- Funding what’s hot: cardiovascular, metabolic, CNS and autoimmune diseases.
What’s not: oncology, rare diseases and late stage medical devices in particular. - M&A activity will continue to pick up, in particular for larger life science conglomerates seeking to actively fill pipelines, achieve growth plans and replace divested legacy assets whilst weighing and mitigating regulatory risk, by targeting small-to- medium sized companies.
- Sustained and elevated interest rates, as signalled by the Federal Reserve and ECB, with fewer cuts expected in 2024, prolonging harsh deal conditions that buyers and sellers must navigate.
- Potential persistence of lower public valuations, whilst creating further opportunities for cash-rich sponsors to undertake public-to-private acquisitions.
- Divestitures, distressed asset sales and carveout activity will continue, as companies align strategic priorities and specialisations with high debt costs and weaker balance sheets, pushing companies to pay down debt and raise capital through asset sales.
- The need to invest in innovation will continue, as companies push to gain an advantage over competitors. AI and technological breakthroughs will drive discovery and development.
By proactively addressing these developments, you can leverage them to your benefit and ready yourself for their implications. The five developments we’ve pinpointed are:
- Fundraising trends in 2023
- IP licensing: a tale of opportunities
- AI and Data in Healthcare
- IPOs in EU vs VS
- M&A and regulatory developments
Fundraising trends in 2023
Market volatility and uncertain economic outlook – investors want to wait until market
conditions are more stable and certain;
- Timing is everything: private funding rounds used to take six months, now they are more often close to a year.
- Investors are looking for hard data instead of relying on strong management teams;
- Convertible loans and SAFEs are prominent to bridge valuation gaps. SAFEs are a good alternative for bridging time gaps without interest and with possible discounts;
- Increased focus on downside protection (e.g. anti-dilution and participating preferred shares).
- Increased usage of government-backed funding e.g. Invest-NL, regional investment agencies, RVO and EIF.
- Reduction in number of competitive processes.
- Increasing inflation.
- Desire to avoid 'down rounds' despite frothy valuations in recent years.
IP licensing: a tale of opportunities
A strong IP licence agreement creates a win-win scenario for both parties, with the license or benefiting from the monetisation of their IP and the licensee gaining access to valuable assets that can enhance their business. Both parties must negotiate and draft the agreement carefully, ensuring it meets their objectives and provides adequate protection. Significant value is created by devoting proper attention to preparing a robust licence agreement. Recurring themes that warrant such attention in particular include the scoping of the licence agreement, the financial provisions, mutual effort obligations and governing prosecution and enforcement. The advent of the Unified Patent Court is forcing licencing parties to address this reality in the agreement to be concluded. As a result of the overriding principles of reasonableness and fairness, the application of Dutch law to a licence agreement affects, among other things, the interpretation thereof. Recent Dutch Supreme Court case law suggests, however, that there may be a way around the Haviltex standard to find a way out of a licence agreement. At the same time, the principles of reasonableness and fairness are not unbridled, as illustrated by the recent decision of the Amsterdam court in the Lutathera case.
AI and data in healthcare
To unlock the full potential of healthcare data, the European Commission has introduced a regulation to establish the 'European Health Data Space' (EDHS). This specialised health ecosystem consists of regulations, common standards, practices, infrastructure, and a governance framework, all aimed at standardising health data exchange within the European Union. The EDHS proposal also builds upon the guidelines set forth in the AI Act, released by the European Commission in April 2021. The AI Act seeks to unify European rules governing AI system development, market placement, and usage, addressing associated AI-related risks. It adopts a risk-based approach, tailoring obligations to the level of risk posed by AI systems, categorised into four levels: low and minimal risk, limited risk, high risk, and systems with unacceptable risk. When AI is integrated into the lifecycle of medicinal products or medical devices, it can introduce regulatory challenges under the AI Act, and additional responsibilities under the GDPR when it involves the processing personal data. Therefore,we recommend taking ownership, implementing a risk-based strategy, and conducting a thorough analysis to identify potential overlaps with other regulations (such as the GDPR and the Medical Device Regulation) and areas of compliance gaps. In this analysis, we also suggest considering the Ethics Guidelines for Trustworthy Artificial Intelligence provided by the Ethics High-Level Expert Group on Artificial Intelligence (AI HLEG), established by the European Commission.
IPOs in EU vs US
- A healthy follow-on market in the US has led to a slight opening up of the US IPO market and a number of European listings being announced for Q4 2023;
- Investor caution over IPOs is beginning to dissipate and the pipeline for Q1 and Q2 is building up, both for the US and Europe.
- Most investors remain bullish about the follow-on market and the quality of deals being seen|.
- The US elections remain an uncertain factor for Q3 and beyond. Deals are being pushed forward to Q1 and Q2.
As for IPOs in the life sciences market, the most relevant factors are an experienced leadership team, strong clinical data and a specialised shareholder base that will back follow-ons.
M&As and regulatory developments
- The choppy funding climate may cause companies to expedite M&As at sub-optimal valuations or even in distress.
- Sellers should be weary of buyers stalling for time to obtain leverage.
- Incumbent parties with dry powder may take advantage of this, but their capacity for doing a multitude of deals simultaneously should not be overestimated.
- Deferred consideration remains increasingly prevalent in life sciences deals and even more so in biotech, hence ensuring a proper focus on buyer diligence requirements remains key.
- In the wake of geopolitical protectionism, European and national regulators are seeking new tools or can leverage existing tools to scrutinise M&As.
- The scope of the Dutch FDI regulations may be expanded to life sciences companies.
- Parties that prepare and strategise on these developments will do well.