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The Post-Pandemic World Is One Of Widespread Dependence On Government

The Post-Pandemic World Is One Of Widespread Dependence On Government

Authored by Per Bylund via The Mises Institute,

The state strives for power, and what grants power is fear and dependence. The state is making people dependent on it,…

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The Post-Pandemic World Is One Of Widespread Dependence On Government

Authored by Per Bylund via The Mises Institute,

The state strives for power, and what grants power is fear and dependence. The state is making people dependent on it, both as means for control and as an outcome of many policies intended to provide relief.

We have seen a lot of fear and dependence in this pandemic. Fear has been the message that has propelled types of repressive policies that were not possible before. Had anyone suggested only over a year ago that whole countries, democratic European countries, would close down and quarantine people in their homes most of us would have thought him crazy. But it happened. Because fear was drummed up, many populations went along with it. Even though they later protested and resisted, it was too late. Much of the damage was already done. And of course, many feared not only the virus but also the police, which sometimes with enormous brutality cracked down on those seeking a breath of fresh air after weeks stuck in their homes.

It is possible to roll back these policies. However, many of them will need to be rolled back for society to function again. To be clear, it is not possible for the state to keep everybody locked in their homes for long. This is an overreach and points to the limit of the state's power. When the people rise in opposition, as we've seen in this pandemic, the state has no power.

Much more troublesome is the other side of the lockdown and the damage caused to the economic system. Not only were people locked down, but society and therefore practically the whole economy was forcefully paused. The problem here is that there is no "Pause button" for the economy. It may sound easy for politicians, who have no conception of how the real world works. But you cannot simply pause a business. You also cannot pause the supply chain. If you have ever run a business you know that being an entrepreneur is not a steady state but a changing process. It is a constant struggle to get money to come in so that you can cover costs that you've assumed long ago. That's what entrepreneurs and businesses do. They assume costs and imagine they will be paid for their efforts later, and paid more than the cost they already assumed.

In other words, if you "pause," a business, the costs remain but you get no revenue. How are you going to pay those bills when everything is on pause? You cannot. This is perhaps easy to understand … so easy that even some politicians grasp the concept. So many countries like the United States have offered relief in the form of loans to businesses. Of course, such schemes come with the usual cronyism and favoritism. The loans often do not end up in the hands of those intended. They also shift power and influence away from the market to the bureaucrats in government. Or to put it differently, businesses survive or go under as decided by bureaucrats, not by consumers.

There is more than simply money. Imagine food processing and the beef farmer when the politicians press Pause, which stops businesses from dealing with slaughtering, cutting, processing, and shipping meat. But it doesn't stop the farming. The farmer's animals will not stop growing and will not stop eating because the economy is paused. The farmer will go bankrupt because he needs to cover their food, water, and care without being able to sell any beef. Even if he has savings to cover the expense, the meat will lose quality and value as the cows grow older than their prime. At the same time, no meat is reaching the shelves in the stores. So while the farmer is stuck with costs he cannot cover because he cannot sell the meat he produces, consumers cannot find meat in stores. Consequently, we experience a shortage of food, while at the same time farmers and other producers have surpluses that they cannot afford to keep and are unable to sell. What a ludicrous situation.

The effect of this is of course that the farmer will not be able to rise again as the politicians press Play on the economy and beef processing is resumed. He will not have been able to make those continuous investments in his business in order to meet future demand for meat. After all, he was stuck with additional costs and no revenue. So pressing Play will not solve the food shortage.

The same story can be told for other types of businesses as well. You cannot stop the freighter that is on its way around the world. You cannot store logs of timber waiting for the sawmill. You cannot pause mines and smelting plants. And if one task can be paused, it affects the other task in the supply chain. The longer the lockdown, the more businesses would have failed and the supply chains lain in shambles. This is an enormous loss. While it can be rebuilt, it can only be so at an enormous expense. And it still requires that there are people with the know-how and willingness to start such businesses again. Can we rely on them to rise and try again, even after they have been crushed?

The long-term effects of this madness have yet to be seen. Even if the virus disappears tomorrow, these problems will remain. They take time to be resolved and it takes lots of work to piece things together again even if it is all possible. The issue here is that this would be a very bad situation if it were a sudden shock to an otherwise free market economy.

This is not the case. These Western nations were hardly free market havens. Rather, they were welfare states to varying magnitudes. In the case of the United States, a welfare-warfare state. In other words, these societies and economies were already burdened by large and very costly states which were usurping what the market was allowed. What this means is that the market that existed was already burdened by financing the nonmarket.

The state costs money, but the greater burden is loads of people that it relieves from the discipline of the market. In the purely free market, you are paid in accordance with your contribution to the value facilitated to the consumers. To put it bluntly, if you produce lots of value you get paid a lot. But if you produce nothing, that nothing might be your wage.

Of course, there would be systems and institutions in place to care for those in temporary unemployment and those with lesser fortune. But they would be the exception to the rule. Most people would be able to find a job but would be paid what is not called a living wage. Prices are overall much lower when we are all producing, which means our wages can buy many more goods and services. It would be an easy burden to carry and to care for those who are in need when most people can care for themselves. It can be done and voluntarily. And this used to be the case. With cooperative unemployment insurances and collective sick pay funds, where workers share their risk, that was the case. When the state monopolized these services, it also made them more general, and offered them for "free."

The incentive became to exploit the system as much as possible rather than contribute to but otherwise stay out of it out of respect of your peers. People were trying to stay away from burdening others. Now it is the other way around. This has increased the burden and therefore the cost, and also taxation. Then, the state hires more people to administrate these systems. This was in the beginning, but it has been going on for many decades. The state is an enormous enterprise throughout Europe and the West and much of what it does is to undermine the market by creating incentives to not work, to not produce, and not contribute to joined welfare. The result is that big parts of the population do not actually contribute to the wealth of the nation. This does not only include the sick, elderly, and those exploiting the system because they can. It also includes everybody working for the government, who are in fact living off the production that takes place in the market. The government does not produce any value.

While the cost of the state is typically counted towards the county's GDP, it would make more sense to subtract it from the value created in the market. That will give us a good idea of the soundness of the economy. How many economies in the West do you think create more value than they use up? With this enormous burden on the economy, the chances of entrepreneurship to be at all successful diminish. Even to start a business that puts enough food on the table is very difficult. It is made much more difficult because of the levies, taxes, licenses, regulations, and so on that politicians and bureaucrats force onto the entrepreneur and private businesses.

In other words, many opportunities are simply not valuable enough to cover the extra burden placed on entrepreneurship by the state. So they remain unexploited or underexploited. This reduces the number of jobs in businesses, which leaves even more people without the possibility to make a living. And so, they seek help and therefore become embedded in the state system. The only way out is to find a job in one of those businesses that are unlikely to be started because the state has made it all too burdensome to run a business.

For every person who no longer works and makes a living, and thereby no longer contributes in the economy, there is a loss of one in production and an increase of one in burden. For every person who loses their job and becomes dependent on the unemployment benefits and other subsistence, the economy both loses production and must carry a heavier load. As a result, the economy becomes less lively and exuberant. There is less entrepreneurship, there is less production, which means there are fewer opportunities for people to find jobs. They become ever more dependent on the state.

This dependence is a problem for many reasons, especially when people become dependent on the system in the long term. As a brief stop to get on one's feet, the system would do only little harm. It would do what private systems used to do. But that is not how these systems work, especially when the state becomes an ever-increasing burden on value creation and the market. People get stuck in the system because there is rarely a way out and because the systems have been designed to be generous. They are not punishments after all.

Politicians pride themselves on promising that you will not need to lower your standard of living much when you lose your job. It is a great way to get votes and it makes you look generous and caring, but it is utterly destructive to pay people as much for not working as for when they contribute to our society's overall well-being. When people get stuck in these systems it affects their self-esteem. The longer they remain in these programs, the smaller the chances they have a skill or value, a means to contribute, that they can do something that is still of value. They lose hope, they lose confidence, they become fully dependent on the state, and not only financially. When they start believing that they cannot make a living on their own, that they cannot take care of themselves and their families, and when they conclude there are no jobs for people like them, that's when they become lost and stop trying. After all, what is the point?

People in this terrible situation are much more likely to be hostile toward those who are not giving them a chance, that is, businesses, entrepreneurs, the market. They are more likely to use their votes to benefit themselves, for which you can hardly blame them. The burden of the economy rapidly increases, which causes greater problems and more people dependent on the state, and even fewer in positions in which they actually contribute. Add to this situation, which existed before the pandemic, the mass death of businesses following the disastrous policies adopted to "fight the virus."

The farmer in my example will not be able to rebuild his business. Even if he could afford it, why would he choose to build again what was once destroyed? No one will thank him. And it may be destroyed again. Why would he put in all that effort and shoulder that risk when there is little to no gratitude for what he does? There might not even be much profit. So, resentment builds, the burden increases, it becomes harder to start and run businesses. More people become dependent on the state and thereby add to the burden to those who are not. This is a recipe for disaster because it leads us down only one path, which Hayek referred to as "the road to serfdom." The state grows like a disease in a body that is not healthy enough to withstand the attack. Politically, this is a path to the all-encompassing state—totalitarianism.

The state needs and is granted more power as more people become dependent on it. That is the sad truth and that is what we are seeing. Those depending on it are all too willing to grant a little more to get the system fixed. The problem, however, is not the inability of the state. The state never has such ability. The problem is a lack of market, and this lack becomes more present the more the state grows. This is the reason for pushing harder against the state, but for most the incentives are exactly the opposite, to ask for more. This is what we are dealing with and why we must break people's dependence on the state.

Tyler Durden Mon, 10/04/2021 - 03:30

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I created a ‘cosy game’ – and learned how they can change players’ lives

Cosy, personal games, as I discovered, can change the lives of the people who make them and those who play them.

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Cosy games exploded in popularity during the pandemic. Takoyaki Tech/Shutterstock

The COVID pandemic transformed our lives in ways many of us are still experiencing, four years later. One of these changes was the significant uptake in gaming as a hobby, chief among them being “cosy games” like Animal Crossing: New Horizons (2020).

Players sought comfort in these wholesome virtual worlds, many of which allowed them to socialise from the safety of their homes. Cosy games, with their comforting atmospheres, absence of winning or losing, simple gameplay, and often heartwarming storylines provided a perfect entry point for a new hobby. They also offered predictability and certainty at a time when there wasn’t much to go around.

Cosy games are often made by small, independent developers. “Indie games” have long been evangelised as the purest form of game development – something anyone can do, given enough perseverance. This means they can provide an entry point for creators who hadn’t made games before, but were nevertheless interested in it, enabling a new array of diverse voices and stories to be heard.

In May 2020, near the start of the pandemic, the small poetry game A Solitary Spacecraft, which was about its developer’s experience of their first few months in lockdown, was lauded as particularly poignant. Such games showcase a potential angle for effective cosy game development: a personal one.

Personal themes are often explored through cosy games. For instance, Chicory and Venba (both released in 2023) tackle difficult topics like depression and immigration, despite their gorgeous aesthetics. This showcases the diversity of experiences on display within the medium.

However, as the world emerges from the pandemic’s shadow, the games industry is facing significant challenges. Economic downturns and acquisitions have caused large layoffs across the sector.

Historically, restructurings like these, or discontent with working conditions, have led talented laid-off developers to create their own companies and explore indie development. In the wake of the pandemic and the cosy game boom, these developers may have more personal stories to tell.

Making my own cosy game

I developed my own cosy and personal game during the pandemic and quickly discovered that creating these games in a post-lockdown landscape is no mean feat.

What We Take With Us (2023) merges reality and gameplay across various digital formats: a website, a Discord server that housed an online alternate reality game and a physical escape room. I created the game during the pandemic as a way to reflect on my journey through it, told through the videos of game character Ana Kirlitz.

The trailer for my game, What We Take With Us.

Players would follow in Ana’s footsteps by completing a series of ten tasks in their real-world space, all centred on improving wellbeing – something I and many others desperately needed during the pandemic.

But creating What We Take With Us was far from straightforward. There were pandemic hurdles like creating a physical space for an escape room amid social distancing guidelines. And, of course, the emotional difficulties of wrestling with my pandemic journey through the game’s narrative.

The release fared poorly, and the game only garnered a small player base – a problem emblematic of the modern games industry.

These struggles were starkly contrasted by the feedback I received from players who played the game, however.

This is a crucial lesson for indie developers: the creator’s journey and the player’s experience are often worlds apart. Cosy, personal games, as I discovered, can change the lives of those who play them, no matter how few they reach. They can fundamentally change the way we think about games, allow us to reconnect with old friends, or even inspire us to change careers – all real player stories.

Lessons in cosy game development

I learned so much about how cosy game development can be made more sustainable for creators navigating the precarious post-lockdown landscape. This is my advice for other creators.

First, collaboration is key. Even though many cosy or personal games (like Stardew Valley) are made by solo creators, having a team can help share the often emotional load. Making games can be taxing, so practising self-care and establishing team-wide support protocols is crucial. Share your successes and failures with other developers and players. Fostering a supportive community is key to success in the indie game landscape.

Second, remember that your game, however personal, is a product – not a reflection of you or your team. Making this distinction will help you manage expectations and cope with feedback.

Third, while deeply considering your audience may seem antithetical to personal projects, your game will ultimately be played by others. Understanding them will help you make better games.

The pandemic reignited the interest in cosy games, but subsequent industry-wide troubles may change games, and the way we make them, forever. Understanding how we make game creation more sustainable in a post-lockdown, post-layoff world is critical for developers and players alike.

For developers, it’s a reminder that their stories, no matter how harrowing, can still meaningfully connect with people. For players, it’s an invitation to embrace the potential for games to tell such stories, fostering empathy and understanding in a world that greatly needs it.


Looking for something good? Cut through the noise with a carefully curated selection of the latest releases, live events and exhibitions, straight to your inbox every fortnight, on Fridays. Sign up here.


Adam Jerrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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KIMM finds solution to medical waste problem, which has become a major national issue

A medical waste treatment system, which is capable of 99.9999 percent sterilization by using high-temperature and high-pressure steam, has been developed…

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A medical waste treatment system, which is capable of 99.9999 percent sterilization by using high-temperature and high-pressure steam, has been developed for the first time in the country.

Credit: Korea Institute of Machinery and Materials (KIMM)

A medical waste treatment system, which is capable of 99.9999 percent sterilization by using high-temperature and high-pressure steam, has been developed for the first time in the country.

The Korea Institute of Machinery and Materials (President Seog-Hyeon Ryu, hereinafter referred to as KIMM), an institute under the jurisdiction of the Ministry of Science and ICT, has succeeded in developing an on-site-disposal type medical waste sterilization system that can help to resolve the problem caused by medical waste, which has become a national and social issue as the volume of medical waste continues to increase every year. This project was launched as a basic business support program of the KIMM and was expanded into a demonstration project of Daejeon Metropolitan City. Then, in collaboration with VITALS Co., Ltd., a technology transfer corporation, the medical waste treatment system was developed as a finished product capable of processing more than 100 kilograms of medical waste per hour, and was demonstrated at the Chungnam National University Hospital.

Moreover, the installation and use of this product have been approved by the Geumgang Basin Environmental Office of the Ministry of Environment. All certification-related work for the installation and operation of this product at the Chungnam National University Hospital has been completed, including the passage of an installation test for efficiency and stability conducted by the Korea Testing Laboratory.

Through collaboration with VITALS Co., Ltd., a corporation specializing in inhalation toxicity systems, the research team led by Principal Researcher Bangwoo Han of the Department of Urban Environment Research of the KIMM’s Eco-Friendly Energy Research Division developed a high-temperature, high-pressure steam sterilization-type medical waste treatment system by using a high-temperature antimicrobial technology capable of processing biologically hazardous substances such as virus and bacteria with high efficiency. After pulverizing medical waste into small pieces so that high-temperature steam can penetrate deep into the interior of the medical waste, steam was then compressed in order to raise the boiling point of the saturated steam to over 100 degrees Celsius, thereby further improving the sterilization effect of the steam.

Meanwhile, in the case of the high-pressure steam sterilization method, it is vitally important to allow the airtight, high-temperature and high-pressure steam to penetrate deep into the medical waste. Therefore, the research team aimed to improve the sterilization effect of medical waste by increasing the contact efficiency between the pulverized medical waste and the aerosolized steam.

By using this technology, the research team succeeded in processing medical waste at a temperature of 138 degrees Celsius for 10 minutes or at 145 degrees Celsius for more than five (5) minutes, which is the world’s highest level. By doing so, the research team achieved a sterilization performance of 99.9999 percent targeting biological indicator bacteria at five (5) different locations within the sterilization chamber. This technology received certification as an NET (New Excellent Technology) in 2023.

Until now, medical waste has been sterilized by heating the exposed moisture using microwaves. However, this method requires caution because workers are likely to be exposed to electromagnetic waves and the entrance of foreign substances such as metals may lead to accidents.

In Korea, medical waste is mostly processed at exclusive medical waste incinerators and must be discharged in strict isolation from general waste. Hence, professional efforts are required to prevent the risk of infection during the transportation and incineration of medical waste, which requires a loss of cost and manpower.

If medical waste is processed directly at hospitals and converted into general waste by applying the newly developed technology, this can help to eliminate the risk of infection during the loading and transportation processes and significantly reduce waste disposal costs. By processing 30 percent of medical waste generated annually, hospitals can save costs worth KRW 71.8 billion. Moreover, it can significantly contribute to the ESG (environmental, social, and governance) management of hospitals by reducing the amount of incinerated waste and shortening the transportation distance of medical waste.

[*Allbaro System (statistical data from 2021): Unit cost of treatment for each type of waste for the calculation of performance guarantee insurance money for abandoned wastes (Ministry of Environment Public Notification No. 2021-259, amended on December 3, 2021). Amount of medical waste generated on an annual basis: 217,915 tons; Medical waste: KRW 1,397 per ton; General waste from business sites subject to incineration: KRW 299 per ton]

As the size and structure of the installation space varies for each hospital, installing a standardized commercial equipment can be a challenge. However, during the demonstration process at the Chungnam National University Hospital, the new system was developed in a way that allows the size and arrangement thereof to be easily adjusted depending on the installation site. Therefore, it can be highly advantageous in terms of on-site applicability.

Principal Researcher Bangwoo Han of the KIMM was quoted as saying, “The high-temperature, high-pressure steam sterilization technology for medical waste involves the eradication of almost all infectious bacteria in a completely sealed environment. Therefore, close cooperation with participating companies that have the capacity to develop airtight chamber technology is very important in materializing this technology.” He added, “We will make all-out efforts to expand this technology to the sterilization treatment of infected animal carcasses in the future.”

 

President Seog-Hyeon Ryu of the KIMM was quoted as saying, “The latest research outcome is significantly meaningful in that it shows the important role played by government-contributed research institutes in resolving national challenges. The latest technology, which has been developed through the KIMM’s business support program, has been expanded to a demonstration project through cooperation among the industry, academia, research institutes, and the government of Daejeon Metropolitan City.” President Ryu added, “We will continue to proactively support these regional projects and strive to develop technologies that contribute to the health and safety of the public.”

 

Meanwhile, this research was conducted with the support of the project for the “development of ultra-high performance infectious waste treatment system capable of eliminating 99.9999 percent of viruses in response to the post-coronavirus era,” one of the basic business support programs of the KIMM, as well as the project for the “demonstration and development of a safety design convergence-type high-pressure steam sterilization system for on-site treatment of medical waste,” part of Daejeon Metropolitan City’s “Daejeon-type New Convergence Industry Creation Special Zone Technology Demonstration Project.”

###

The Korea Institute of Machinery and Materials (KIMM) is a non-profit government-funded research institute under the Ministry of Science and ICT. Since its foundation in 1976, KIMM is contributing to economic growth of the nation by performing R&D on key technologies in machinery and materials, conducting reliability test evaluation, and commercializing the developed products and technologies.

 

This research was conducted with the support of the project for the “development of ultra-high performance infectious waste treatment system capable of eliminating 99.9999 percent of viruses in response to the post-coronavirus era,” one of the basic business support programs of the KIMM, as well as the project for the “demonstration and development of a safety design convergence-type high-pressure steam sterilization system for on-site treatment of medical waste,” part of Daejeon Metropolitan City’s “Daejeon-type New Convergence Industry Creation Special Zone Technology Demonstration Project.”


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IFM’s Hat Trick and Reflections On Option-To-Buy M&A

Today IFM Therapeutics announced the acquisition of IFM Due, one of its subsidiaries, by Novartis. Back in Sept 2019, IFM granted Novartis the right to…

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Today IFM Therapeutics announced the acquisition of IFM Due, one of its subsidiaries, by Novartis. Back in Sept 2019, IFM granted Novartis the right to acquire IFM Due as part of an “option to buy” collaboration around cGAS-STING antagonists for autoimmune disease.

This secures for IFM what is a rarity for a single biotech company: a liquidity hat trick, as this milestone represents the third successful exit of an IFM Therapeutics subsidiary since its inception in 2015.

Back in 2017, BMS purchased IFM’s  NLRP3 and STING agonists for cancer.  In early 2019, Novartis acquired IFM Tre for NLRP3 antagonists for autoimmune disease, which are now being studied in multiple Phase 2 studies. Then, later in 2019, Novartis secured the right to acquire IFM Due after their lead program entered clinical development. Since inception, across the three exits, IFM has secured over $700M in upfront cash payments and north of $3B in biobucks.

Kudos to the team, led by CEO Martin Seidel since 2019, for their impressive and continued R&D and BD success.

Option-to-Acquire Deals

These days option-based M&A deals aren’t in vogue: in large part because capital generally remains abundant despite the contraction, and there’s still a focus on “going big” for most startup companies.  That said, lean capital efficiency around asset-centric product development with a partner can still drive great returns. In different settings or stages of the market cycle, different deal configurations can make sense.

During the pandemic boom, when the world was awash in capital chasing deals, “going long” as independent company was an easy choice for most teams. But in tighter markets, taking painful levels of equity dilution may be less compelling than securing a lucrative option-based M&A deal.

For historical context, these option-based M&A deals were largely borne out of necessity in far more challenging capital markets (2010-2012) on the venture front, when both the paucity of private financing and the tepid exit environment for early stage deals posed real risks to biotech investment theses. Pharma was willing to engage on early clinical or even preclinical assets with these risk-sharing structures as a way to secure optionality for their emerging pipelines.

As a comparison, in 2012, total venture capital funding into biotech was less than quarter of what it is now, even post bubble contraction, and back then we had witnessed only a couple dozen IPOs in the prior 3 years combined. And most of those IPOs were later stage assets in 2010-2012.  Times were tough for biotech venture capital.  Option-based deals and capital efficient business models were part of ecosystem’s need for experimentation and external R&D innovation.

Many flavors of these option-based deals continued to get done for the rest of the decade, and indeed some are still getting done, albeit at a much less frequent cadence.  Today, the availability of capital on the supply side, and the reduced appetite for preclinical or early stage acquisitions on the demand side, have limited the role of these option to buy transactions in the current ecosystem.

But if the circumstances are right, these deals can still make some sense: a constructive combination of corporate strategy, funding needs, risk mitigation, and collaborative expertise must come together. In fact, Arkuda Therapeutics, one of our neuroscience companies, just announced a new option deal with Janssen.

Stepping back, it’ s worth asking what has been the industry’s success rate with these “option to buy” deals.

Positive anecdotes of acquisition options being exercised over the past few years are easy to find. We’ve seen Takeda exercise its right to acquire Maverick for T-cell engagers and GammaDelta for its cellular immunotherapy, among other deals. AbbVie recently did the same with Mitokinin for a Parkinson’s drug. On the negative side, in a high profile story last month, Gilead bailed on purchasing Tizona after securing that expensive $300M option a few years ago.

But these are indeed just a few anecdotes; what about data since these deal structures emerged circa 2010? Unfortunately, as these are mostly private deals with undisclosed terms, often small enough to be less material to the large Pharma buyer, there’s really no great source of comprehensive data on the subject. But a reasonable guess is that the proportion of these deals where the acquisition right is exercised is likely 30%.

This estimate comes from triangulating from a few sources. A quick and dirty dataset from DealForma, courtesy of Tim Opler at Stifel, suggests 30% or so for deals 2010-2020.  Talking to lawyers from Goodwin and Cooley, they also suggest ballpark of 30-50% in their experience.  The shareholder representatives at SRS Acquiom (who manage post-M&A milestones and escrows) also shared with me that about 33%+ of the option deals they tracked had converted positively to an acquisition.  As you might expect, this number is not that different than milestone payouts after an outright acquisition, or future payments in licensing deals. R&D failure rates and aggregate PoS will frequently dictate that within a few years, only a third of programs will remain alive and well.

Atlas’ experience with Option-based M&A deals

Looking back, we’ve done nearly a dozen of these option-to-buy deals since 2010. These took many flavors, from strategic venture co-creation where the option was granted at inception (e.g., built-to-buy deals like Arteaus and Annovation) to other deals where the option was sold as part of BD transaction for a maturing company (e.g., Lysosomal Therapeutics for GBA-PD).

Our hit rate with the initial option holder has been about 40%; these are cases where the initial Pharma that bought the option moves ahead and exercises that right to purchase the company. Most of these initial deals were done around pre- or peri-clinical stage assets.  But equally interesting, if not more so, is that in situations where the option expired without being exercised, but the asset continued forward into development, all of these were subsequently acquired by other Pharma buyers – and all eight of these investments generated positive returns for Atlas funds. For example, Rodin and Ataxion had option deals with Biogen (here, here) that weren’t exercised, and went on to be acquired by Alkermes and Novartis (here, here). And Nimbus Lakshmi for TYK2 was originally an option deal with Celgene, and went on to be purchased by Takeda.

For the two that weren’t acquired via the option or later, science was the driving factor. Spero was originally an LLC holding company model, and Roche had a right to purchase a subsidiary with a quorum-sensing antibacterial program (MvfR).  And Quartet had a non-opioid pain program where Merck had acquired an option.  Both of these latter programs were terminated for failing to advance in R&D.

Option deals are often criticized for “capping the upside” or creating “captive companies” – and there’s certainly some truth to that. These deals are structured, typically with pre-specified return curves, so there is a dollar value that one is locked into and the presence of the option right typically precludes a frothy IPO scenario. But in aggregate across milestones and royalties, these deals can still secure significant “Top 1%” venture upside though if negotiated properly and when the asset reaches the market: for example, based only on public disclosures, Arteaus generated north of $300M in payments across the upfront, milestones, and royalties, after spending less than $18M in equity capital. The key is to make sure the right-side of the return tail are included in the deal configuration – so if the drug progresses to the market, everyone wins.

Importantly, once in place, these deals largely protect both the founders and early stage investors from further equity dilution. While management teams that are getting reloaded with new stock with every financing may be indifferent to dilution, existing shareholders (founders and investors alike) often aren’t – so they may find these deals, when negotiated favorably, to be attractive relative to the alternative of being washed out of the cap table. This is obviously less of a risk in a world where the cost of capital is low and funding widely available.

These deal structures also have some other meaningful benefits worth considering though: they reduce financing risk in challenging equity capital markets, as the buyer often funds the entity with an option payment through the M&A trigger event, and they reduce exit risk, as they have a pre-specified path to realizing liquidity. Further, the idea that the assets are “tainted” if the buyer walks hasn’t been borne out in our experience, where all of the entities with active assets after the original option deal expired were subsequently acquired by other players, as noted above.

In addition, an outright sale often puts our prized programs in the hands of large and plodding bureaucracies before they’ve been brought to patients or later points in development. This can obviously frustrate development progress. For many capable teams, keeping the asset in their stewardship even while being “captive”, so they can move it quickly down the R&D path themselves, is an appealing alternative to an outright sale – especially if there’s greater appreciation of value with that option point.

Option-based M&A deals aren’t right for every company or every situation, and in recent years have been used only sparingly across the sector. They obviously only work in practice for private companies, often as alternative to larger dilutive financings on the road to an IPO. But for asset-centric stories with clear development paths and known capital requirements, they can still be a useful tool in the BD toolbox – and can generate attractive venture-like returns for shareholders.

Like others in the biotech ecosystem, Atlas hasn’t done many of these deals in recent funds. And it’s unlikely these deals will come back in vogue with what appears to be 2024’s more constructive fundraising environment (one that’s willing to fund early stage stories), but if things get tighter or Pharma re-engages earlier in the asset continuum, these could return to being important BD tools. It will be interesting to see what role they may play in the broader external R&D landscape over the next few years.

Most importantly, circling back to point of the blog, kudos to the team at IFM and our partners at Novartis!

The post IFM’s Hat Trick and Reflections On Option-To-Buy M&A appeared first on LifeSciVC.

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