M&A multiples in the US – should you go west?

Sunstone has over the past years continuously highlighted observations and learnings from successes in European biotech. The learnings have consolidated, tuned and verified our current investment strategy.

Sunstone is today primarily an early stage (pre-clinical/phase 1) Series A investor with a strong focus on generating value within the first EUR 50 million spent by our portfolio companies to demonstrate human safety and efficacy – simply because this is where European biotech has generated the best returns in the past 15 years.

We have previously highlighted that with a median return of around 6x per M&A transaction, a portfolio of 15 companies will need a substantial number of successful companies to return a fund 3x! Some might argue that venture capital is an outlier business, where performance is driven by the outlier transactions that return the entire fund rather than the on-average 6x transactions! Everything before and after that transaction just becomes more icing on the cake!

To find and characterize potential fund returners transactions we have studied 71 EUR >50 million M&A transactions from 2010 to 2024 extracted and processed from Pitchbook®.

The figures below show the total transaction values (the bio-$!) (left) and our best estimate of the actual transaction returns (right) subdivided into clinical stages.

In our experience a VC ownership is typically 10-15% and a small to medium sized fund will be EUR 100 to 150 million. Thus, in ballpark figures only M&A transactions above EUR 1 billion can create fund returner outcomes.

When considering the likelihood of achieving post-transactional milestone payments the number is only 8 companies of the 71 (right figure). That highlights the need for an investment strategy that also captures returns from M&A transactions below EUR 1 billion.

An important observation from our data is that only biotech companies sold at phase 2 or later achieve M&A transaction values above EUR 1 billion and a VC portfolio needs to have companies that progress to phase 2, or human efficacy studies, to be exposed to fund returners.

If the combined M&A value from all 71 transactions is distributed by clinical stages (data not shown) 23% of the value originates from preclinical and phase 1 transactions and 36% from phase 2 transactions. Nevertheless, from previous analyses we also know that return multiples before phase 2 are substantially better relative to transactions in phase 2, despite a lower total value.

In summary, an investment strategy embracing early investments with the objective to potentially achieve efficacy results in humans in phase 2 should capture the best of everything.

By no coincidence, this is exactly what we try to do at Sunstone.

And while we wait for the fund returner and enjoy the summer break, we can prep by humming the old Beach Boys hit: “Wouldn’t it be nice”:

Have a great summer break.