Interview: Why Biotech Companies Should Be Confident About Deals Despite Coronavirus

BY ELEANOR MALONE

Executive Summary

Fundraising in the life sciences sector has been booming even as firms in many other industries are struggling to stay in business. Goodwin’s David Mardle is upbeat about the sector’s ongoing prospects – although M&A deals are currently proving tricky to complete.

Biotech always needs money – lots of it – and to get that money it must convince investors that there is a good chance of a profitable exit. It would therefore stand to reason that at a time of stock market retraction and a global recessionary environment, the sector would face a funding crunch. However, in both public and private markets, money is flowing into biotech.

The world is beset by significant macro issues – from the pandemicrelated supply chain challenges and economic recession to Brexit – but “by and large biotech ignores these: they don’t really drive any material behaviors in biotech,” David Mardle, a UK-based partner in the technology and life sciences practice of global law firm Goodwin, told Scrip.

Goodwin has advised on $500m in life science company financings in the first half of 2020, including Calliditas Therapeutics AB’s upsized $90m initial public offering (IPO) on NASDAQ in June; Novo Holdings A/S’s $40m lead investment into Exscientia Ltd.’s $60m series C funding in May, and NodThera Limited’s $55m series B equity financing, also in May. “People are saying: ‘if anything [COVID-19] is just highlighting the need for more health solutions’,” noted Mardle. “Those times when people said they just did not wish to invest in biotech, those times are gone for good.”

The coronavirus has thrown the spotlight on biotech and pharma companies: does Mardle believe life sciences valuations are displaying bubble characteristics as companies scramble to develop therapies, vaccines and diagnostics? Pointing out that much of the recent investment has been in companies doing non-COVID related work, Mardle said: “I think biotech will stay strong: all the indications are that this is an expanding opportunity.”

Public And Private Financing Hold Strong

Biotechnology went into the pandemic in an advantageous position, in terms of financing. “There’s been an awful lot of money raised in recent years, which has been partly deployed, but there is still capital searching for homes,” said Mardle. “That’s healthy when you have an environment like this, because it means for the right opportunity the capital is there: it’s already raised.”

Companies and investors have adapted well to lockdown restrictions to continue fundraising business as usual. “Take the recent IPOs. They managed to do it on a virtual roadshow. They didn’t fly around the world, but apart from that, it was as normal a process as it would have been pre-COVID. So the US public investors are not shying away from the sector.” Indeed, 14 biopharma companies completed IPOs on NASDAQ in June alone, and the first half/second quarter tally was 29. “Our US public market team is very busy,” said Mardle.

He conceded that some companies have had to delay funding events and existing investors have had to tide them over to allow for delays to non-COVID trials that were occasioned by the pandemic and its associated lockdowns. However, “early fears that some trials might have to be canceled altogether have not really played out, at least as yet: there’s been some delay but not outand-out cancellation,” he said.

Biotech companies also tend to have longer cash runways than they used to. “We have moved on from the model of 15 years ago when companies were funded to the next event, and then funded a bit more. A lot more companies now fund for success. They raise a big round at the start, and they often then go back to the same investors. There is stability.”

Furthermore, new money is entering the sector. “When fund managers are looking at what their next fund is going to be exposed to, very few of them are saying we do not wish to look at health in the broadest context. Most are also saying they want to be in new medicine: in patient outcomes rather than simply patient care. That means that when the established names go out to raise more money, the funds they raise will be bigger and they will come from more diverse limited partners.”

Mardle’s advice to biotech firms therefore is to “be confident. Financing appears to be very robust. If you had a good proposition before COVID, you had a good chance of being funded and COVID has not changed that. Of all the sectors we are involved in, this is the healthiest in terms of funds available and opportunities to raise funds.”

Where’s The Exit?

But even if “the trend pre-COVID was to hold assets longer and let them grow bigger and bigger before a sale,” at some point investors will want to realize their gains.

Aside from a public market listing or making the difficult transition from R&D to become a commercial business, the main way that biotech firms crystallize their value for investors is through a sale to big pharma. On this front, Mardle has observed more challenges.

“Be aware that transactions are always quite difficult to get over the line even in the very best of times, and lockdown has made it trickier because it’s given people more reasons not to engage,” he warned. “We know buyers are still active and that they are looking at companies because we are involved in quite a few deals. But getting them over the line to commit to buy something is where the question mark is.”

Part of this is about the challenges of being unable to do the physical due diligence that is customary in M&A deal-making, such as meeting management and visiting facilities.

People are becoming more comfortable with video conferencing as a way of conducting predeal conversations. “It will become second nature but in the first months of COVID it has been quite a novelty and it has had an impact,” he said.

As for site visits, “people have been using drones to go into the facilities,” he said. “It’s not quite the same, but it’s better than nothing.”

However, visiting sites using a drone is unlikely to satisfy a potential acquirer enough to close a deal. “They’re using it as helpful information so that when they can get to see the company in person they will be better placed to move more quickly.” When it comes to asset auction processes, “all the same players are saying they are interested and having a look” but “it’s not moving at quite the pace that a good process ideally does, or at the pace it was moving pre-COVID.”

This reticence among potential buyers has had the knock-on effect of making potential sellers wary of putting themselves on the market. “When you get those two things happening in tandem it becomes a self-fulfilling prophecy and deals don’t get done,” Mardle pointed out.

Nevertheless, he thinks the situation unlikely to persist. “A deal will get done in this environment where there haven’t been opportunities for faceto-face engagement, and once that’s happened people will think ‘OK, unless I do this, I’m potentially going to lose out. Therefore, I’m going to have to jump this psychological hurdle and get on with it.’ It’s really a question of when this plays out. Is it the next three months, or three months later?”

Meanwhile, even if “as a general community they are not moving quickly on opportunities to buy,” buyers in contrast are much more comfortable with joining funding syndicates or entering into collaborations with biotech which includes some financing element. “The one announced between Evox and Eli Lilly is a great example.” (Also see “UK’s Evox Gets Lilly Onboard For CNS Exosome Collaboration” - Scrip, 9 Jun, 2020.)

Overall Impact

On the overall impact of the coronavirus pandemic on biotech deal making and financing, Mardle observed that the next 3-6 months would be the hardest to predict. The disruption to the usual conference and partnering circuit – the last major opportunity for companies to network with investors was the annual J.P. Morgan Healthcare conference in San Francisco in January – may not

have affected deals being done in the first half, but “it probably has had an impact on the timing of future deals because it takes time to build that trust up.”

“If we don’t have a second spike and people are back on aeroplanes by Christmas, you may not even see a blip at all. It may be as if it never happened for the biotech community, performance wise. But if we do have a prolonged period of this sub-optimal way of doing things, it’s bound to have some impact. It’s just very difficult to predict where it will fall and how extreme it will be.”