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Reporting from the 2022 Jefferies London Healthcare Conference

December 2022

Investor perspectives and critical macro-environment and micro-sector trends impacting the biotech and biopharma industries shaped discussions at the recent Jefferies London Healthcare Conference. While challenges for leaders still remain, there are reasons for optimism too. Here’s our viewpoint on the key leadership trends and top headlines from this annual event.

  • Leadership challenges aplenty. Board directors evaluating non-executive director (NED) opportunities have much to ponder. From the quality of the technology platform to shareholder expectations, from the capability of the CEO to the strength of their relationship with the chair and other NEDs, there is no shortage of priorities to address. Independent directors are also trimming their portfolios and focusing on boards where they can have the highest impact, as well as maximised return on their time and capital invested.
  • Wanted: top negotiators and stakeholder managers. Investors are looking for chairs and NEDs with superlative negotiation and stakeholder management skills, which are seen as essential capabilities for helping the CEO navigate different investor agendas on the board, negotiating partnership deals and engineering potential acquisitions by big pharma.
  • Character counts. Recent macro events have increased the pressures on CEOs and CXOs. They now need to be able to translate increased complexity and uncertainty into opportunity whilst also galvanising the workforce. Boards and CEOs making critical hiring choices need to quickly evaluate character (i.e. the nature of the person, their emotional drivers, values and leadership style) and capacity to fully assess potential and learning agility. These are proving to be important when considering alignment with an organisation’s culture
  • Balancing the board. We are seeing a trend in hiring experienced CEOs who have successfully navigated complex challenges in their previous roles. However, most appointments at this level remain first-time CEOs. Investors who have multiple first-time board or CEO/CXO executives should pay increased attention to board composition and dynamics, top team effectiveness, and organisational culture to mitigate risk in their overall portfolio.
  • The advance of the chief operating officer (COO). We are seeing multiple COO appointments across the healthcare spectrum. This is a result of companies and investors facing the need to manage costs and strengthen operating efficiencies while adapting to higher inflationary environments. COOs can help address these challenges by bringing lessons learned from an array of experiences depending on stage and maturity of the company, as well a greater focus on succession planning.

Not all bad news

As 2022 draws to a close it is clear that the anticipated recession, rising inflation, and fluctuating interest rates have created a challenging environment for businesses and consumers alike – but healthcare forecasts are not all gloomy. There is capital to be deployed and we are optimistic about the investment opportunities which adorn the horizon; there are smart deals to be made, great science/business models and teams to be backed by buyers with conviction.

Leadership in turbulent times

Nonetheless, the recent confluence of macro and geopolitical events has intensified the pressures on CEOs to successfully navigate this fast shifting terrain. This is a particularly acute challenge given that the markets have been favourable for 14 years, which means that many of today’s leaders have minimal experience of dealing with a downturn.

These leaders also need to motivate their workforce while effectively managing the challenges arising from hybrid working. With employees now enjoying greater flexibility in working arrangements and roles, the need to create a strong, mission-led culture is now a key feature of any employer’s value proposition. How this impacts employee engagement and inclusion longer term is yet to be seen.

For some CEOs these challenges are proving too much, and we expect to see more transitions continuing. As boards and CEOs make critical hiring choices, the need to carefully evaluate executive potential continues to be a critical theme. While combining first time C-suite and chair appointments will continue to occur, they require more careful risk mitigation strategies. In addition, the increasing prevalence of the COO is especially pertinent in healthcare, where higher inflationary costs highlight the need to effectively manage the sourcing and procurement of complex raw materials and the efficient manufacturing of product.

We believe 2023 will be the year of the CFO. Companies are looking for an increasing contribution from the finance team beyond just fundraising, and we see the CFO role as being highly strategic, with a focus on effectively partnering with the other C-suite executives to support prudent cash-flow management and creative deal-making, whether in BD&L or production.

There will also be a strong focus on cost management, with significantly greater demand than in 2021, when ‘capital market CFOs’ were particularly popular. Cost management is also likely to involve a shift of focus from ‘fixed costs’ to ‘variable costs’, which will move the spotlight onto partnering and outsourcing, especially for pre-commercial biotechs.

In addition, we expect companies to be increasingly ruthless on pipeline prioritisation across biotech and pharma companies, with the chief scientific officer and chief medical officer playing pivotal roles together with the CEO and commercial counterparts to focus on the right indications and translation of high value assets. The advent of data science is also proving to be a significant enabler of novel target identification.

Money matters

Against this uncertain backdrop, finance is becoming more complex and expensive, and the price of debt is rising. Deal activity is not concerningly low, however. Healthcare can call on strong multiple growth paths and is on track for a return to normalcy. While spending is adapting, we are seeing more bilateral transactions, as well as a shift towards portfolio companies, later phase deals, growth markets, and achievements of larger health outcomes.

It should also be remembered that the greatest vintage years in private equity (PE) occurred after a market correction. So although we are in a lull, opportunities remain and PE funds are poised to commit cash to healthcare when the right opportunity arises. As more data points of company performance in deteriorated markets materialise, valuations should improve. The results may not rival the 40x EBITDA deals which occurred in 2021, but more creative deals can be expected. This will fuel projected growth trends between 2024 and 2030 before pipelines start to deliver from 2030 onwards.

ESG on the rise

Healthcare leaders, particularly those in mid-large scale companies, also need to consider ESG – both strategically and to gain competitive advantage. While biotechs are more intensely focused on weathering the storm ahead and financing, higher ESG standards correlate with higher staff retention and a strengthened employer value proposition.

While the use of ESG financial incentives is not currently part and parcel of every compensation package, in five years’ time this could be the norm. Some have even set aside 10% of C-suite compensation for ESG metrics. Determining how to drive board oversight of ESG issues and develop and implement an effective ESG governance structure is a challenge. This is due to the sheer breadth of issues potentially encompassed within the term “ESG”, company-specific variations, lack of investor consensus on priorities, and the continually evolving nature of this area,

Today, oversight of ESG issues can sit with the full board, an existing board committee, or a newly formed, dedicated ESG committee. It can also be shared by the full board and one or more committees or by multiple committees covering ESG issues that fall within their charter mandates and areas of expertise. Some use a combination of these approaches. Approaches to board oversight of discrete and collective ESG matters differ and there is no ‘one-size-fits-all’ approach – we would expect to see more discussion around the best approach to ESG for the maturity level of the company.

In conclusion

Despite the challenging economic and geopolitical environment, valuations and multiples remain relatively high and there is consensus amongst investors that cash is available. The landscape is ripe for diversification of investor capital across new technologies. This capital is fuelling later phase deals and consolidation in operations to reduce cost and improve efficiency.

Although there is increasing need for NEDs who have experience of overcoming economic turbulence, there continues to be a shortage of experienced board, CEO/ CXO talent. Prudent boards and management teams need to overcome this challenge by building pipelines of future leaders. Best-in-class independent directors are being selective about the board roles they accept by leaning heavily on their time commitment and ability to add value.

Private equity investors are beginning to look for an increasing commitment to ESG, as well as paying close attention to the capability of the board, management team and the quality of the technology. We expect buyers with real conviction to do deals in the first half of 2023, backing those organisations with strong teams and clear strategies to create value amidst the current turbulence.