Multiple Pathways to the Exit: Canaan’s Bloch on Advanced BioHealing Buyout
The $750 million sale of Advanced BioHealing to the Irish drug giant Shire Pharmaceuticals, announced on Tuesday, has been hailed as a rare win for regenerative medicine, with an extraordinary 15x return for Canaan Partners, the venture firm that helped to found the company just five years ago.
But as I noted in a 2009 profile of Advanced BioHealing’s San Diego operations, the development of the company’s bio-engineered human skin substitute extends back quite a bit further—almost 20 years—to San Diego’s Advanced Tissue Sciences (ATS). After pioneering the technology in the 1990s, Advanced Tissue Sciences filed for bankruptcy liquidation in 2002, having raised hundreds of millions of dollars from venture investors, and later from shareholders as a public company. ATS sold the global rights to Dermagraft and its San Diego manufacturing facility to the British company Smith & Nephew in 2003.
Smith & Nephew was ready to sell the Dermagraft business to Canaan by 2006—after spending three years and millions of dollars more in a second bid to commercialize the technology.
Stephen Bloch, the Canaan general partner who pulled the deal together, tells me that as much as $300 million in total might have been invested to commercialize Dermagraft before he entered the picture in 2006. In other words, roughly $300 million of capital that was invested to develop the technology and win FDA approval was basically written off before Canaan stepped in to restart the business for the third time.
Bloch told me by telephone that in the ensuing years, venture investors sunk about $40 million to re-capitalize the business. He also confirmed that Canaan’s $15 million investment is expected to yield a roughly $225 million payout, “cash on cash,” as he put it, in the Shire acquisition. Safeguard Scientifics, which invested about $11 million in venture capital, is expected to see a roughly $140 million return. Other investors accepting congratulations for their prescience are CDIB Bioscience Ventures, Channel Medical Partners, Horizon Technology Finance, Red Abbey Venture Partners, and Wheatley Partners.
As other reports on this deal have noted, Shire’s buyout offer for Advanced BioHealing was announced just a day before the biotechnology company was scheduled to go public. The company was offering 13.4 million shares priced from $14 to $16, or at least $187.6 million. With nearly 40 million shares outstanding after the offering, the upper range of the planned IPO would have valued Advanced BioHealing at close to $640 million, according to its prospectus.
Bloch says Shire’s offer came forward “relatively late” during the IPO process, but one advantage to conducting an IPO road show was that a lot of detailed information about Advanced BioHealing already was easily available. Unlike many early stage biotechs, Bloch says the company had been profitable for several years, and it was growing, with annual revenue soaring from $8.6 million in 2007 to $146.7 million in 2010.
“This was a very profitable, quickly growing company, so it was a different model” than a development stage life sciences startup that still faced clinical trials and the regulatory approval process, Bloch said.
One boon for Advanced BioHealing was that it was preparing for its IPO and carrying on its buyout talks with Shire at the same time—Bloch says the two deals “were literally going on side-by-side”—which gave the company unusual flexibility in determining the best deal. “It’s a tricky process when you want to keep all options open,” Bloch says. “But the rule of thumb is that you never stop talking to people and you never stop considering your options.”
The decision to accept Shire’s offer, Bloch adds, was “a little bit of a reflection of the conundrum” for small cap IPOs, which tend to be thinly traded. Investors are generally ambivalent toward life science companies these days, and relatively few analysts provide coverage of small cap companies, (which generally have a market valuation under $1 billion). For Canaan, which held about 40 percent of Advanced BioHealing’s preferred shares, and a roughly 30 percent stake in the company overall, that meant it would likely take about two years to liquidate its stake. “Those things really depend on the strength of the company and of the public market,” Bloch says.
In the end, Bloch says Advanced BioHealing was in a rare situation with an unusual advantage: As a privately held life sciences company, Advanced BioHealing had written off the cost of developing its technology; it had an approved product, a strong business, and multiple paths to liquidity. No wonder it landed such a great deal.