Planning for a TechBio Exit – what does 'good' look like?

Our Cambridge Life Sciences and Healthcare team hosted a brilliant Bruntwood SciTech event, 'Planning for a TechBio Exit – what does 'good' look like?'.  Here, Nick Vollers and Adrian Toutoungi have put pen to paper to give the lowdown of key takeaways for techbio founders considering their exit strategy. 

Our key takeaways:

Think carefully about what your 'product' should be

During the life sciences fundraising boom of 2020-2022, before the current financing downturn, techbio founders were able to raise money - in particular from tech investors - with a commercial model that was not much more developed than a plan to generate data and libraries (eg of in silico targets, hits compounds and lead series). Investors did not require a clear plan of how to commercialise that data. Now the market has tightened, and investors now require techbio companies to define much earlier than in the boom years their product and business model. This is a critical decision for founder teams, as your business model and product will largely define your exit opportunities.

AI is not the only game in town

The panel emphasised that not all techbio companies are "AI for drug discovery", even though media attention in recent years has focused on the emergence of that modality. Other techbio drug discovery approaches include computational biology or bioinformatics – quite different to AI. Schroedinger, Nimbus and Lambic are good examples of this. And many techbio companies do not focus on drug discovery at all. Benchling, Inivata and Unlearn.AI are good examples of those. It goes without saying that companies in all these different sub-verticals will have quite different business models and exit opportunities.

Exit opportunities for techbio companies with a drug discovery platform

These include: 

• IPO (when the biotech IPO window re-opens…). The IPOs of Recursion (April 2021, raising USD$440 million on a valuation of USD$5 billion), Exscientia (October 2021, raising USD$510 million on a valuation of USD$2.7 billion) and Relay (July 2020, raising USD$460 million on a valuation of USD$1.8 billion) are good examples.
• Platform sale to big biopharma (eg BioNtech's purchase of Instadeep in July 2023 for GBP362 million in cash and BioNTech shares, and additional performance-based future milestone payments up to approximately GBP200 million).
• Platform sale to a CDMO looking to add techbio capabilities to its existing non-techbio offering (eg X-Chem's purchase of Glamorous AI in October 2021).
• Platform sale to big techbio looking to consolidate the market and add complimentary techbio capabilities to its existing techbio platform (eg Recursion's recent purchase of Canadian techbio platform companies Cyclica for USD$40 million and Valence Discovery for USD$47.5 million).
• Asset/programme sale to big pharma (eg Takeda's purchase of Nimbus' tyrosine kinase inhibitor programme subsidiary for USD$4 billion upfront and USD$2 billion in commercial milestones; or Roivant Sciences' sale of its Telavant subsidiary, including US rights in an irritable bowel disease asset, to Roche for USD$7.1 billion).

Platform sale to big biopharma

This is a tricky exit strategy to pull off. There have not been many big biopharma acquisitions of techbio platforms. The BioNtech/Instadeep acquisition quoted above was a fairly rare example. The old adage that 'pharma buys assets' continues to hold true. Pharma has developed its in-house techbio capabilities to some extent through organic growth, but otherwise has focused on discovery collaborations with techbio companies rather than bolt-on platform acquisitions.

Consolidation exits

Exiting to a more established techbio company looking to consolidate the market is viable. However, to date these deals generally do not attract high valuations in the current market (consistent with what we are seeing in other sub-verticals, exceptions aside).

Asset v platform

The age-old debate on how to value a company with a drug discovery platform continues to rage, and requires careful thought and planning by founder teams and boards of techbio companies. Techbio companies with a drug discovery platform are in this respect similar to previous more traditional drug discovery platform technologies such as phage display, transgenic mice or fragment-based 3D structure drug discovery. However, as techbio companies sit at the intersection between the tech sector and life science sector, valuation methodologies, exit strategies and venture capital requirements from the tech sector also play a role. 

• A techbio company without a drug discovery platform is likely, as a general rule, to be valued by investors and the public markets as a software company (ie on a multiple of annual recurring revenues).
• A techbio company with a drug discovery platform but no proprietary assets (eg as its business model is to enter into discovery stage partnering arrangements with pharma customers in which it uses its platform for target discovery or hit/lead discovery for the pharma partner) is at risk of being valued as a CDMO/fee for service company, even if it can command upfronts, milestones and royalties in its collaboration agreements.
• A techbio company with a drug discovery platform and its own therapeutic asset programmes is likely, as a general rule, to be valued at the net present value of its therapeutic programmes. Opinion was divided on the panel about what additional value, if any, would be attributed to the platform itself. 
• Techbio companies which raised during the boom years and need to continue to raise capital to develop their platform before they can become revenue-generating will need to access growth investors. This is a key moment in the company's evolution. Growth-stage tech investors in the current market typically require a track record (one to two years) of material revenues. So a techbio company which is pre-revenue is likely to struggle to raise any further investment from tech funds. It will come under pressure to complete development of an MVP-version of its platform as soon as possible, and launch it within its current runway. Growth-stage biotech investors are another potential source of capital. They are more tolerant of pre-revenue companies, but as a general rule are only interested in therapeutic assets rather than platforms, and typically only clinical assets with good data. So a techbio company with a drug discovery platform but no proprietary assets is likely to come under investor pressure to launch its own therapeutic development programmes.
• This doesn't mean a 'discovery partner collaboration' business model is not viable for a techbio company. Exscientia ran this model for several years very successfully. It raised substantial non-dilutive cash from these collaborations and was self-sustaining. However, this was before it sought venture finance. Once it started down the path of raising venture finance, its model evolved and it started to develop proprietary programmes in order to offer the prospect of big increases in valuation required by growth-stage biotech venture investors. Peptone went through a similar evolution.

Be wary of pharma collaborations

Collaborations between a techbio company and big pharma can be a helpful source of non-dilutive funding, and crucial validation for the techbio's platform. However, before entering into a high-value, long-term collaboration deal, big pharma will typically first insist on a low-value, short-term collaboration as it dips its toe in the water. Some of the panel suggested that techbio companies should only pursue these pilot collaborations if they are well funded in themselves, or linked to a longer-term plan with a significant prospect of further deals with the big pharma. Many big pharma companies have entered into large numbers of pilot collaborations with techbio companies, as a way of keeping tabs on a fast-moving technology field, but with no real intention to move forward to larger-scale deals in more than a handful of cases. An isolated pilot collaboration may offer low financial backing and could push your company in a direction you hadn’t intended, leaving your company stranded once the pilot has finished.