Q1 2016
Life Sciences Transaction Report A 2016 CohnReznick LLP Report
Q1 2016 Overview Healthcare and life sciences companies depend upon access to capital to support operations and fuel research and development. Even though pricing performance post-IPO has been more challenging of late, both public and private investors are still drawn to the healthcare and life sciences sectors. This is especially true as companies move closer to regulatory approval of their science and increase the likelihood of generating revenue. In Q1 2016, continued market volatility and increasing scrutiny from investors have contributed to the constriction of capital transaction pipelines for most forms of capital. Even though healthcare and life sciences companies continue to attract interest from investors, market volatility, primarily as a result of global economic uncertainty, may make capital raising activities more challenging in the near term. Today, astute management teams are engaging in discussions concerning the timing of the need for capital and strategies to manage cash. Some companies have decided to conserve cash by re-prioritizing growth initiatives and postponing those that are not considered critical. Alternatively, for companies with cash on their balance sheets, current market conditions present opportunities for growth through acquisitions.
Q1 IPO Transaction Activity* Number of IPOs
60 FLAT %
Q1 2016
6
The capital raising seas are no less choppy for companies that are already public. In Q1, healthcare and life sciences companies’ follow-on transactions decreased by 63% and proceeds raised decreased by about 60%. In the event that traditional follow-on offerings continue to be challenging, issuers may consider an “at the market” offering. This will enable public companies to sell shares over time—when market conditions are supportive and perhaps when a specific company milestone is achieved.
Q1 2015
15
Q1 2016
1.2B
Q1 2015
997M
Q1 Follow-On Activity* Number of Follow-Ons
Proceeds
63 62 %
Q1 2016
In Q1 2016, six of the nine IPOs that made it to market were issued by healthcare and life sciences companies. Even though the total number of Q1 IPOs is the lowest number since 2009, the good news is that 67% were issued by healthcare and life sciences companies. Looking forward, healthcare and life sciences companies with good stories for investors and that are further along in the development and approval process, will receive continued interest from investors. Those companies that demonstrate timely achievement of milestones and the ability to commercialize products and services should fetch additional interest from investors along with higher valuations.
Proceeds
43
Q1 2015
115
Q1 2016
8B
%
Q1 2015
21B
Q1 VC Investment Activity* Number of Deals
Capital Invested
38 33 %
Q1 2016
189
Q1 2015
305
Q1 2016
2.6B
%
Q1 2015
3.4B
*Healthcare and Life Sciences transaction data from Thomson Reuters and Pitchbook
The Wall Street Journal recently reported that, “Venture-capital firms are raising money at the highest rate in more than 15 years, even as the values of some once-hot startups have begun to cool.” So, yes, financial investors like venture capital firms have money to invest, but they are proceeding cautiously. VC investments in life sciences companies in Q1 2016 were down 38% year over year and the amount of capital invested has dropped by 38%. These decreases may lead a life sciences company to believe that VCs aren’t investing, but that couldn’t be further from the truth. Venture capital firms want to put money to work by investing in companies with good stories, good science, and experienced management teams. As with public investors, VCs will reward life sciences companies that achieve milestones, that successfully commercialize their products and services, and that shown signs of intelligent growth and advancement. In Q1, venture capital firms like Orbimed Advisors, New Enterprise Associates, and ARCH Venture Partners have been some of the most active.
Strategic Investors Offer Attractive Alternative To achieve their growth objectives, most healthcare and life sciences companies have committed to strategies that combine efforts to grow organically and through mergers and acquisitions. But today, organic growth has been difficult and expensive to achieve so they have placed greater emphasis on growth through mergers and acquisitions. Corporate investors and their venture capital arms have been active acquirers. In 2015, wellknown healthcare and life sciences companies like Celgene (CELG), Laboratory Corporation of America (LH), Pfizer (PFE), Roche Holdings (RO), and Becton Dickinson & Company (BDX) were some of the most active acquirers. In Q1 2016, corporate venture capital investors like GV (Google Ventures), Pfizer Venture Investments, Novo (Novo Nordisk Foundation), Novartis Venture Funds, and Johnson & Johnson Development Corporation, have been some of the most active investors. Strategic and corporate venture capital investors offer an interesting option for healthcare and life sciences companies. These investment groups are familiar with the industry and will typically pay a premium for the right acquisition. Why? First,they can reduce organic research and development expenses by purchasing good science. Second, they can reduce the time involved in regulatory approval processes if they purchase science that’s close to approval. And lastly, with sales and distribution channels already in place, they can integrate new products and services with little additional investment. All of these lead to a faster and greater return on investment. Looking past Q1, strategic and corporate venture capital investors will continue their quest for quality acquisitions. This creates significant opportunities for companies raising capital.
Debt Is an Option If cash needs are immediate, unavoidable, and short-term, debt is an option for some healthcare and life sciences companies.
Some non-bank debt providers can help a company get through trials to achieve their next milestone without even making a payment. Payments would start at a pre-determined time negotiated by both parties. Suffice to say that debt is more readily available to those companies in later stage trials and more advanced stages of approval. Today, one of the real advantages of a debt transaction is that it doesn’t expose the company to the risk of a reduced valuation or down round. Both of these have become increasingly common.
Explore Internal Funding Options First Before knocking on doors and placing calls to external funding sources like public and private equity and debt transactions, it is prudent to approach current investors, employees, or board members. Those who already have confidence in your business model may agree to help with temporary, short-term or even long-term financing such as bridge loans or convertible debt.
Conclusion Healthcare and life sciences companies are fortunate. When compared to other industry sectors, they continue to receive strong interest from the investment community. Despite the fact that broader market conditions and economic factors have created elevated levels of market volatility, along with reduced levels of investor confidence, in Q1, options exist for management teams in need of capital. Looking forward, we expect the IPO market to improve, but a near-term recovery seems unlikely. Even with a reduced number of IPOs in the near term, we believe that the healthcare and life sciences sectors will be well-represented. Private investors, strategic investors, and corporate venture capital investors are likely to continue their interest in acquiring well-managed healthcare and life sciences companies. This group of investors may offer management teams the greatest opportunity and some of the most attractive deal terms as they compete for quality acquisitions.
Report Contributors • Alex Castelli, Partner, Technology and Life Sciences Industry Practice Leader, alex.castelli@cohnreznick.com • Craig Golding, Partner, craig.golding@cohnreznick.com • Ravi Raghunathan, Partner, ravi.raghunathan@cohnreznick.com
About CohnReznick’s Life Sciences Industry Practice As one of the top accounting, tax, and advisory firms in the United States, CohnReznick has a proven track record in helping private, public, and venture and private-equity backed life sciences companies manage financial growth at every stage of their life cycle. Our professionals provide clients with a range of services that helps improve financial reporting and operational efficiency and minimize tax obligations. Clients benefit from our entrepreneurial culture that includes hands-on partner involvement. CohnReznick works with numerous life sciences clients including drug development and pharmaceutical companies, medical device and equipment manufacturers, and healthcare technology and research, testing, and laboratory organizations. Our team has extensive knowledge in dealing with accounting and tax requirements specific to these companies—including complex licensing deals, tax sensitive financial structures, purchase price and stock valuations, and specialized audit services to help meet lender and investor expectations..
About CohnReznick CohnReznick LLP is one of the top accounting, tax, and advisory firms in the United States, combining the resources and technical expertise of a national firm with the hands-on, entrepreneurial approach that today’s dynamic business environment demands. Headquartered in New York, NY, and with offices nationwide, CohnReznick serves a large number of diverse industries and offers specialized services for middle market and Fortune 1000 companies, private equity and financial services firms, technology companies, government agencies, life sciences companies, and not-for-profit organizations. The Firm, with origins dating back to 1919, has more than 2,700 employees including nearly 300 partners and is a member of Nexia International, a global network of independent accountancy, tax, and business advisors.
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