and toasty for consumption by our mid-late stage clinical development, regulatory and market access expertise. Or, as they say… Maybe.

In my opinion, the single most important factor in realizing all of these latent and potential benefits is how the acquiring organization adapts over the course of the partnership. The big hurdle the buyer has to overcome is the, “but its not ours, we are just passive investors until proof-of-concept” mantra. This mindset leads to indefinite optimism on the part of the company, but no real specific ownership. Unless very careful attention is paid to how the rest of the organization begins its slow movement towards acquisition, all of the intended benefits of the deal structure may slowly dissipate and be lost. If the organization literally just waits for the data to come rolling in before everyone begins to suit up and try the program on for size and feel, most of the potential benefits baked into the investment thesis will most likely never be realized.

It’s important to appreciate the slow simmer aspect to all of this. This is a long process: for us, nearly four years from the first real discussions to the ultimate acquisition. Lots can and will happen in that time. For Medco, when we began discussions, our cardiovascular business unit was asymmetrically dominant. Our second, and much smaller business unit (surgery, the one that would eventually develop Annovation’s drug) had one U.S. commercial product with limited revenue and no pre-clinical or development stage assets. By the time we exercised our option on Annovation, Medco had acquired five other companies, built a third business unit in hospital infectious disease, and the surgery business was now competing for resources with a massive R&D enterprise that hadn’t existed just 18 months prior.

During all of this change, you have to keep making forward progress in aligning the organization to the value of the potential acquisition. Or else, when proof-of-concept data come in, there is no longer strategic support for the program and, little real alignment around the business case for the deal. In our case: New business unit, pockets of new executive leadership (five acquisitions!), and multiple project owners across much larger and dispersed geographic areas, none of whom had ever heard of Annovation or anesthesia. How do you solve this problem when the probabilities of failure for such early stage drug programs are high (see here for the sobering numbers) and available management bandwidth for getting involved in new projects is small? Is it really reasonable to spend any time at all having strategic discussions about a drug that isn’t ours and will in all probability fail?

A lot has been written about portfolio management of R&D projects, but for Medco, our approach fits our business model. We don’t have wet lab space. Instead, we have business development: our R&D is really a set of orbital shells of development and partnership programs almost exclusively derived outside of the company. We rely on the ‘search and develop’ (S&D) methodology to build our pipeline and drive our growth, and well-disciplined, strategically aligned business development is crucial for looking out the windows and finding the stories that we think are worth pursuing. For us, there are some broad brushstroke generalities that capture our thinking about portfolio management and integration of S&D projects:

• Traceability of the project back to strategy

• Capacity of the management and scientific teams to consume the external program and create a functional internal project, and;

• Applicability of the output ‘solution’ back to strategy (more on the solution thing below).

For Annovation, traceability was simple. It derives from our core company purpose and hit the big-ticket strategic priorities—we are in the hospital, we are in the acute care space, and we are in operating rooms. Check. Check. And check. It’s the other two concepts that can trip up a slow simmer M&A.


In the end, any acquisition means finding the organizational and management space to take over the program. The real challenge for us during the slow waltz period of the partnership was to ensure that Medco advanced this capacity along the way. So, how do you do this? How do you spark managerial ignition, and minimize attention drift over the lifetime of the external development program? After all, it’s a two to three year journey while the science works itself out and we even know if the cool lab experiments translate into real clinical science.

If I had the opportunity to do this over again, I would add one important internal feature to the partnership. I would charter and run a shadow team that would be working alongside Annovation. A lean, virtual company that is executing fast on a proof-of-concept program makes decisions that involve tradeoffs and consequences that the buyer will have to address later. The shadow team would sit ringside for whatever important decisions Annovation is making. It would help move the science along while also focusing on how the decisions Annovation makes may affect Medco. What things will we need to address or understand if the asset ever comes our way?

Management focus and people time are certainly not free and one has to be cautious about diverting too much of either, but a shadow team would have ensured that we were feeling and retaining some ‘experiential residue’ of the external program. Annovation hit a number of bumps along the way, and we saw and digested them alongside Annovation with eyes wide open. There were simple choices, like filing patents in countries that line up pretty closely with our global commercial footprint and engagement areas. There are more complicated ones, like where to open a phase I program (U.S. or Europe). We were at the table when these discussions were being had. But, knowing of the nuances and tradeoffs made in reaching the decisions is not the same as having a plan and a team in place to quickly and effectively pivot around them and move the program to the next stage when the asset eventually becomes ours. Without genuine investment of emotional and fiscal energy to the project, Medco knew about these decisions, but never really owned their consequences and the effort that would eventually accompany them in practice.


Like all companies, we have a purpose which, distilled down, is all about trying to develop a solution to an important unmet medical need. A solution (vs. a drug) includes aspects of behavioral change, process change, and some new technology (like a drug or a device). The challenge with the slow M&A burn lies in converting a clinical development program that was designed to get to proof-of-concept with speed, elegance, and capital efficiency, into a much larger program that leads to the eventual successful treatment of patients and moves the needle on some genuine unmet medical needs. This is not semantics. It’s the difference between an asset, or even a drug, and a solution to a problem that we find strategically important and worthy of resources. This is so crucial, because the business case for an acquisition ultimately rests on applicability of the management bandwidth-weighted program to our overall strategy.

So, why is this a challenge? In an ideal drug development model, customer jobs and their attendant needs are fully baked into clinical development from the earliest stages. Data that eventually enable hospitals, payers, and governments to see real-world value added and also to make smart decisions about reimbursement and guideline inclusion are all generated via the development program as part of a comprehensive solution set. The issue is how to do this with an S&D sourced program. It’s not our asset, and if we take that shadow team (limited investment of human resources and management time) and start allocating real dollars, the deal calculus changes. The statistics around success rates of new drugs start to exert some gravitational tug and we get jolted back to reality: the reason we entered into the deal in the first place was to avoid the resource trap of early stage development.

The big value inflection point for Atlas was reaching proof-of-concept. This is the point at which a lab experiment becomes an asset, options get exercised, and exits happen. For Medco, however, the real value inflection point comes years later and is realized only with successful commercialization. There is almost no accretive value to Medco for adding another ‘portfolio’ project (see here and here for some excellent discussions about this topic). This really means that the more relevant we make our commercial enabling endpoints, and the earlier we build them into clinical trials (go/no-go decisions around commercial potential is critical for us), the more we discharge commercial risk and get more comfortable around valuation and investment.

We need to find the equilibrium between the lean, asset-centric development model of Annovation and the much more capital intensive and commercial success-enabling one required for Medco. But, when you are 12 to 18 months away from a potential option trigger, how do you make these kinds of capital allocation decisions? I do not have a single answer to this question. Instead of proffering one, I prefer to highlight the fact that while the S&D method helps companies like Medco overcome the science risk and get a good jumpstart on discharging the clinical risk, it largely leaves the commercial risk unaddressed. Without a thoughtful approach to this ‘last mile’ problem, a really promising drug may have poorly defined strategic applicability.

M&A done by slow simmer makes addressing these two issues much more complex, which means that these types of programs need a bit of special handling by the potential pharma partner long before acquisition day arrives.

Jason Campagna is the SVP, Health Sciences Lead, in the Surgery and Perioperative Care Global Innovation Group at The Medicines Company. Follow @jcampagna98

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One response to “Biotech M&A by Slow Simmer: An Inside Look at the Build to Buy Deal”

  1. Extraordinarily insightful post.