Biopharma Financial Climate and Market Dynamics in 2023: Interview with David Dowling, Ropes & Gray

Recently, David Dowling, a senior lawyer at Ropes & Gray, has outlined his predictions for M&A in the European biotech sector in 2023 in his blog Why 2023 is set to be a blockbuster year for European biotech dealmaking. 

Ropes & Gray is a global law firm with approximately 1,500 lawyers and legal professionals serving clients in major centers of business, finance, technology, and government. Since the company is quite active in the life sciences space and regularly publishes market research findings in private and public biotech markets, I was excited to ask David a number of questions about his reflections of 2022 market climate and what we can expect in the industry in 2023. 

According to Ropes & Gray, 2022 has been a more downbeat year for fundraising. Valuations have fallen on public markets and the anticipated boom of dealmaking failed to materialise. However, there are a number of factors set to make 2023 a truly exceptional year for biotechs, whether in licensing, fundraising or M&A:

Listed valuations remain low. There are good targets whose pricing remains suppressed. In Europe the continuing weakness of the Pound and the Euro will make European targets even more attractive for US buyers.

Many biotechs are beginning to run low on cash, with expensive pipelines to fund. They may soon show more willingness to negotiate with investors.

Financial investors are becoming increasingly interested in the sector. Private equity and venture capital funds desperate to spend their piles of cash are expanding their horizons, moving away from healthcare services businesses and into actual biotechs. A number of these have already or are in the process of raising dedicated life sciences funds

Many big pharmaceutical companies are also sat on large amounts of cash. So far they have been judicious in the targets they choose. However, later stage biotechs in need of expertise and funding for expensive trials may become more willing to compromise on pricing for the right partner.

That said, not all dealmaking will be through M&A. There may be greater rewards for those willing to find alternative deal structures. Either way, 2023 promises to be a year to watch. Below are David's reflections on the market conjuncture:

Andrii: Can you tell me about yourself and your journey into Life Sciences and Healthcare legal advisory? 

David: It’s funny as I actually loved science at school (and I even did triple science if that means anything for some UK readers), and so I am pleased that I now spend my days learning about companies with such fantastic innovation. However, I also enjoyed playing with words, debating and finding solutions to problems, which eventually led me to a career in transactional legal work.

Like many M&A lawyers in the City who began their career in the period immediately following the Global Financial Crisis, my practice was initially focused on private equity. Over time, I gradually found myself drawn to healthcare, life sciences and venture capital transactions (still sometimes for private equity funds).

I love how incredibly optimistic the sector is and how genuinely focused those within it are on improving the lives of patients. Without being too grand, everyone involved ultimately wants to ensure more people live for longer with a better quality of life. It is a privilege to help these companies find ways to grow and realise that ambition.

Andrii: Ropes & Gray is known as a global brand for helping clients of various industries and backgrounds solve their legal needs. The company firm seems to have a heavy focus on Life Sciences and Healthcare, can you outline some “domain-specific” peculiarities when dealing with such clients as compared to other industries? (if any?). 

David: Legal issues are fundamentally intertwined with both the value creation but also costs and risks of life sciences companies. There are few industries where this is the case in quite the same way – where firms and their investors must invest incredible sums of money at high risk to hopefully achieve the financial rewards of an approved product.  This dynamic leads to unique considerations on transactions where parties try to share some of this risk and reward.  To successfully represent clients in this sector, lawyers need to be familiar with the intellectual property and regulatory considerations that drive the business results. In addition, due to the nature of scientific work and clinical trials, these companies typically require early, consistent and growing access to capital, whether privately through collaborations and venture financing or in public markets.

That is why Ropes & Gray has grown and continued to expand with its healthcare clients. One of my favourite parts of working at the firm is the ability to access the range and depth of expertise we have in the sector. This is particularly important when working in Europe, given the scale and (in some areas) increased sophistication in the US.

Andrii: Can you outline the current private investment climate in biotech markets and the overall situation in 2022? Also, what has been happening in public markets?

David: 2022 was marked by a series of events that had a cooling effect on risk taking generally, and the biotech market is one in which people take a lot of risks. Whether that was Russia’s invasion of Ukraine, inflation, the UK ‘Mini Budget’ or interest rates, there were a number of factors that caused deal makers and investors to pivot to a “risk-off” posture. Public markets in particular saw declines in valuations of biotech companies, with many trading below their cash balance. In the US the Inflation Reduction Act was passed, with implications for drug pricing. The full impact of this is still being digested by the industry.  

That said, several interesting deals did get done. There will always be a market for strong assets. However, we did see some biotechs having to pursue different transaction structures. Capacity building in particular was an area of focus, with a number of transactions involving contract research organisations or digital health solutions.

We are optimistic that with 2022 behind us, the interest rate hiking cycle hopefully coming to an end soon and markets starting to rebound that the “risk-off” atmosphere of 2022 will begin to reverse in 2023, with activity levels hopefully picking up by the back half of the year.

Andrii: What are we to expect in 2023? Can you summarise some takeaways of what you believe may be driving private and public biotech markets, including M&A activity, in particular in Europe? 

David: I expect 2023 to be a year of two halves; the first may continue to be quiet while dealmakers bide their time, and the second will see a significant amount of deal activity. A lot of investors (both in strategic corporates and in venture / private equity funds) have significant amounts of dry powder to spend, and the need for pharma companies to replace lucrative products coming off patent never seems to end. Sellers and fundraising companies appear to be accepting the new pricing, but buyers and investors are in phrase of waiting to decide which assets to choose.  

During the course of the year we will see some companies start to run out of cash, prompting them to be more open to negotiation or pursue alternative transaction structures. That said, companies with a strong science will always be of interest and may hold their value better than those whose concept is yet to be proven. While public markets remain suppressed, we will continue to see take privates, reverse takeovers and PIPEs. We may even see greater transaction volumes in 2023 than we saw last year, as companies in need of liquidity are forced into transactions.

The types of companies being invested in may change. New technologies such as RNA and cell and gene therapy will continue to be areas of significant interest. In addition, medtech and digital health solutions remain a focus as health systems try to move patient care out of hospitals. Looking further ahead, the industry is generally very optimistic because there is a belief that there levels of innovation are very high. Whether that is through new technologies, new ways of treating diseases or artificial intelligence, the consensus is that the scope for innovation is greater now than it has been previously.

For those interested, we have written a number of more detailed pieces recently on what we can expect from the market generally in 2023, the UK Government’s policy on becoming a ‘science superpower’  and also reflections following this year’s JP Morgan conference.

Andrii: If I ask you to give one grand piece of advice for biotech entrepreneurs starting their company now or in 2023, what would you suggest?

David: I would encourage founders to think past their first few rounds of venture financing or even the first potential liquidity event. Europe needs companies of scale, and this involves finding ways to continue to grow the business and diversify revenue, rather than just exit to the first interested buyer.

It is incredibly difficult to get any company off the ground, but it is particularly complicated for life sciences companies with all the additional early costs and risks. I haven’t set up a company, but I imagine that it would be tempting to take the first opportunity for meaningful personal liquidity.

However, I would encourage founders to think big (while being realistic) and plan out the future of their companies (while still being able to change to events). I would like to see more European companies engaging in M&A and expanding into the US.

As a slightly contradictory piece of advice, if there is one thing that 2022 taught us, it is that access to financing is not always easy or available. Therefore, biotechs looking to grow over the long term should be taking every opportunity they can to build their cash reserves.