This communication is of a general nature and sets forth the views of the author(s) and is for informational purposes only. It is not intended to be investment advice. We urge you to consult your investment, legal, tax, accounting and other advisers in connection with any investments.
COVID-19 has impacted the daily operations of life sciences companies in fundamental ways. It has also forced these companies to evaluate their financial stability and goals, including funding sources and new business opportunities as they strive to return to “business as normal” in a post-pandemic world. We spoke with a number of investors and bankers to assess their take on how the life sciences industry is changing and how the pandemic has impacted their own views and operations as well. We identified ten key takeaways that we believe every life sciences executive should consider as we emerge from the grips of COVID-19:
Investors may be evaluating their own footprints post-pandemic
Some investors are reporting 90% productivity as their employees work remotely, leading some to question the value of high-dollar business leases in major metropolitan areas. Given the computer-centric work of many investment firms and analysts, prime real estate locations may become less significant in the future. For investors who will be returning to their offices, Labor Day appears to be a target date. Ultimately, the decision about how and where investors will choose to continue working post-COVID-19 will come down to a few key considerations: the health and safety of those working at, or visiting, the office; overhead cost savings; the ability to maintain high productivity levels out of the office; shifts in the high-level talent pool; and what clients want and expect.
Virtuality has its challenges
Working remotely and limiting (or eliminating) business travel has nonetheless posed challenges. Life sciences companies and investors are currently more interested in virtual rather than face-to-face conferences and meetings. It appears there is little appetite for resuming routine business travel until Q4 2020 at the earliest. However, when it comes to brokering an investment deal, video-only discussions seem to be coming up short at times. Many investors, large and small, still want to meet with targets face-to-face before making major investment decisions. Not surprisingly, the continued use of non-traditional meeting formats is leveling the playing field for smaller bankers and other investment firms that are operationally more nimble. Further, the traditional benefits that larger institutions have provided to win deals are not generally available in the current environment.
The deals that are still happening look different
Deals are still closing in the current environment, though these deals were often initiated before the pandemic. Deal completion is also taking longer as due diligence is taking longer – likely in part because of associated remote work challenges. It appears that about 25% of venture capitalists are waiting on the sidelines right now, and the remainder are scrutinizing deals even more thoroughly. Valuations seem to be down about 25%. Importantly, some banks and investors are now tending to look at deals where they already have a pre-existing relationship with the company or its management, often as follow-on investments.
Raising capital will continue to present challenges
Life sciences industry executives know that capital raising is difficult in the best of times. It is a mechanical process that is nonetheless often driven by a personal touch which, as noted, has been impacted by the current virtual environment. Stock market fluctuations have not helped, either. Given the uncertainty regarding the duration and impact of the COVID-19 pandemic on capital markets and the U.S. economy, many companies are reporting they are unable to assess the impact of the pandemic on their future access to capital. Nevertheless, we note that registration statements on Form S-1 filed in 2020 (year to date) with the U.S. Securities and Exchange Commission (SEC) are consistent compared to filings in the same period for each of the past four years. Stock prices often shape deals, and some prices may be high right now as people write off 2020 and look ahead to 2021. Furthermore, many investors are leery of public market investing now because the current volatility of the public markets could potentially reflect badly on their own end-of-year report cards. Many life sciences companies and investors are looking to replicate their past successes, but the bar has been raised. Investors appear less willing to accept risk right now, and may be holding out until they face the need to put their money to work. However, keep in mind that a subset of investors tend to be contrarian and act out of step with the rest of the industry.
Don’t forget about foundations and family offices
While investors often rely on a standard playbook that has worked for them in the past, foundations and family offices are increasingly willing to look at non-traditional or disease-specific investments. Foundations may be established around a particular disease or family of diseases, but non-disease focused foundations and family offices often look for meaningful investments that are important to the family office members. Foundation and family office investors typically have smaller boards, enabling them to be more nimble to make changes and may make multiple investments. Some foundation and family office investors have also moved from direct deals to investing in private equity funds.
Healthcare is in trouble, but may be assisted by telemedicine
Investors noted that healthcare systems have been significantly impacted by the pandemic, and the systems’ financial shortfalls will likely have significant repercussions. The cuts to non-emergency surgeries and other procedures, along with decreased investment income, have significantly impacted revenue. Most hospitals are volume businesses operating on thin margins with fixed costs that cannot be easily cut. Furthermore, life sciences companies have been hampered in deploying their sales forces to healthcare systems and physician practices during the pandemic. As a result, virtual marketing to healthcare systems and physicians has increased. The emergence of telemedicine to access healthcare during the pandemic is expected to generate revenue for practitioners, and reimbursement has at least temporarily increased. Telemedicine and home diagnostics may therefore represent a fundamental shift in healthcare delivery and consumption in this country that may remain, even as the pandemic subsides.
Research investments are tenuous, but COVID-19 is still drawing certain investors
Many universities have shut down non-essential (non-COVID-19-related) research, impacting their overall research portfolios and budgets. These difficulties have been exacerbated for many smaller private colleges and universities that have historically relied on foreign students paying premium tuition and fees. With the uncertainty of whether universities and colleges will be holding face-to-face or virtual classes in fall 2020, these problems are likely to persist. Nonetheless, there is an ongoing research and investing halo around COVID-19-related products, such as antibodies, vaccines, and antivirals. This halo may persist unless the pandemic produces a long-term sustained impact on the economy. Serious concerns exist, however, about the future allocation of COVID-19 vaccines and therapeutics not only in this country, but around the world as well. Developed countries may be able to take care of their own populations, but the ability of developing countries to do the same is in doubt.
The search for a COVID-19 treatment has renewed the interest in “drug repurposing”
Numerous academics and consortia are screening approved drug products against COVID-19 to get a potentially effective treatment into clinical trials as quickly as possible. However, testing and developing a current asset for a new use is not so easy. Manufacturing logistics can pose roadblocks, particularly for products that used to be produced with now-dated technology or procedures. Some of these older technologies may also have created environmental problems that are now not easily addressed. Many nonprofits have been working on repurposing for years, but getting new business partners and investors interested in drug repurposing can prove difficult. The questions of correct dose, duration of use, and even location of use (in home, in the hospital, or in a healthcare facility) need to be addressed. For those companies looking to repurpose a drug for COVID-19, capacity and logistics are often the deciding factors in where to invest or partner.
505(b)(2) new drug applications may attract interest in the right situations
505(b)(2) new drug applications (NDAs) can be an attractive way for a life sciences company to bolster a weak pipeline. However, many investors believe that 505(b)(2) NDA applicants are financially naïve. Institutional investors tend to favor 505(b)(1) NDAs vs. 505(b)(2) NDAs based on their view that the intellectual property position for a 505(b)(1) drug is stronger, easier to defend, and more difficult to work around than for a 505(b)(2) drug. Some investors believe that private deals for 505(b)(2) investing may be the most practical at this time, and that there is money on the sidelines that is poised to be invested. Although timelines are increasing from around 4-6 to 6-9 months or longer, certain investors believe that there may be deal acceleration by Q3 and Q4 2020. Life sciences companies should also remember that there are non-dilutive investment opportunities for 505(b)(2) NDAs as well, such as licensing to partners in foreign territories. Companies looking for 505(b)(2) NDA investors and partners need to be able to clearly articulate the value proposition that a particular drug brings to the market based on its IP position, potential patient population, and technology. It is important to build realistic but successful analogies.
Don’t chase a lost cause
Some life sciences companies treat their ideas and products as sacrosanct and believe that all investors should see their value. The reality is that some investors will not be interested in certain products or product categories. Some investors will only pursue earlier successful strategies and invest only in particular products or business situations. Life sciences companies can spend valuable time and resources chasing these investors, when they should instead perhaps be looking for those that are open to new ideas and alternative investment strategies. Life sciences companies should keep in mind the filters that investors use to assess potential deals. Finally, they should have answers to five critical questions that investors want to know:
- How strong is your IP portfolio?
- What are the realistic vs. wildly successful outcomes of your technology?
- What are the time and cost investments in your development plan?
- What are your operating logistics?
- What is your projected return on the investment?
As we attempt to emerge from COVID-19, life sciences companies and investors are looking for success and the path to equity. A key is finding the right partnership. By keeping these ten issues top of mind, life sciences companies can focus on what they need to do to try to stay relevant and attract interest in the days to come. Remaining nimble is also critical, as the trajectory of new COVID-19 cases appears far from settled.
For more cutting-edge perspectives on legal and business implications of COVID-19, visit our COVID-19 resource center.