Global Uncertainty Is Impacting Deal-Making, Investment Decisions

Deloitte chief global economist Ira Kalish said in a Biocom webinar that the war in Ukraine increased existing macroeconomic uncertainty, which is keeping businesses and investors from deploying capital.

Source: Alamy

The war in Ukraine has increased economic uncertainty globally

The biotechnology industry, and health care overall, is generally somewhat protected from broader economic concerns, but the war in Ukraine adds to an existing sense of uncertainty due to rising inflation, ongoing labor shortages and continued supply constraints that were already troubling investors who have moved money out of the industry, Deloitte chief global economist Ira Kalish said in a recent fireside chat hosted by Biocom California.

Biopharma Feels Ukraine War Impact

The Russian-Born CRO Leader Trying To Keep Clinical Trials Going In Ukraine

Pharma Companies Are Suspending Trials In Russia - But For Practical More Than Ethical Reasons

Big Pharma Braces For Modest Financial And Clinical Trial Disruption In Eastern Europe

Medicines And Misinformation: Social Media Brings Pharma To Ukraine’s Frontline

EU Industry Condemns Invasion Of Ukraine, Gives Details Of Pharma Firms’ Donations

"A month ago, before the Russian invasion of Ukraine, I would have told you that the biggest issues facing us are inflation, supply chain disruption and labor shortages in the context of still fairly strong economic growth and full employment,” Kalish said during the 23 March webinar. “If you ask me today, I'd say those are still very important issues but some of the challenges, like inflation and supply chain disruption, are likely to be exacerbated by the war in Ukraine and the strong growth that I would have talked about is probably going to be somewhat less than would have been the case absent the war."

He said his expectation for 2022 because of the war in Ukraine is higher inflation, slower economic growth, and a more uncertain and riskier environment than anticipated before the conflict due to economic sanctions that have cut off oil and other commodity exports from Russia to the US, Europe and other regions. Companies and investors, feeling all of these macroeconomic conditions shifting, have become hesitant about deals, including mergers and acquisitions.

M&A Down Across The Board

“We've already seen a weakening of financial conditions not only because we're seeing a tightening of monetary policy and a rise in bond yields, but also the war is making people scared of engaging in transactions and the volume of M&A transactions has dropped sharply in the past month,” Kalish said. “And when there is uncertainty, there is a tendency to avoid investments and avoid transactions and that, in and of itself, can have a negative impact on economic activity."

Deal-making in the biopharmaceutical industry has not exactly lived up to investors’ hopes during the past year or so, with big pharma companies more focused on licensing transactions and smaller bolt-on acquisitions rather than larger mergers. (Also see "EY: Don’t Expect Mega-Mergers To Return, But ‘Never Say Never’" - Scrip, 10 Jan, 2022.) Big pharma CEOs emphasized their intentions to stay focused on licensing and bolt-on deals at the start of 2022 as they intend to use these smaller transactions to build out existing research and development pipelines. (Also see "Deals Or No Deals, J.P. Morgan Sets The Tone For 2022" - Scrip, 12 Jan, 2022.)

Those declarations of deal-making intent have played out with no big M&A deals so far this year, but there have been many licensing agreements, collaborations and smaller acquisitions as large players continue to bulk up their R&D pipelines. However, deal-making momentum may increase as the year wears on and stock market investors continue to move their money out of biopharma and into other industries or different types of investments. (Also see "Deal-Making Attitudes Begin To Shift As Funding Options Decline" - Scrip, 24 Feb, 2022.)

Venture capital for private companies is relatively plentiful, but the pullback in investor support for public biopharma firms makes a licensing deal an attractive alternative to a public offering at unfavorable terms. (Also see "Venture Investment May Dip, But Capital Remains Plentiful" - Scrip, 14 Feb, 2022.) Without lucrative partnerships, many companies have restructured and cut costs this year to conserve capital for key programs and extend their cash runway. (Also see "Finance Watch: Days Of Reckoning As Biopharma Valuations, Fundraising Opportunities Fluctuate" - Scrip, 4 Feb, 2022.)

Licensing likely will remain attractive for big pharma versus acquisitions as the cost of borrowing money rises this year. The US Federal Reserve has committed to gradually increasing interest rates in 2022 to try and reduce the rate of rising inflation, while trying not to halt economic growth that is in flux due to the war in Ukraine, labor and supply shortages, and inflation.

"The Federal Reserve just boosted their benchmark short-term interest rate by 25 basis points,” Kalish pointed out. “They said in the coming year there will be seven such increases, and probably more in the year to follow, so that's a big increase in the cost of capital. But still, [with] a few increases seven more times, you're still left with a short-term interest rate of under 2%. Historically, that's actually not so bad.”

Moreover, he noted, businesses are still flush with capital.

Companies Have Money To Spend

“We saw a huge accumulation of cash during the pandemic and even in the period prior to the pandemic, so I actually don't think that financial conditions for doing transactions are all that bad. They're worsening, but they're still not bad,” Kalish said. “What may be bad is the sense of risk and uncertainty. And as I indicated, across the board we've seen a drop in … the volume of transactions since the war began, and that reflects not so much worsening financial conditions but the fear of what might happen, because there are a lot of bad things that can happen.”

Even so, the US is in a better position than the rest of the world. Looking at a global index of financial conditions assembled by Goldman Sachs, Kalish said the index is at its worst level since 2008. But while the bank’s US index of financial conditions has worsened, falling to its lowest level since 2016, he noted that “2016 was not such a bad time."

In terms of the biotech industry, the economist explained that he is not an expert in the sector, but he offered some hope about its prospects in the face of economic uncertainty.

"My understanding is that this is an industry that's one of the least vulnerable to economic gyrations, and that's generally true of industries that are heavily fueled by innovation and technology,” Kalish said. “Biotech is at the leading edge of technology and there is obviously and will be a strong demand, driven more by demographics than by economics. That's not to say it can't suffer from economic or financial conditions, but I think that among all the panoply of industries, this is one of the industries that's probably least vulnerable, and therefore remains a pretty good investment provided that technological innovation continues."