The economic picture seems dire these days. But unlike the global financial crisis of 2008, when you zoom out a bit, the broader economic picture actually gets a lot sunnier. Private markets continue to hold vast stores of liquidity, for one. Meanwhile, private equity (PE) firms are sitting on kegs of dry powder of unprecedented proportions. So much so, in fact, that at this point many are wondering: What's going to light the match in 2021?
Life sciences companies hold keys to the answer. Eager for investment, far more resilient than the S&P 500 in general during the crisis and poised for a coming sea of divestitures, the life sciences space is attracting a lot of attention from PE firms these days — and it's easy to see why. Let's take a deep dive into the space to analyze what's happened so far, then turn to lay out four predictions for the year ahead.
analysis: COVID-19 and the life sciences outlook
Looking back at the most immediate consequences of COVID-19, life sciences companies were hamstrung in the early going by social distancing protocols in ways that, for instance, tech or engineering firms were not. For one, companies actively involved in clinical trials were forced to deal with potentially disastrous disruption. At the height of the crisis, in fact, more than half of the companies in the space said they had paused recruitment for clinical trials, and another three quarters said they had halted site activation for the majority of their trials.
For life sciences companies engaged in earlier stages of research and development, on the other hand, the experience was more mild. So while, broadly speaking, the global pandemic hemmed in the growth forecasts for life sciences companies across the board, that impact was for the most part uneven.
How hemmed in, exactly? Most life sciences indexes show losses in the range of two to six percent for the year, which compared to the Dow, which has hemorrhaged 17 percent of its value year to date, looks pretty bullish.
And that performance is not something that's been lost on PE firms throughout this crisis. Add to that long-term demographic trends — the number of people globally who are 60 years or older today is expected to double again by 2050, and aging populations who are dependent on new drugs — and it's easy to see why PE firms are looking at life sciences under a microscope.
You can see that play out in a series of polls taken between August and October. These reveal the shifting thinking among PE firms and investors — and more than that, how a primarily risk-averse outlook has gradually given way to one that is far more bullish. In August, for example, the majority of respondents said they were focusing on "in-process investments" and expanding "existing relationships." Come October, the majority answer was "business as usual." During the same period, planned investments in the life sciences space, which contracted slightly in September, appeared to have made a full comeback and even increased marginally by the time October arrived.
Of course, most of this so far has been looking in the rearview mirror. What's next on the road ahead?
forecast: four predictions for PE, life sciences and the year ahead
These four key trends will likely come to maturity in 2021 — and potentially reshape the life sciences space.
1. divestitures on the rise
COVID-19 brought far-reaching changes upon companies across the board, and life sciences companies are no exception. Despite the general resilience of the sector, many companies were forced to consolidate their portfolios and make hard choices about priorities. In short, managing a more limited set of R&D resources may be one of the short- and near-term consequences of the global pandemic. Life sciences companies will therefore look to divest assets, streamlining their operations in order to focus on core competencies. For many, that will seem like the most desirable path to securing much-needed capital — and securing the future of their highest-priority projects in turn.
2. higher-value, lower-volume dealmaking
The fiscal year preceding the global pandemic shattered all records in terms of deal value in the life sciences space ($231 billion). And yet, while values ran sky-high, overall deal volume was actually quite low — down 14 percent from the previous year. Most analysts at the time chalked the discrepancy up to a disconnect between buyers and sellers around valuation prices. At present, it isn't clear the extent to which, how or if this wrinkle has been somehow ironed out in the course of the global pandemic. It probably hasn't. And it might prove to be an obstacle in the way of new deals going forward.
3. life sciences tech in the crosshairs
Life sciences companies themselves made 37 acquisitions of tech companies in 2019, and that stat dovetails with a broader trend we've seen in PE in recent years: Namely, while the number of exits has increased across virtually every industry, the most significant increases in exit values have all been in solidly tech-centered fields: medtech, consumer tech, IT, IT-enabled services and so on. As tech becomes increasingly interwoven into the very fabric of healthcare delivery, it stands to reason that M&A activity at the intersection of tech and health (that is, in the bailiwick of life sciences) could be red hot. Expect a lot of energy and attention from PE firms early in 2021.
4. the "x" factor
So much of what we've seen so far suggests a potentially robust dealmaking season in the year ahead. And yet, there's also so much that remains entirely unknown, and even unknowable. How, exactly, the experience of COVID-19 will influence the future behavior of life sciences companies themselves is a case in point, and worth mentioning since it surfaces one of the more interesting takeaways from the global pandemic in the life sciences space. That is, these companies actually don't have to go through traditional M&A channels in order to access the resources, assets or backing to drive strategic goals. As the pandemic amply demonstrated, there are alliances, joint ventures, licensing agreements, partnerships and a host of other routes, all of which will remain on the table for life sciences companies in the year ahead.
key takeaways
The 30-000-foot view is that life sciences companies, as well as associated capital markets, could emerge from the crisis stronger and even more resilient than ever before. Even beyond the indicators touched on so far, there are other signs that are promising. Throughout the pandemic, for one, supply chains have held up. And more recently, and more importantly for PE firms looking at investments and patients alike, clinical trials have also since restarted, which is a strong indicator that the core strength of the ecosystem remains intact.
How PE firms will respond to all of this remains to be seen, but if recent events are any indicator of what is to come next, one clear lesson is that leaders will need to rise to the occasion, and they may be tested as never before. For PE firms looking to earn multiples at exit, meanwhile, navigating the life sciences space itself comes with novel challenges: scientific expertise, regulatory environments and more. Only PE firms that are positioned to act strategically and decisively, with the right leadership in place, will be able to take full advantage — and they'll likely leapfrog those that remain attached to older models, too.
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