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IB Interview Guide, Module 3: Deal Discussions – Sell-Side M&A

Example (Assurex / Myriad – $410 Million Sale of Private
Biotech/Neurosciences Company)
You can use this outline and executed example for sell-side M&A discussions.
This example is based on a discussion in a mock interview with a client. We have disguised the
company and industry, but the substance of the discussion remains intact.

Sources of Information:
We changed this discussion to use a real deal so that we can point you to the key links. We
retrieved some facts and figures from Capital IQ, but most of the information is public:
Financial Information on Assurex:
https://www.sec.gov/Archives/edgar/data/899923/000119312516767889/d200649dex992.ht
m
Credit Agreement to Fund $200 Million Term Loan/Bridge Loan in Deal:
http://files.shareholder.com/downloads/MYGN/4048013647x0xS1193125-16-
699650/899923/filing.pdf
https://www.sec.gov/Archives/edgar/data/899923/000119312516756511/d253869dex102.ht
m
https://www.genomeweb.com/molecular-diagnostics/myriad-inks-300m-credit-agreement
Press Releases:
http://www.fiercebiotech.com/medical-devices/myriad-enters-neuroscience-225m-assurex-
health-buy
http://www.bizjournals.com/cincinnati/news/2016/08/11/why-the-value-of-assurex-healths-
buyer-just.html

Resume/CV Presentation:
Advisor on Assurex’s $410 Million Sale to Myriad Genetics (Sell-Side M&A Transaction)

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• Valued Assurex based on 20-year DCF analysis and estimated market size and patient
count for key products; determined implied Enterprise Value of $500 – $600 million if
company achieved its financial projections

• Reviewed client’s financial supplement and found that bookings were flat over past
year, despite significant revenue growth; analysis led team to discuss issue with CFO and
address it in management presentation for potential Buyers

• Valuation work resulted in compromise where Myriad agreed to pay 45% of total
consideration ($185 million) in earn-out linked to development milestones

Outline:
1) Company Background: Assurex was $66 million revenue neuroscience company with
diagnostic tests to determine most effective drugs/treatments for patients; negative
margins, but revenue had doubled YoY. Buyer, Myriad, was $2 billion market cap
biotech company with diagnostics and cancer treatments.

2) Deal Motivation: Assurex wanted to sell to take advantage of high deal multiples and
frothy market; VCs also wanted an exit after ~10 years. Myriad had had flat growth for
several years and wanted to expand its pipeline and gain access to more patients.

3) Your Personal Contributions: Discovered that client had flat bookings despite 100%
revenue growth; addressed this point in management presentation. Valued company
and suggested earn-out based on results.

4) Current Status: Myriad acquired Assurex for $225 million upfront and $185 million earn-
out; EV / Revenue of 5x; Myriad’s stock price fell 40% after announcement, but deal
closed because of Cash + Term Loan funding.

Executed Deal Discussion:

“One deal I worked on at Leerink was Assurex’s $410 million sale to Myriad Genetics. Assurex
was a $66 million revenue neuroscience company that provided diagnostic tests to determine
which drugs or treatments would be most effective for patients. It had negative operating
income and cash flow but had been growing revenue at 100% year-over-year.

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The Buyer, Myriad, is a $2 billion market cap biotech company that does diagnostics and cancer
treatments.
Assurex wanted to sell to take advantage of high deal multiples and a frothy biotech M&A
market, so we ran a broad process with a few dozen potential Buyers. The VC investors had also
been on board for ~10 years and wanted an exit.
Myriad had flat growth for several years and wanted to expand its pipeline and gain access to
more patients; around 75 million in the U.S. could benefit from Assurex’s treatments.
I wrote the CIM, completed the valuation, and tracked the process, but my main contribution
was discovering a major problem with Assurex: It had flat bookings over the past year despite
100% revenue growth, and no one had noticed it until I reviewed its financials.
I pointed it out to my VP and MD, and we added several slides to address it in the management
presentation, explaining why the company’s policies created this issue. I also built a 20-year
DCF for the company and suggested an earn-out based on the results.
Myriad acquired Assurex for $225 million in upfront payment and a $185 million earn-out; the
EV / Revenue multiple was 5x if you assume a 50% payout probability. Myriad’s stock price fell
40% after the announcement, but the deal still closed successfully because the company used
Cash and $200 million Term Loan for funding.”

Follow-Up Discussion:
After you give this upfront summary, here’s what the rest of the conversion might sound like
(assuming a few more minutes of questions about this deal):
Q: Great. So, let’s start with the process you ran. How did you select Buyers to approach?
A: We ran a broad screen and looked for biotech and pharmaceutical companies with market
caps less than $5 billion that had a history of acquiring companies similar to Assurex for high
multiples.
We also looked for companies that could do the deal with Cash or Debt rather than Stock
because there was a risk of a share-price decline after this type of deal.
Q: OK, but why not target much bigger Buyers as well? Couldn’t a company like Pfizer do this
deal more easily?
A: Companies like that weren’t interested in a company the size of Assurex. Also, many of them
already had genetic diagnostic tests and a presence in this market.

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Q: And what happened when you approached these Buyers?

A: Most of them were not interested, but four of them went to the next round and submitted
initial indications of interest.
Only one of them could have used Cash to fund the deal, but it also offered the lowest price, by
far – around $150 million.
Out of those four companies, we settled on Myriad since it offered the best price and Cash +
Debt financing rather than Stock.
Q: You also mentioned discovering this problem with Assurex’s bookings.
When did you find out?
A: It happened after we had already distributed CIMs to potential Buyers because Assurex did
not share all its financial details in the beginning.
Some of the Buyers had requested data on bookings or the order log, and I spotted this
problem right before management meetings began.
Q: OK. And what was this problem, exactly?
A: The issue was that the company took a long time to recognize revenue – up to 2-3 years –
because of how it delivered its services over years of patient treatments.
Assurex had quickly expanded into a few niche markets, but it had already captured almost
100% of those markets. And they hadn’t entered any new markets in the past year.
So, the company’s revenue increased dramatically, but it hadn’t been booking much new
business. They claimed it was because they were too busy servicing existing clients and need
more funding to expand.
Q: But that seems like a huge problem. If there was no underlying growth, why would Myriad
have paid a 5x revenue multiple for this company?
How did you address this issue?
A: We turned it into a strength by finding data on all the markets the company could enter and
showing how quickly it had captured ~100% share in the first few markets.
There were a lot of other “mental disorder” markets that were prime candidates for the
company’s tests.
We also pointed to the company’s client list and how many large accounts it had won.

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So, we made the pitch more about the untapped potential and the ~75 million new patients
that Assurex could bring in rather than its short-term performance in the past year.
Q: But weren’t the Buyers skeptical of this explanation?
A: Of course; no one gave us “full credit” for our revenue and cash flow projections.
We projected $2 billion in peak sales for the company’s products, but that was a big leap from
$66 million in revenue.
Q: OK. And is that how you valued Assurex? What about public comps and M&A comps?
A: They weren’t relevant because there weren’t enough public comps in the same market; also,
most of the M&A comps were for much earlier-stage or much later-stage companies.
So, we relied on a 20-year DCF with peak sales of $2 billion and operating margins of 45-50% in
Year 10, with declining sales in Years 15-20.
We used a higher Discount Rate in the earlier years, which produced implied Enterprise Values
of between $500 million and $600 million.
Q: But Myriad did the deal for $410 million, or $225 million if you exclude the earn-out.
A: Yes. Their finance team didn’t believe our projections, so they haircut them and reduced the
peak sales assumption in Year 10 to $1 billion instead.
That produced implied Enterprise Values of $250 to $300 million, and they pushed that price
range for a few weeks.
Q: It still seems like a pretty good outcome – a revenue multiple of 3.8x to 4.5x for a company
with flat bookings.
A: Yes, it was a high multiple, but the CEO and CFO weren’t satisfied. And as bankers, we had to
push for a higher price.
So, we went back to Myriad and proposed a lower upfront payment in exchange for an earn-
out that would bring the total price to over $400 million.
They didn’t like that at first, but their bankers argued that the fair value of the earn-out was
only $130 million, so the “effective purchase price” was more like ~$350 million.
Q: What revenue or milestone targets was the earn-out based on?
A: I can’t disclose that because those details are confidential, but the earn-out was based on
development milestones, not financial targets.

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Q: OK, fair enough. You also said that Myriad’s stock price dropped by 40% after this deal was
announced. Wasn’t your valuation of Assurex responsible for that?
A: You could argue that, but as bankers, our job was to get our client the best possible price for
its business.
If you look at the numbers, that 40% decline corresponded to a value of more than $410
million, so I think the market was penalizing Myriad for making an acquisition at all.
Myriad had missed its quarterly earnings right before this deal announcement, so its stock price
declined partially because of that as well.
Q: OK. So, if you had been your VP or MD advising Assurex, what would you have
recommended?
A: I would have told them to stick with the Myriad deal.
If the company had had stronger bookings growth – not necessarily 100%, but maybe 30-50% –
then it would have made more sense to pursue other Buyers and push for a higher price and
more upfront consideration.
But because of the flat bookings, it would have been difficult to do much better than this,
especially since both sides couldn’t even agree on peak sales.
Q: Thanks for that overview. Moving on…

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