Biopharma companies are now increasingly focused on extending their runways – the amount of time a business has to remain solvent, provided they don't raise any additional funds. They are doing this not through extra borrowing, but by prioritising programmes, implementing restructurings and reducing workforce numbers.
These moves can extend runways by between six and 12 months but such is the scale of the current geopolitical challenges, companies now need a two-to three year runway, with funding ideally in place until 2025. Navigating complex choices, making indication selections or taking non-dilutive funding, for example, requires CEOs who not only have experience but the executive intelligence required to navigate deeply complex choices that have unintended consequences.
Whilst the state of big pharma M&A is currently depressed, we can expect to see an increasing number of partnering deals between pharma and biotechs to seed optionality. These partnership deals involve less risk, bring in real dollars, create opportunities for smaller companies and will stimulate future M&A activity.
From a board, CEO and C-suite leadership perspective, we see more complexity at the board level, with larger boards requiring more careful management by the chair. Navigating the route to exit has always been important for the CEOs but the IPO is not the holy grail. A sale to a strategic buyer is just as viable, especially if the company has a cash-hungry clinical trial need to reach a critical milestone.
The need for good deal structuring is even more important, especially in the form of good chief business officers and strategic CFOs. CEOs need to be able to develop high-performing executive teams and chairs need to provide wise counsel, especially when coaching a first time CEO. Investing in appropriate on-boarding, coaching and top team effectiveness programs de-risks a CEO appointment.
The ups and downs of data
The febrile state of the markets is no recent phenomenon and instead goes back to before the first quarter of this year. This was a time when data – regardless of whether it was good, bad or indifferent – no longer seemed to matter quite as much and everything became a selling opportunity. With the share price not necessarily correlating with positive data, generating meaningful phase II results is now critical for future funding.
For example, when Allogene Therapeutics went on clinical hold in the final quarter of last year and its stock fell by 30 per cent. But when it came off hold the stock went down another 10 per cent. There is no rationale for why emerging from a clinical hold makes a company less valuable. This environment is therefore driving a survivalist instinct in companies and honing their ability to adapt using whatever tools they have at their disposal.
It’s not all bad news. Combining technology, biotech and life science Venture Capital (VC) funds there is just under $4 trillion of capital available. Limited Partners (LPs) still seem happy to invest and allocate to funds that are raising money and so the appetite and interest remains, albeit dimmed given the rising cost of capital. The market turmoil also opens up new avenues for creative companies to flourish.
In some ways, then, there has never been a better or more exciting time to be in biotech. There are more types of therapy and more technologies than ever before – the current challenges are not rooted in a failure of the technology but more the desire to fund all the options, which created too many cash-hungry companies. The North Star now needs to be how companies create more value, which they do via their products.
Rather than being distracted by external events, leaders should therefore continue to think long term and avoid being blown off course. Constantly checking your company’s share price, for example, only serves as a distraction – limit this to once a day, and only when the markets have closed. But admittedly this is easier said than done.
Despite the impact of Brexit, the UK continues to enjoy a strong magnetic allure as a global scientific powerhouse. The Universities of Oxford and Cambridge remain highly attractive as academic centres of excellence and scientists from all over the world jostle to work in the UK’s biotech sector. The UK also benefits from English being the global business language and its visa-friendly environment. By contrast, there are more logistical issues in countries such as France and Belgium, where international executives don’t necessarily speak the language and may be more reluctant to relocate, given the higher costs of employment.
However, the current market turbulence will be the first experience of an economic downturn for some working in the sector. It is vital that they reach out and seek counsel from those with more experience in their local and international networks. At the same time, though, we are now seeing more experienced boards, those people with extra managerial experience, particularly in Europe. This can only add considerable value to the underlying enterprise.
There have been fewer recent workforce reductions in the UK than in the US – partly because UK companies are smaller and partly through things like attrition; not replacing staff when they leave.
Go back 10 years, though, and the UK used to have a number of big research facilities. Their closures led to a huge amount of job losses, such as those caused by the closure of the Pfizer site in Sandwich which had been the largest local employer for 50 years. These changes, however, released tens of thousands of scientists back into the market, recycling a pool of talent which has strengthened the UK’s biotech/pharma industry.
Bridging the Atlantic
It is systematically harder to raise money in Europe than it is in the US due to less capital – something that isn’t going to change any time soon – but there is an abundance of buying opportunities in Europe.
Although the Nasdaq remains the more established stock market – 30-40 per cent of IPOs in the US are healthcare/biotech and there is no expectation of a shift back to the UK – British companies enjoy some significant competitive advantages. These include a significantly lower cost base than their US counterparts, as well as benefits from the R&D tax credit and other legislative support.
The disparity in capital raising also means that some of the larger Private Equity (PE) firms have acquired or invested in biotech VC firms. LSP/ EQT, Carlyle/ Abingworth, Apollo/ Sofinnova have all completed substantial deals over the past several months and it will be interesting to see how this changes the scene, particularly in light of the UK government’s planned £500m fund for science and tech scale-ups. Certainly, the rise of non-dilutive funding has accelerated the need for new leadership to bridge PE and VC cultures.
Other advantages of being in Europe include access to clinical trials – the UK started and finished several vaccine trials before the US and EU had even started. However, the regulatory environment can be challenging, and it can be difficult to build entrepreneurial companies because of company law restrictions in many European countries which discourage innovation.
For example, share options in Switzerland need to be exercised before a transaction, not simultaneously and that’s something that limits start-up potential. There is a longer term need for productivity improvements in R&D, so the C-suite of many companies are investing in technology that helps make the drug development process more efficient. This trend will continue and fuels the interest of PE investors looking for appropriate pharma service platforms.
The impact of technology continues to reshape the sector. Although it is clear you can’t do an IPO roadshow from your laptop, ours is a hybrid world with board meetings split between being face to face and online. But while virtual meetings are here to stay, people nonetheless crave in-person contact and connection. Today’s generation of CEOs need to be able to lead at a distance, manage complexity, galvanise and inspire workforces in hybrid work settings.
Looking at the technology scene more broadly, pharma companies are generally more interested in products not platforms, but this raises the risk of missing out on novel technologies. Investing in platform companies offers scope to go out and partner and bring in other discovery deals. However, the value from these platforms can only be realised by converting them into assets in one form or another.
There is no doubt we are continuing to endure a hugely disruptive political and economic period in the US, UK and European Union. When it comes to dealing with such a wildly unstable macro environment, the advice for biotech leaders is simply to deal with and adapt to these unexpected changes while also looking beyond these immediate challenges.
But amidst this turbulence, which has no end in sight, it’s important to acknowledge those chinks of light which continue to pierce the gloom. While capital discipline is vital, equity continues to be cheap and there are many openings for investors due to the disconnect between price and value. The IPO window is not entirely shut either, as seen by Prime Medicine’s $175M IPO.
Opportunities, then. You just need to know where to look.