Overview
In November, we were pleased to once again host our annual European Health & Life Sciences Symposium in Paris. The event attracted a large number of healthcare professionals, investors and dealmakers to the Shangri-La Hotel for a series of insightful panel discussions, including a particularly interesting session on innovations in the financing market.
The broader macro and geopolitical landscape has created a particularly challenging financing environment for investors in health and life sciences in 2023. Uncertainty and the higher cost of capital has driven lender reticence, resulting in a flight to quality borrowers and top-tier assets such that really high quality assets continue to transact at values largely unchanged but for others it is difficult to convince lenders to transact.
In Depth
Meanwhile, cash-strapped biotechs have in many cases been forced to leverage relationships with big pharma to address liquidity. Cash is king in a financing environment such as we have observed over the last 18 months, and the biotech industry requires a lot of cash so it has had to adapt. For those companies unable to tap into big pharma, the alternative has been to streamline the business and prioritise core business lines.
For lenders, the focus has been much more on downside risk in such an uncertain environment, so the assets in favour have been those with sustainable cashflows and the ability to create true growth. That has led to more activity in generics and well-positioned CDMOs, and an increased spotlight on relationships with management teams.
Some of the lenders that joined us at the symposium spoke about the need for borrowers to be able to tell a clear and compelling story about their business, demonstrating track record and sharing data points to secure capital. Others talked about being laser-focused on business quality, looking harder than ever at gross margins and recurring revenues and digging deep into customer-level diligence to look at things like re-ordering patterns.
Despite the pressure on balance sheets, lenders have done nothing to loosen their focus on the environmental, social and governance aspects of their investments, and our panellists talked about how ESG is a large (and growing) priority. Both sponsors and credit funds say LPs are still pushing them to be ESG-centric and lenders continue to look for ways to use financial and other incentives to drive impact.
Ettore Scandale, partner with McDermott Will & Emery in Milan, says: “Outside of financial metrics, impact metrics are really important to lenders. Even those that are not Article 9 funds under the regulations are looking closely at ESG indicators during due diligence and are discussing them in depth during investment committee meetings.”
He adds: “There is a clear focus across the market on having defined quarterly impact metrics that credit funds can report back to their LPs to demonstrate and follow the impact of their investments. Increasingly that is seen as a critical element of driving the return.”
Moving into 2024, a number of challenges remain that will impact the demands for financing in our market in the year ahead. Chief amongst these is the lack of available venture capital to a lot of biotech and medtech companies that are yet to become EBITDA positive. That shortage of finance has impacted CMOs and other businesses in the complex biologics value chain, meaning many companies that service venture-backed companies are delaying projects and some platform businesses in that space are becoming single-asset companies.
Another challenge noted by our speakers was the regulatory landscape, with changes such as the introduction of drug pricing policies in the US creating uncertainty for equity investors. With the pricing of pharmaceuticals less certain, that has changed the lending dynamics for a number of sub-sectors which will remain mindful of the need for further clarity.
Looking forward to the next 12 to 18 months, the feeling was that outlook may be bumpy but can quickly change for the better. While the lack of an IPO market continues to make it difficult for biotech companies to access cash, we continue to move out of a period of economic uncertainty and so many are hopeful that equity markets will rebound in 2024. Likewise, lenders are increasingly willing to offer flexibility in the form of full PIK tranches where they have conviction, suggesting the private debt markets are continuing to find ways to support companies in dominating the debt markets.
There is a hope that defaults will remain low through 2024 and also a recognition that, while deals are available, they may take longer to get done and diligence will be very thorough. Long term, there remains strong conviction around the growth fundamentals in our industry as well as around the potential for technology to overcome many of the structural issues that undermine the delivery of healthcare, so the return of more buoyant deal activity cannot be far off.
Aymen Mahmoud, partner and co-head of the London Finance, Restructuring and Special Situations Group, says: “Relationships have been prioritised in 2023 and will remain the focus in 2024, with lenders looking to build productive two-way partnerships with management teams and sponsors in order to navigate balance sheet challenges.”
He adds: “The real message from our session at the symposium was that borrowers in health and life sciences are better positioned than many in other industries when it comes to accessing the credit markets, and for the right deals there is still plenty of capital available. They should continue to expect an appropriate level of investee scrutiny from lenders through 2024, but we expect the finance markets to continue to trend to unlock throughout the year.”
