The emergence of COVID-19 has drastically affected many aspects of life for people around the world. The extent of the impact in a commercial and transactional context is still being played out, but there are already significant differences in how life sciences mergers and acquisitions are being carried out in this environment.
Last September, we explained emerging trends in the market that we were seeing at that time and why, and set out our expectations for M&A activity in the life sciences and healthcare sector for the foreseeable future. Since then, life around the world has changed beyond recognition, as almost every government's focus shifts to protecting its population and economy from COVID-19.
Overriding public opinion appears to be that we are still in the early stages of the pandemic with no clear end point, so the full implications are impossible to predict. While the commentary on the trends and our expectations are still evident, we can expect a major underlying determining factor for most M&A in the coming months to be COVID-19, as well as it creating additional opportunities and resulting in those trends we identified being exacerbated.
Restructuring of portfolios and divestments
There has already been a notable contraction in the M&A market as a result of COVID-19, with a number of deals being put on hold as parties turn their attention to ensuring their business continuity, grappling with their workforce working from home where possible, and re-assessing the financial and commercial drivers for the transaction.
While some of those transactions will get re-invigorated, it is likely that some will fall through. Life sciences companies will not be immune to this inevitable down turn in the worldwide economy, although some may prove more resilient than others.
As the weeks and months pass, we can expect to see an increase in the number of divestitures and spin outs – a trend we identified last September – as life sciences companies are required to devote their attention to core business areas and restructure their existing portfolios, more so than they would had the COVID-19 outbreak not happened. Existing strategies to divest parts of their business will get accelerated, and new plans will develop as companies attempt to minimise their losses and keep their businesses afloat.
Institutional interest
In our September 2019 article, we noted that private equity investors have started to show an increasing interest in the healthcare market. This is in part due to the high levels of cash they have to spend after a few strong fundraising years. Another factor is the changing landscape of health and healthcare businesses, with technological developments creating new solutions.
COVID-19 is surely going to be a further push for institutional investors into the life sciences industry. The number of new opportunities of assets being brought to market will reduce across all industries, so those processes outside of the distressed markets will become even more competitive. Of course, it will depend on the nature of the business, but companies in the life sciences industry are likely to show greater resilience than most given everyone's focus on health and wellbeing.
As almost every aspect of day-to-day life is forced online, digital solutions to the more classic healthcare business models will be enhanced and become ever more important. As well as innovative solutions being developed to solve new or previously unexposed problems that have been exacerbated by the current crisis, greater numbers of people are being forced to utilise the alternative solutions available to them online. Companies are going to need capital injections to facilitate their growth projections, which are primed to disrupt an industry which is in the spotlight.
Looking forward
Some of the areas that buyers and sellers of life sciences assets have to consider when pursuing, negotiating and executing such transactions in the current environment are:
Supply chain disruption
Buyers will be looking for confidence that supply chains are not going to be disrupted affecting the value of assets being purchased. This will require planning to overcome any short term issues.
Availability of finance
As the economic downturn continues, buyers may struggle to obtain third party financing for transactions. Sellers should do what they can to ensure the financial fortitude of potential buyers.
Particularly where there are split exchange and completion processes, sellers should be seeking guarantees from a parent company, equity commitment letters (if the buyer is backed by an institutional investor) or explore the possibility of a bank or other debt provider entering into contractual agreements which are conditional on the transaction completing.
Increased demand for certain products
Increased demand for certain medicinal products (and reduced demand for others) may lead to unusual sales patterns. This could affect the effectiveness of valuations for assets being sold and acquired. It could also cause issues for buyers with markets saturated by certain products therefore making it difficult to make sales and obtain profits in the short to medium term depending on the nature of the relevant products.
Market opportunities
Sellers may experience profitability issues or issues servicing existing debts, potentially resulting in divestments of non-core assets. If buyers are considering an acquisition arising from a distressed situation, there are advantages to structuring the transaction as an asset purchase as opposed to a purchase of a company's share capital. This is because an asset purchase allows a buyer to select the specific assets that it wants to acquire and to leave liabilities behind.
Enforceability of agreements
Market volatility changing the attractiveness of opportunities or risk appetites of players may encourage buyers and sellers to try to unwind M&A agreements which have already been entered into, but not yet completed.
Where transactions involve split exchange and completion, buyers will be particularly keen to ensure that they have widely drafted material adverse change clauses, and sellers will be seeking to significantly limit the circumstances where buyers can terminate M&A agreements. Buyers could attempt to introduce force majeure clauses – which are not normally included in M&A agreements – if they are seeking to limit the risk of market disruption events brought about by COVID-19.
Insurance
While the warranty and indemnity insurance market has not shown signs of any reduced appetite for transactions, insurers have started seeking to introduce exclusions in relation to COVID-19. Whether this impacts the expected usefulness of the policy will vary according to specific facts and matters of a particular transaction so will need to be determined on a case-by-case basis.
