Biopharmas Manage To Deal During Pandemic

M&A activity faces numerous hurdles during the COVID-19 pandemic but companies are finding different ways to negotiate, conduct due diligence and get deals completed, BIO 2020 speakers said.

Deal-making continues in biopharma despite the limitations of the COVID-19 pandemic

Biopharma deal-making has continued at a steady pace during the novel coronavirus pandemic – helped by frequent transactions related to COVID-19 – but the industry also is getting more used to the limitations imposed by social distancing, speakers said on panel at BIO’s digital meeting.

The drivers underlying deal-making remain unchanged – big pharma and other players need new pipeline assets and remain very interested in novel technologies – Prakash Raman, senior partner and chief business development officer at Flagship Pioneering, said during a session on what companies are looking for in acquisitions. Although not billed as a session specific to the impact of the pandemic, much of the discussion centered on how deals are being negotiated and finalized in this different environment for business.

While some experts had predicted a slowdown in deal activity just a couple months ago, new expectations of business development running under new conditions reflects the quickly changing dynamics of the pandemic. (Also see "COVID-19 And M&A: Multiple Scenarios In Store As World Adapts" - Scrip, 21 Apr, 2020.) Partnerships were fast to form around coronavirus interventions, with reports of companies starting work before having final contracts signed. (Also see "Deal Watch: Coronavirus Collaborations Reflect Industry’s Full Press Pandemic Response" - Scrip, 27 Mar, 2020.) Fundraising has also proved resilient, following an initial pause in activity.  

“I think we are going to evolve the way we actually get deals done,” Raman said, noting that limitations on meeting in person are leading to more efficient processes. “People are going to figure out a way to make sure that the right deals get done. I’m very bullish – I think at the end of the day, pharma needs pipeline deals and biotech is the one that’s going to provide them.”

Some In-Person Meetings Still Necessary

If face-to-face meetings remain limited for the next six to 12 months, “clearly, we’ll continue to get better at this,” said Lonnie Moulder, founding partner at Tellus BioVentures LLC. Still, he thinks in-person meetings between the principals in a deal generally need to happen to close a deal. Those meetings are needed in most cases to reassure each side of a transaction that its partner is mission-driven, doing the right things and proud of what they are doing, he explained. “When that understanding was there, it just felt as if a deal could get done, so I think that’s a critical stage.”

Raman concurred, noting that body language is especially difficult to read on a video call. “More importantly, who actually takes the trouble to fly over to be part of the management team discussion is also very important, a sign of how interested they are,” he added. “To me, all of those things are sort of lost in this current environment.” But to facilitate deal-making during social distancing, maybe fewer meetings of principals will take place, Raman said, perhaps waiting until the deal is near the finish line.

Due diligence will remain a challenge for finalizing deals during a time of social distancing, Moulder said, but it won’t be the rate-limiting factor as solutions can be found.

“We need to figure out how do you inspect manufacturing labs,” he noted. Although not related to M&A activity, he said two of his portfolio companies recently had to qualify manufacturing sites. “We were doing it virtually,” Moulder explained. “They had filmed everything in their facility and then we actually had walk-throughs with cameras.”

Alan Hartman, a partner at Centerview Partners, agreed that there is a limit to what can be done from a distance. With a large transaction, many things can be done virtually, but not all, he said. “At some point, somebody wants to look this seller CEO in the eye and have those kinds of discussions.”

With the initial days of the pandemic over, the industry is starting to get back to business as usual, while still working under some of the restraints imposed by COVID-19, Hartman said. Interest remains strong in scientific advances and clinically de-risked, pre-launch assets, particularly in areas such as oncology and rare diseases, he pointed out.

But “things that [acquirers] weren’t interested in before [are faring] even worse today,” Hartman said. “Companies in the middle of a launch – we all know how difficult that is for companies. Companies that were about to start a pivotal trial but have had to delay, that [results in] delayed interest.”

Positives: More Access, Time To Reflect

There have been at least a couple of positives resulting from the changed way of doing transactions, the speakers agreed: time to be more reflective and greater access to decision makers with most people working out of their homes.

“I think the one good thing that has come out of COVID is that the key decision makers are not on planes, trains and automobiles all of the time, and they seem to be more available for calls,” Raman said. “Setting up longer-term calls or key calls seems to be a little bit easier.”

But at the same time, if current circumstances have affected the urgency of a potential deal, maybe the opportunity to slow down the process and think it through more could be a benefit, Moulder asserted. “Having a meeting between principals may be more difficult,” he said. “If there isn’t a reason to move now, now would be a good time, I would suggest, to really be reflective. We run like crazy operationally to get things done. … Right now, because there are some things we are unable to do, why not be a bit more reflective and think about the strategy and engage in one-on-one discussions with the board and the management team.”

“I think companies don’t do enough of that, they’re always running at like 100 miles per hour,” Raman added. “But this is an opportunity where you can actually take stock of what you have and where you think you want to be. I don’t think we really support companies to do that as well as they could.”

Another factor that isn’t going to drive or slow down deal-making, Hartman said, is the biotech valuation fluctuations seen during the pandemic, as many companies’ perceived value declined in March but then rebounded strongly afterwards. Declines in the 30% range were seen early on, but now the Nasdaq Biotechnology Index is up more than 10% for the year, he noted. (Also see "Finance Watch: Investors Bet Billions On Big Biopharma Offerings" - Scrip, 29 May, 2020.)

“This sense that biotech is expensive [or] biotech is cheap, that doesn’t really drive transactions,” he asserted, conceding that his opinion is based on talking to colleagues, not hard data. “What drives transactions is pharma’s need for new products … their need, their ability to go acquire things because of their great cash flow.”

Another hurdle for M&A deals, Hartman said, is getting antitrust approvals from the US Federal Trade Commission and its foreign counterparts. So far, that process does not seem to have transitioned over to a virtual model as easily as other parts of deal-making, he said. And delays in a quickly evolving sector like life sciences can have a major impact on valuations, he added.

“That’s another risk that’s sort of out there on the rise and people will have to manage through,” Hartman said. “But I’m bullish that everyone in the life sciences arena will find ways to make that happen.”