Takeaways
- Deal talks are pivoting to strategic investments and partnerships in an effort to keep the door open to a full acquisition when the dust settles, advisors said.
- Many life sciences strategics are actively looking for cheap assets, and there is a high demand for partnerships that could lead to an acquisition later on, one advisor said.
- One client has conducted due diligence of a manufacturing facility via a drone, and this technique could be adopted by more companies looking to keep deal talks rolling, one advisor said.
While M&A activity has stalled over the last month amid a volatile financial market and nationwide lockdowns, the healthcare industry is seeing the emergence of creative deal structures to keep prior scuppered deals alive as well as a future M&A pipeline full, sector advisors said.
Reorg
reported last month that the pharma and biotech industry was likely best positioned to emerge from the Covid-19 crisis, and while this is playing out, dealmakers working in other healthcare subsectors - including medical devices, diagnostics and healthcare services - said they are starting to gain some momentum around negotiation tactics and deal structures that could lead to future M&A transactions.
Since lockdown measures were adopted across the United States in mid-March, five advisors said they are now starting to get more accustomed to the new normal and are finding ways to become more agile. For example, the initial market downturn has significantly muddled future forecasting, but advisors said they are surfacing with revised structures to address that uncertainty. These include pivoting to strategic investments and partnerships in an effort to keep the door open to a full acquisition when the dust settles, the advisors said.
One advisor said an agreement between two medical devices companies was at the final negotiation stages, but the macroeconomic environment completely “killed” the deal around mid-March when the crisis escalated in the United States and elective hospital procedures were canceled. Six weeks on, the buyer is negotiating a strategic investment deal, with the option to buy the company after a set period of time.
Another advisor said that before the lockdown, one healthcare deal had reached the letter of intent stage, but the buyer dropped out as the market tumbled due to disagreements on the new value of the target. The advisor said the deal was put on hold but the two parties are entering a supply agreement, while the door remains open to restart negotiations once the market stabilizes. Other earlier-stage deals in the pipeline have been stalled as the pandemic forced the country into lockdown, the first and second advisor said.
Meanwhile, many life sciences strategics are actively looking for cheap assets, and while outright acquisitions are expected to slow down in the current environment, there is a high demand for strategic partnerships that could lead to an acquisition later on, said a third advisor.
Covid-19 itself has already kept drug, vaccine and diagnostic companies busy with partnership deals. Notably, San Francisco-based Vir Biotechnology, with a $3.6 billion market cap, entered a number of Covid-19 related partnerships including separate collaborations with
Alnylam Pharmaceuticals and
GlaxoSmithKline earlier this month. In Reorg’s March 31
article, Gilead Sciences was named as one of the companies in a good position to scout targets amid the market turmoil.
Bloomberg reported on April 15 that Gilead was considering buying a significant stake in California-based oncology developer Arcus Biosciences, which has a $1.3 billion market cap.
While oncology and gene therapy pharmaceutical assets remain favorites among buyers, digital health companies are also emerging as hot targets, said the third advisor. This is a good time to pick up some “great assets,” as clinical trial and innovation disruption will mean there may be a potential dearth of next generation targets over the next few years.
Digital health companies are also popular among investors. Cloud-computing life sciences company Veeva Systems and healthcare technology company Livongo Health are up 27% and 67%, respectively, since the start of the year.
Veeva Systems has a market cap of $27 billion and trades at 25x LTM revenue, while
Livongo has a market cap of $4 billion and trades at 24x LTM revenue, according to Reorg’s analysis.
Meanwhile, for the healthcare services sector, a fourth advisor noted that hospitals have been heavily and directly affected by the crisis, and while deals are still being negotiated, they are moving slowly. On the other hand, significant M&A opportunities may emerge for telehealth companies, as they are expected to alleviate some of the pressure faced by hospitals, he added. With valuations of these companies up, it may be hard for a traditional healthcare provider to digest a company of the size of
Teladoc Health, which has a $13.5 billion market cap and trades at more than 20x LTM revenue, but this could be an opportunity for some of the tech giants such as Amazon, as they look to gain a greater share of the healthcare pie, he said. A fifth advisor said tech companies are circling the sector, but whether they are equipped to deal with the regulation remains a question.
Meanwhile, private equity has been making strides to get more active with strategic investments in healthcare opportunities, three advisors said, noting sponsors remain keen on getting more exposure to the more resilient sectors. Blackstone recently made a debt and equity
investment of $2 billion in Massachusetts-based life sciences company Alnylam, in order to bring it to profitability and gain future commercial drug royalties from the $16 billion market cap company. The third advisor noted that, as things stand, financing deals are the most active as private equity firms and venture capitalists are looking to deploy capital.
Overcoming Physical Challenges
Traveling still remains the biggest challenge as much of deal making is leveraged by personal rapport and in-person due diligence, all advisors said. However, three bankers said their teams are getting more agile to conduct most M&A work remotely. Regardless, evaluating products or assessing manufacturing facilities can be hard and may prevent a deal from moving forward, they all agreed.
With some healthcare manufacturing facilities, buyers often need to walk through the facility to get a feel for it, and lockdown can hinder that option, said the sixth advisor. However, he said one client has conducted due diligence of a manufacturing facility via a drone, and this technique could be adopted by more companies looking to keep deal talks rolling.
The use of drones to evaluate “clean rooms” is sometimes adopted during management presentations when gathering initial bids, though it is not common, the first advisor said, who added drone use could gain popularity if social distancing restrictions continue longer term.
--Surani Fernando