The biopharma deal environment is showing signs of life.
Biopharma’s cold deal environment is finally showing signs of a thaw. Many observers expect interest rates to fall in the second half of the year, which would help revive a quiet deal market. The IPO market has brought optimism, starting with two January IPOs that exceeded expectations; three upcoming IPOs have garnered high hopes as well. Meanwhile, large pharmaceutical companies are eager for deals to backfill their pipelines with a patent cliff looming, and have the funding to do so, while private equity firms have money to deploy and are investing in and around biopharma.
Some deal bright spots are clear. Investors of all types are interested in phase 2 and 3 assets, with large pharma companies looking to these assets to enrich their pipeline. Neuroscience is attracting new interest, especially in assets that are close to approval, as investors look for new places to deploy capital.
Yet amid the optimism was a sense that we’re not out of the woods yet. The geopolitical and macroeconomic environment is still jittery, starting with two ongoing wars and an upcoming U.S. presidential election. And interest rates remain high, which is still dampening deal activity and business results.
Many private equity firms have extended asset holding periods as desired exit valuations are challenged, in turn reducing PE reinvestment in the market. Meanwhile, some public biotech companies are struggling to stay in business. Plummeting valuations have, in some cases, triggered debt covenants that give lenders an equity stake, which dilutes ownership to the point that the company cannot be sold.
Don’t overlook human capital in your deal-making. Amid a cautious deal-making environment, pre-deal diligence is more critical than ever — especially when it comes to human capital and, in particular, the leadership team. Human capital can in fact be the key success factor in any given deal.
Seek CEOs with strong communications and stakeholder management skills. At public and privately held clinical-stage biotech companies, the CEO is central in navigating a much more complex shareholder base, connecting with new and existing investors while finding creative ways to secure additional financing. The right CEO needs to interact with shareholders in a confidence-inspiring way; Spencer Stuart research has shown how the ability to collaborate and influence is a common trait among successful leaders. At private equity– and venture capital–backed companies, engaging and leveraging the board and investor teams and aligning on the value creation plan are also critical.
Focus on “below-the-surface” skills to broaden the talent pool. The pool of experienced candidates willing to leave large pharma organizations for biotech companies is small, as many see the move as risky considering the current market volatility and uncertainty. Rather than focus simply on career experience, biotech companies can find strong leaders by understanding individuals’ capability, capacity and character, which can be as or more predictive of future success. Some biotech companies are also doubling down on developing a strong internal bench for succession planning. The need for assessing and shaping robust development plans for internal future C-suite candidates has never been stronger.
Different investors are taking on new risks in biopharma.
The deal environment has forced many private equity funds to adjust their value creation plans and, in many cases, extend their ownership past their original exit timelines. In biopharma, they also are considering earlier-stage and longer-term investments than before.
PE’s presence in pharma services is on the rise, with growing investment in increasingly popular hub services offering a single point of contact between manufacturers and patients and in distribution organizations.
New funding models are arising, spanning the entire development life cycle. Take Arena BioWorks, an investor-funded biomedical research institute, which launched in early January to fund basic biological research with the goal of “quickly translating insight and discovery” by housing “discovery and company development … seamlessly under one roof.”
Private equity is also taking on more development risk, with some creating, acquiring or investing in VC funds. For example, in October 2023, KKR acquired a minority stake in Catalio Capital, a firm focused on investments in breakthrough biomedical technology; a year earlier Carlyle acquired Abingworth, a life sciences investment firm.
- Build management teams with an eye toward long-term leadership. As hold periods go longer, PE firms need to adjust what they seek in management teams. Increasingly, the top leaders will be those with an entrepreneurial spirit who can grow the business during the hold period and set it up for further growth post-exit, increasing the company’s overall value.
- Turn to board directors, advisory boards and experienced CEOs as key advisers. As the nature of their investments change, PE firms are turning to independent board directors with industry experience to provide guidance and support for the management team. PE also is increasingly sending advisers (including past CEOs) into portfolio companies not just to support the development of company strategy, but also to implement that strategy. PE firms that acquire venture capital funds can also tap into the expertise housed within these firms for due diligence on deals.
Biopharma is not immune to shareholder activism.
Shareholder activism is on the rise. And a recent report by the Harvard Law School Forum on Corporate Governance rated biotech the most vulnerable to activism of all business sectors.
The volatility of biopharma stocks and low company valuations form the underpinnings of this trend. Increasingly activist investors are watching regulatory and business developments — a missed clinical milestone or a warning letter from the FDA. And it is not just large activist investors buying a large percentage of outstanding shares over a short period. It is also smaller activists purchasing smaller percentages of shares over a longer time horizon. Both scenarios put CEOs and boards at a higher risk of being targeted and pushed out.
- Proactively address activist risk. A strong CEO-board relationship can deter activist shareholders and position the company to mitigate activist risk early. A collaborative CEO is critical: They must be vulnerable enough to recognize they don’t have all the answers and seek guidance and support from their chairs when necessary.
- Assess your board’s activist readiness. Boards can take steps to ready themselves for activist investors. They can proactively assess the board and identify potential vulnerabilities, consider whether enhancements to the proxy statement disclosure are warranted, and create a boardroom culture that values continuous evolution and board refreshment. Boards should review their composition annually — comparing their composition to peer groups and tracking and managing tenure and diversity.
The biopharma business environment is extremely complex.
Leaders continue to face tough — in many cases existential — funding decisions as the business environment remains complex. Broad trends are perplexing leaders across industries — supply chain anxiety, geopolitics and still-lingering question of return-to-office are just a few.
For biopharma, some industry-specific issues add to the complexity. The blocked deal between Sanofi and Maze Therapeutics highlighted how regulatory scrutiny could imperil alliance and licensing deals between biotech and pharma. The Inflation Reduction Act affects reimbursement, something companies must consider much earlier, well before a drug enters the clinic.
Dormant therapeutic areas, like neuroscience, are seeing a revival, and some pharma companies are seeking a cost-effective way to reenter. Recent breakthroughs in antibody-drug conjugates (ADCs) research spurred deals for a drug that has been around for over 20 years. The ripple effects from the rise of GLP-1 agonists like Ozempic and Wegovy throughout the healthcare industry and beyond remains to be seen. For one, these drugs are currently limited by manufacturing capacity. And in the longer term, there is both excitement about these blockbuster drugs’ revenue possibilities and lingering questions about reimbursement, patent protection, oral reformulation, and long-term safety profiles.
Amid all of this, leaders face some big questions with some difficult answers. Do you conserve cash by laying off staff? Do you consider cutting programs or slowing down trials? Do you have enough cash to get you through to 2025 or beyond?
- Look for leaders with broad skill sets. A narrow specialist is not enough for today’s leadership roles. The strongest leaders understand the entirety of the business — discovery research, clinical development, commercial and deals — and the interdependencies across the key areas. Can they prepare for a multitude of scenarios and manage an increasing number of stakeholders? Can they cut through the noise to focus the entire company on disciplined execution? While an experienced CEO is one answer for addressing these complex questions, don’t overlook first-time candidates who demonstrate the capacity and character to succeed. Recent Spencer Stuart research found what made CEOs successful in the past is no longer sufficient. Systems thinking, self-reflection and adaptability, accountability with empathy, communication, and mental and emotional resilience are now critical attributes for success.
- Get the entire C-suite right. C-suite talent is as important as the right CEO. No one person can be everything the company needs, and the CEO instead needs to be a leader in fostering a world-class leadership team with diverse perspectives, experiences, skills and capabilities. The skills mix is important, and often underestimated. Can the same leaders hired for their ability to raise money also lead on cutting costs and improving operational efficiency, advancing the company toward key milestones to capitalize on funding opportunities when they arise?
- Evaluate board composition. Given the complexity faced by boards, experienced directors and chairs who have weathered these storms in the past are in demand. Yet these directors are being more selective in their board assignments, particularly when you consider the time commitment required: According to a 2023 Spencer Stuart survey, the average director logs 278 hours per year of work on their most complex board. At the same time, it is more critical than ever to ensure that boards are truly diverse in all senses of the word — experience, skills, capabilities, gender, race and ethnicity, etc. — to provide healthy challenges to the management team and bring new perspectives to the table during challenging times. A holistic approach to board composition is the key.
Biopharma embraces the AI revolution.
AI is top of mind across industries, and biopharma is no exception. The industry has been using AI in drug discovery for some time, but advances could have a wide-ranging impact on how drugs are developed, in back-office operations, and in how companies go to market. A growing “techbio” sector — tech-first companies with a biological focus, rather than biological companies that incorporate technology into their operations — is becoming a major investment area. AI could also prove valuable on the commercial side, in identifying, targeting and reaching prescribers and patients and working to help patients stay on their medications.
Much has been written about how AI will change organizations’ operating models. One big question is whether AI capabilities need to be outsourced or can be built in-house, and in turn what leadership and team structure are needed to support the AI strategy.
- Understand AI’s impact on the business. However AI capabilities are sourced, the leadership team must understand AI’s impact on the business. The answer is not as simple as hiring a chief AI officer, but a strong technology leader who can advise on the buy vs. build decision is crucial. Boards must also take steps to accelerate their learning curve in AI and cybersecurity, understanding AI’s opportunities and risks and effectively managing the cybersecurity risks.
- Set up AI talent for success. As biopharma organizations look to build some AI capabilities in house, they will need to hire AI talent, talent that likely will come from the tech industry. Biopharma organizations need to set these individuals up for success, supporting them at the most senior levels.
- Look for curious, critical-thinking leaders. As AI tools become more common, critical thinking, conceptual reasoning and the ability to ask the right questions will become increasingly important leadership capabilities. AI is a crucial tool for biopharma to generate new ideas for exploration. Leadership must be able to discern the signal from the noise when evaluating AI outputs.
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The week in San Francisco underscored something we consistently see in our work: strong leadership has never been more important. In a complex and volatile world, leadership is the best predictor of organizational viability and lasting success.
Whatever the situation a particular company faces, the fact remains that insightful, inspirational leaders remain in demand to guide their organizations through the uncertainty.