Biotechnology Focus October/November 2016 Report by Promotive Communications

M&A Report

| Compiled By Shawn Lawrence

Special Report

MERGERS Acquisitions

Three former Canadian biotech company founders weigh in on how their deals went down, while providing some strategic advice for achieving a smooth exit

hen it comes to mergers and acquisitions, the Canadian pharmaceutical and biotechnology sectors saw their fair share in 2016. The deal-flow culminated with Marlborough, MA-based Sunovion Pharmaceuticals CDN$841 million purchase of Toronto-based Cynapsus Therapeutics Inc. in what was perhaps the biggest transaction of the year. This deal was very significant on multiple fronts as it allowed Cynapsus to maximize the financial return for its investors, while at the same, it ensured that the development of its lead product would continue. Certainly Cynapsus hit a home run on both fronts, and Sunovian was quite pleased with both the asset and the company they acquired. While financially less impactful, ProMetic

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M&A Report

Likewise, monetization isn’t the only driver behind the merger and acquisition process. More often than not, deciding to go the M&A route is about looking for a fresh start, sometimes even to the benefit of both parties involved in the deal. Life Sciences Inc.’s acquisition of Telesta Therapeutics (formerly Bioniche Life Sciences) was very significant strategically to the company. The deal allowed ProMetic to further integrate its manufacturing capabilities through its expansion into Telesta’s 150,000 sq. ft. manufacturing facility in Belleville, Ont. The transaction also allowed ProMetic to expand its presence nationally and provincially. Continuing with our rundown of 2016 M&A’s, there are many who view Miamibased OPKO Health’s acquisition of Transition Therapeutics, a Toronto-based clinical stage biotechnology company, in an allstock transaction valued at about $60 million, as a steal for OPKO. The deal, which was closed on August 31, saw OPKO land Transition’s full clinical portfolio, including a treatment for type 2 diabetes and obesity, a treatment for low testosterone, and a third neuropsychiatric drug candidate that 14 BIOTECHNOLOGY FOCUS October/November 2016

targets patients with Alzheimer’s disease and Down syndrome. For OPKO, it was a major windfall, but for Canadian biotech, it was both sad and disappointing to see the Toronto-based Transition Thereapeutics exit at such a low valuation. Unfortunately, the reality is that not all M&A deals are created equal, and not all exits are positive. Likewise, monetization isn’t the only driver in the merger and acquisition process. More often than not, deciding to go the M&A route is about looking for a fresh start, sometimes even to the benefit of both parties involved in the deal. Look no further than Quadrologic Technology (QLT) Inc.’s merger-slash-acquisition of Massachusettsbased Aegerion. Through this M&A, the two sides created a new company called Novelion Therapeutics Inc., and in its new incarnation, the company now has a diversified portfolio consisting of Aegerion’s two commercially branded products, Juxtapid®

(lomitapide) capsules and Myalept® (metreleptin), and QLT’s QLT091001 asset. And finally, not all the M&A’s of 2016 were “high-profile” deals. For example, earlier this year, Vancouver-based biotech Zymeworks Inc. completed a merger and acquisition of CDRD spin-out company Kairos Therapeutics. This deal saw Kairos’ technology and pipeline integrated with Zymeworks’ research platforms with a number of Kairos staff joining Zymeworks, including John Babcook, president and chief scientific officer of Kairos. He joined Zymeworks as senior vice president of discovery research. While not considered a major transaction on the world stage, it certainly was a victory for Canadian biotech, with homegrown innovation staying in Canada and one of the industry’s leading biologics drug discovery and development organizations becoming that much stronger. There were a lot of similarities between this deal and one that took place in January, where clinical immuno-oncology company Trillium Therapeutics Inc. acquired all of the outstanding shares of Fluorinov Pharma Inc., a privately-held oncology company spun out by FACIT. Under the terms of the agreement, Trillium agreed to acquire all of the outstanding shares of Fluorinov for an upfront payment of $10 million in cash, plus up to $35 million of additional future payments contingent on achieving certain clinical and regulatory milestones with an existing Fluorinov compound. Again, it was a case of Canadian innovation being kept in Canada, and an existing company becoming that much stronger through the acquisition. Looking back at these deals, and how such deals come about, we decided to ask three former Canadian biotech founders how their own M&A deals went down. Moreover, we wanted to know how they attracted the attention of a bigger player, and whether they struggled over the initial decision to sell. Among the participants providing their own keys to successfully completing an M&A deal are: Dr. Irena Barbulovic-Nad whose Toronto-based microfluidics startup Kapplex was acquired by San Francisco-based Miroculus in April of this year; Dr. Malik Slassi whose company Fluorinov was acquired by Trillium Therapeutics; and finally Dr. Scott Tanner, former chief technology officer of Fluidigm Corp. to discuss his decision to sell DVS Sciences in 2014.

M&A Report

Can you break down the deal for us, what was being acquired/the terms of the agreement etc? Irena Barbulovic-Nad: Miroculus, a San Francisco based company developing microRNA-based diagnostic tests, acquired Toronto-based microfluidics startup Kapplex on April 7, 2016. Through the acquisition, Kapplex became a wholly owned subsidiary of Miroculus and kept the operations in Toronto as one of the major R&D arms of Miroculus.

What do you think drove their interest to buy your company and what made Kapplex an attractive asset?

Irena Barbulovic-Nad, PhD Chief Operating Officer, Miroculus

“I am very optimistic about future of Kapplex under the Miroculus umbrella. Both companies have very similar visions about democratizing diagnostics and clinical tests, and now, with this merged, synergetic approach we can push forward much harder and reach our goals faster.”

Irena Barbulovic-Nad: Their interest in our company was technology driven. Miroculus has been developing tests for early cancer diagnosis based on detection of free circulating miRNAs in blood. They were looking for the right technology to miniaturize chemistry and to develop a completely automated instrument that can be operated by virtually anyone. Their vision has been to democratize diagnostics while offering high quality molecular tests. Kapplex had the right platform for it; we had been developing a diagnostic platform technology for accurate, sensitive, affordable and completely automated clinical tests of blood and other biofluids to detect common infectious diseases like flu or urinary infections. Our instruments and consumables are driven by a proprietary Digital Microfluidic (DMF) technology developed at the University of Toronto. Digital microfluidics enables complex clinical tests on a credit card size devices for the fraction of the cost and time compared to standard laboratory tests. It is flexible and adaptable to various types of clinical applications including cancer diagnostics.

Tell us about the genesis of the deal, did they come to you, or were you looking for an exit? Irena Barbulovic-Nad: After learning about our technology, Miroculus had approached us in spring 2015. Attracted by the capacity, flexibility and affordability of our instruments they wanted to explore the compatibility between our platform and their assays through an R&D project. The collaboration was successful and resulted in a prototype demon-

strating a good fit of the two technologies. Our teams worked very well together and we soon started talking about taking the collaboration to a whole new level.

Did you struggle over the decision to sell? What ultimately convinced you that the M&A path was the way to go?

Irena Barbulovic-Nad: Acquisition was not in Kapplex’s plans at that time and the M&A offer by Miroculus made our board go through a complex process of decision making. We were facing two options: 1) continue to fundraise, build the team and go to market ourselves, or 2) join forces with Miroculus and maximize our opportunities to get to the market with a product. The compatibility of our teams and a possibility to keep operations in Canada were important factors in the decision making.

Why was it the right time to do a deal of this nature?

Irena Barbulovic-Nad: As I said, Kapplex did not plan for an exit, but the M&A offer did seem to have come at the right time. We had an advanced hardware and software platform and were just starting to grow our bioassay team and to focus our product development on one particular assay/test that we would take to the market. Our platform is very flexible and can accommodate various types of tests, but we had to choose one test as our first go-to-market application. Miroculus assay/test for early cancer detection using miRNAs as biomarkers came at the right time and gave us an immediate focus. We saw huge potential in these biomarkers and were excited to discover through our initial collaboration that the Kapplex platform works well with miRNA assays.

Before or during negotiations, how many other companies did you talk to? And if you had multiple suitors, what factored into your decision that Miroculus was the right buyer?

Irena Barbulovic-Nad: I must say that 2015 was a very exciting year for Kapplex. We had conversations with two large life science companies on licensing and partnership. Also, concurrently with the Miroculus offer, there was a M&A offer on the table from another diagnostic company. The deals were similar and what made us choose Miroculus over the October/November 2016 BIOTECHNOLOGY FOCUS 15

M&A Report

other company was what we believed was a better market opportunity and the business case for Kapplex. As importantly, it was a decision based on people - it comes down to choosing people you will work with on a daily basis after the merger. We were fortunate to have had a chance to work with Miroculus for a few months prior to the acquisition and to test the compatibility of not only our technologies, but of our teams and company cultures.

Who assisted you in the deal, advisors, consultants?

Irena Barbulovic-Nad: We are grateful to MaRS Innovation, MaRS Discovery District and the University of Toronto for their assistance in this very important transaction for Kapplex. They were invaluable to supporting business negotiations and relations with all parties in the deal. They also made introductions to consultants and lawyers that would best assist in the transaction.

After the deal was made official, what was your initial reaction?

Irena Barbulovic-Nad: I was very excited that Kapplex was becoming a part of a new, bigger venture but at the same time, as its co-founder and CEO, I was somewhat anxious about handing over the company to another CEO and another board. The fact that I would be still actively involved in running the operations of not only Miroculus Canada/Kapplex, but of all of the Miroculus as its Chief Operations Officer made me feel more comfortable with the deal.

What are some of the elements you believe are essential to successful exits in biotech and the technologies markets?

Irena Barbulovic-Nad: The first thing would be to recognize whether a company is salable, or what it takes to make it salable if an exit is the main strategy. At any rate, a M&A should happen at a time when an exit seems to be the best business solution – sometimes it makes more sense to continue building the company and adding more value to it. Once an offer is on the table, then it comes down to having realistic valuation expectations followed by a solid negotiation execution.

Any tips that you can provide on the deal-making front whether it be negotiation tactics, or simply how you go about making a deal?

Irena Barbulovic-Nad: M&As are not trivial deals. Negotiations take a lot of time and can be quite exhausting, often times leading to deal fatigue. Not to risk losing the big picture and getting stuck on minor things, it is very important to prepare well to have an experienced and well-rounded legal counsel that can address all aspects of the deal from corporate to tax matters, particularly if it is a cross-border transaction as in the Kapplex case; and you want to make sure that all business points are very clearly covered early on, starting with the term sheet. Also, it is good to remind yourself often that the deal has to be a win-win solution for both sides. You want to converge on common ground.

Are you optimistic about Kapplex’s prospects and assets under new ownership?

Irena Barbulovic-Nad: I am very optimistic about the future of Kapplex under the Miroculus umbrella. Both companies have very similar visions about democratizing diagnostics and clinical tests, and now, with this merged, synergetic approach we can push forward much harder and reach our goals faster. I have lot of confidence in the Miroculus team and leadership.

Some say Mergers & Acquistions: aren’t the end of a tech story, that they’re the beginning of new ventures. On this front, what’s come next for you?

Irena Barbulovic-Nad: Alongside Miroculus, Kapplex is venturing into new markets with new products. As for myself, I am continuing to run Kapplex operations here in Canada while serving as Miroculus Chief Operations Officer on a global level. Growing operations internationally is a new set of exciting challenges for me.

Would you do it all again?

Irena Barbulovic-Nad: Yes. Once an entrepreneur always an entrepreneur.

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Malik Slassi, PhD Sr. V.P. Discovery Research, Trillium Therapeutics Inc.

Can you break down the deal for us, what was being acquired/the terms of the agreement etc.? Malik Slassi: Trillium acquired all of Fluorinov’s assets including its preclinical product pipeline and proprietary Fluorine technology as well as small molecule medicinal chemistry expertise. Trillium made an upfront cash payment and committed to pay future milestones based on successful development of Fluorinov products.

What do you think drove Trillium’s interest to buy the company? What made your company attractive?

M&A Report

“We have tried very hard to attract investors from Canada, but unfortunately we received only small investments which were not enough to develop our pipeline to the next level and see Fluorinov flourish by its own.Therefore I strongly believe that it was the right decision and time.”

Malik Slassi: Trillium was looking to expand their exciting oncology pipeline beyond biologics and take advantage of the Fluorinov small molecule pipeline in combination therapy with Trillium biologics pipeline, which I believe is the future of the cancer therapy. I think what attracted Trillium to Fluorinov was the fluorine chemistry technology, the pipeline, the small team and most importantly, immediate access to our highly trained small medicinal chemistry team with proven expertise in small molecule drug discovery.

Tell us about the genesis of the deal, did they come to you? Or, Were you looking for an exit, and if so why? Malik Slassi: Fluorinov was not looking for an exit, rather we were looking for collaborations for individual programs, and when we were approached by Trillium we were in discussions with a couple of U.S. companies for individual programs. However, when we evaluated the overall complementarity

between the two organizations, we came to the conclusion that joining Trillium would be the best option for Fluorinov’s shareholders, technology and employees.

Did you struggle over the decision to sell? What ultimately convinced you the M&A path was the way to go? Malik Slassi: For me personally, it was an easy decision to join Trillium and this was for a few reasons. First, my main objective is to succeed in developing the Fluorinov assets in Canada, and specifically in Toronto, where I have been living for the last 25 years. We have received offers in the past from U.S. groups, but it was always tied to the condition to move to U.S. Second, the complementarity between Fluorinov’s small molecule and Trillium’s biological development expertise which has the potential to create one of the most powerful product development engines in Canada’s biotech industry.

Third, Trillium has the expertise and resources to realize the potential of Fluorinov’s proprietary fluorine chemistry platform. Finally and most importantly, to join Trillium’s team and culture that shares my profound vision and belief that we can be successful in Canada despite the challenges of investment in our sector.

Why was it the right time to do a deal of this nature?

Malik Slassi: We have tried very hard to attract investors from Canada, but unfortunately we received only small investments which were not enough to develop our pipeline to the next level and see Fluorinov flourish by its own. Therefore I strongly believe that it was the right decision and time.

Before or during negotiations, how many other companies did you talk to? And if you had multiple suitors, what factored into your decision that Trillium was the right buyer? Malik Slassi: Yes, there were other offers on the table and others involved in the diligence process, but for the reasons described earlier, we believed that Trillium was the right buyer. The integration with Trillium has been seamless and we know that we made the right decision.

Who assisted you in the deal, advisors, and consultants?

Malik Slassi: Fluorinov’s board had very deep experience in the biotech sector in Canada and U.S., and they were very helpful in guiding us throughout the process.

After the deal was made official, what was your initial reaction?

Malik Slassi: As a scientist, my joy is science and focusing on new scientific challenges. So my initial reaction was excitement of joining Trillium’s team to develop our assets and to further explore our collective expertise to create new products.

What are some of the elements you believe are essential to successful exits in biotech and the technologies markets? October/November 2016 BIOTECHNOLOGY FOCUS 17

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Malik Slassi: There are different elements that I believe are a must to a successful exit in biotech and technology markets in Canada: (1) Sound science and technology with solid intellectual property; (2) Knowledge of the biotech sector and competitive landscape; (3) Extreme patience; (4) Awareness of your strengths and weaknesses; (5) And most importantly, the team must have diverse experience in the biotech sector and knowledge in science.

“We were equally fortunate to find an acquisition partner that was evidently enthusiastic about our vision – including our desire to maintain R&D and manufacturing in Canada. This was the right decision, and it was made carefully and strategically. ”

Any tips that you can provide on the deal-making front whether it be negotiation tactics, or simply how you go about making a deal? Malik Slassi: Obviously, there was a lot of back-forth during negotiations, but I believe during the due-diligence and the negotiation process, you build a unique relationship with a potential buyer that comes down to transparency, honesty and common benefit.

Are you optimistic about Fluorinov’s prospects under new ownership?

Malik Slassi: I’m very fortunate for the opportunity to join Trillium’s team, and of course, very optimistic about Fluorinov’s prospects under Trillium, as I have received full support to develop Fluorinov’s technologies.

Some say Mergers & Acquisitions: aren’t the end of a tech story, they’re the beginning of new ventures. On this front what has the transition to Trillium been like for you? Malik Slassi: I would say Mergers & Acquisitions are the end of a chapter and the beginning of a new one, and this new chapter is as exciting as when I founded Fluorinov. The transition has been great. I really feel that I have been working with Trillium’s team for many years, and this could not have happened without tremendous support from the company’s senior management, led by President and CEO, Dr. Niclas Stiernholm.

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Scott D. Tanner Former Chief Technology Officer, Fluidigm Corp.

At the time of the deal, did you struggle over the decision to sell? i.e. the company was your baby.

Scott Tanner: I was fully and thoroughly engaged in the process, and fully committed to the process and outcome. Three years ago, and after an exhaustive search, we completed a Series A venture capital investment that ultimately bequeathed majority ownership of the company to the investors. We sought that investment, and the talent/mentorship that comes with it, so that we could develop a global market presence. The natural outcome of such investment is that there will be an exit for the investors. That exit is normally in the 3 to 7 year window; we achieved that goal at the short end of the timeline. The cofounders of DVS Sciences fully understood the opportunity and the expected outcome of this venture capital. We were fortunate to secure supportive and knowledgeable investors, and they were sensitive to both our needs and wishes during that gestation. We

were equally fortunate to find an acquisition partner that was evidently enthusiastic about our vision – including our desire to maintain R&D and manufacturing in Canada. This was the right decision, and it was made carefully and strategically.

What [are] some of the elements you believe are essential to successful exits in biotech and the technologies markets? Scott Tanner: It’s incredibly important for companies to document every step, every decision, every agreement in a form that can be quickly recalled to support due diligence inquiries and that can be incorporated in the schedules of the investment and M&A agreements. Keep an ongoing cross-reference of the parties involved and the dates of those events. Even apparently insignificant events can become significant at the time of investment or M&A. Second, be welcome to bringing in experienced leadership (aka, hire your new boss!) at least two years before an anticipated exit. Founders often carry certain baggage that can make them a poor choice to negotiate an exit, and they are rarely experts in navigating these waters.

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What is necessary for a successful exit? The definition of “a successful exit” may vary. My definition is an appropriate financial return combined with the retention and culturing of the founders’ vision. In our instance, that vision included the continuation of the technological framework in Canada and the ability to continue to develop innovative technologies that are desired globally and that will contribute to improved understanding and, hopefully, improved response to disease and health.

The investment bankers’ principal job, in my experience, is to find the right potential M&A partner; your job is to provide timely, complete, and truthful response to due diligence requests (hence the need, above, to fully document every event in your history). In the end, there are opportunities to add value to the deal – for example, by sharing risk on uncertain outcomes (IP prosecution, market penetration, etc.). It is your job to ensure those are added values rather than potential risks.

Here are the necessary ingredients: • A technology/product that has a demonstrated customer need and acceptance; • Preferably be cash-flow-positive and profitable, or have a solid plan to become profitable; • A market-appropriate gross margin: I suggest greater than 65 per cent (for instruments) or 85 per cent (for reagents) is a minimum to prove the above customer need; • Have a pipeline of new products; • A cohesive and supportive senior management team that shares and supports your vision; and • A team, across every level, that is engaged, enthusiastic, and (foremost) effective.

Some say Mergers & Acquistions: aren’t the end of a tech story, that they’re the beginning of new ventures. On this front what came next for you?

Any tips that you can provide on the deal-making front whether it be negotiation tactics, or simply how you go about making a deal? Scott Tanner: From my perspective, it is principally important to have a real and demonstrable product that inspires customer excitement and that can reasonably be expected to fulfill the customer’s expectation. Beyond the technology itself, that requires appropriate regulatory approval (or reasonable expectation to achieve that). You should have an investment banker that is respected by the majority of your potential exit partners – if only because the banker can then handle some of the minutiae that can become bothersome. Again, having an investor group, board of directors, and negotiating team that align with your principal vision is critical to a successful exit for you, and hopefully for your investors.

Scott Tanner: For me, the year following the exit was an opportunity to imprint on the organization my vision, and to maximize the opportunities for the team that we had assembled. What’s next for me is to focus on my family, and to volunteer to help guide the life sciences agenda in Ontario and Canada, and to provide mentorship to other early-stage entrepreneurs, primarily through my role with Life Sciences Ontario and Ontario Genomics. And of course, to explore what opportunities may lie ahead.

“I think it’s important to listen very carefully to the people you’ve entrusted to advise you. Everything worked for us in the end, but I do know that a common founder’s mistake is to too lightly brush aside inconvenient advice. ”

Would you do it all again, and if not, what would you do differently? i.e. Do you miss running a company? Scott Tanner: The birth of DVS Sciences was an opportunity borne of more than two decades of planning: it took that long to learn the ropes of technological innovation and to engage the team that could convince me to take the big step. It’s hard to say what I’d do differently. I think it’s important to listen very carefully to the people you’ve entrusted to advise you. Everything worked for us in the end, but I do know that a common founder’s mistake is to too lightly brush aside inconvenient advice. On a personal level, I miss the daily interaction with the team that we assembled – and I mean the entire team of managers, production and commercial operations. It remains a great pleasure to know that they are happy and as enthusiastic as ever.

To see this story online visit www.biotechnologyfocus.ca/special-reportmerger-acquisitions/

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