Christopher Shapiro and Michelle Choi co-wrote this blog post with Cody Powers.
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Over the past ten years, the life science industry has seen unprecedented growth in total transaction value, including mergers and acquisitions (M&A), financing rounds and broader business development and licensing deals.
Yet in the weeks since the World Health Organization declared COVID-19 as a pandemic on March 11, 2020, there have already been signs of a significant impact on deal-making. The generics merger between Pfizer and Mylan was one of the first major transactions disrupted by COVID-19 as Mylan’s shareholder meetings were postponed in light of meeting bans. The high-profile AbbVie and Allergan merger may experience further delays as the FTC offers extensions to mitigate the challenges making witnesses and documents available during these times.
In the near term, the rapid spread of the novel coronavirus has the potential to disrupt deal-making and limit both the ability and willingness of biopharma companies to engage in potential transactions. However, based on data from prior economic events, the long-term impact is less clear – be it a quick rebound, stagnated deal flow or potential inflection point.
Here are five factors that may determine the appetite and ability to execute transactions in the current environment:
Financial: In the near term, both buyer ability to raise cash and seller ability to settle on a meaningful valuation commensurate with perceived value are affected. While early signs suggest central bank quantitative easing have had a positive impact on investment grade debt-raises, depressed valuations on public equity markets have limited ability to raise cash, be they through initial or follow-on offerings. Further, lack of insight into the underlying nature of the pandemic (testing, incidence and mortality), time to widespread healthcare intervention, and general inconsistency between markets in public policy response have had a chilling effect that could also impact ability to raise private capital where necessary insofar as risk premiums drive higher borrowing costs. While there have been some relatively bright spots (for example, large venture firms such as Flagship and ARCH announced successful large new rounds with intent to deploy), the net impact thus far on the industry – especially in the public markets – has been a slower environment.
Separate from fundraising, there is a practical reality of resource allocation to COVID-related changes. For much of biopharma, there is significant disruption to keep discovery, clinical (including trial), and commercial efforts afloat even if expenses have been trimmed to minimize cash burn. As funds are deployed to these alternate uses, companies may choose to reduce business development budgets as a result.
Last year in 2019, 46 biotech companies went public in U.S. markets and raised over $5 billion. Some early projections suggest a potential fall to $3.5 billion this year, given the financial impact of COVID-19. As of late April, the life science industry has seen only two IPOs since the market crash on February 20. (The biotech company Zentalis surprised the industry with a $165 million IPO on April 3 despite unrecovered markets. Keros Therapeutics went public on April 7 for $96 million.)
Regulatory: Companies engaging in transactions face challenges on regulatory review and approval. As the FDA cancels inspections and meetings to reduce spread of the coronavirus and expedites the review of vaccines and treatments for COVID-19, companies have begun to adjust expectations on Q2 2020 and Q3 2020 PDUFA dates. Bristol-Myers Squibb has already announced delaying the launch of ozanimod, one of the high-profile launches in 2020 for the competitive multiple sclerosis market.
Clinical: For clinical stage assets, companies face trial disruption as patient enrollment halts for non-COVID-19 clinical trials or for high-risk patients (for example, chronic lung disease, moderate to severe asthma and serious heart conditions). Without clinical data from completed trials (so-called “biotech currency”), companies are limited in their ability to tell a compelling story and therefore raise money at each milestone.
Manufacturers are also reprioritizing R&D initiatives based on both ability to execute development and shifts in perception for market demand. Some assets for whom development could potentially be a challenge, such as select respiratory indications, may be potentially de-prioritized even without active trials underway, while other therapies may be re-purposed as COVID-19 intervention and moved into the clinic, sometimes ahead of other previously planned programs. As an example, Genentech and Sanofi/Regeneron have begun testing their IL-6 inhibitors for potential use in COVID-19 patients. Similarly, AlloVir has announced plans to expand its investigational T-cell therapy ALVR106 to test among COVID-19 patients.
Reputation: Beyond the financial, regulatory, and clinical barriers, the life science industry faces significant societal pressure on both how to develop and commercialize treatments in light of the crisis. While the broader pricing debate may have somewhat subsided, the industry faces near-term choices on how to develop and commercialize in an environment where stakeholders will be increasingly sensitive to efforts that take needed resources away from the front lines, or worse are seen as self-serving. In addition, any vaccines or treatments developed for COVID-19 are likely to face significant scrutiny on how they are distributed and at what price – likely to grow with time as the crisis continues.
Would-be acquirers may face additional constraints in how to manage drug price transaction risk. ZS research suggests payers expect budget contractions as resources are re-allocated to COVID-related vaccines and treatments, such that would-be buyers may face challenges in securing prices commensurate with valuation and transaction terms.
Logistical: Finally, restricted travel and remote working will severely restrict the ability for companies to conduct complex large-scale deals. As more than a few have quipped, it is difficult to secure a large transaction meeting solely over Zoom.
Looking back at history can help assess how the COVID-19 pandemic may impact the transaction landscape in the coming months. These comparisons face obvious challenges (e.g., economic only in nature and not as a matter of public health), but can provide some useful insight.
Perhaps the most recent analog is the 2008 subprime mortgage crisis, during which the Federal Reserve cut interests rates to below 0.25% and the S&P 500 and Dow Jones Industrial Average (DJIA) lost about 50% of its value from October 2007 to March 2009. Though some measures suggest the life sciences industry was relatively buoyant compared to others, it was impacted nonetheless – as an example, nineteen biotech companies withdrew their IPOs after the financial collapse.
Once markets collapsed following the 2008 crisis, deal volume (any merger, acquisition and alliance between two parties in the pharma or biotech industries) headed toward a downward trend before recovering again in 2009 (Figure 1). Yet interestingly, the value of these deals increased (Figure 2) – potentially illustrating an uptake in deal value spread among fewer deals. While these inverse trends are often obfuscated by large M&A outliers, it paralleled a development that occurred post-2015 through the end of the decade.
Similarly, the economic downturn following the 9/11 terrorist attacks led to decreased transaction activity, albeit an increased value of deals. Unlike during the 2008 crisis, markets recovered more quickly, likely signaling stronger underlying fundamentals.
Figure 1: Total Volume of Life Science Deals Between 2000 and 2020
Source: BioMedtracker 2020
Figure 2: Total Value of Life Science Deals Between 2000 and 2020
Source: BioMedtracker 2020
Over the coming weeks, we’ll dig into these prior analogs and investigate the broader impact on the transaction landscape. Rather than trying to make predictions, we’ll examine both historical and emerging data to shed light on truths that may begin to emerge. For example, would any of the data suggest a faster vs. slower rebound? A period of prolonged stagnation? An inflection point?
Our next post will dig further into prior crises and what we might learn – we plan to incorporate more live data as it becomes available.
For more ZS insights on the impact of COVID-19, visit zs.com/COVID19.