Scrip: industry news and insights
By Kevin Grogan 05 Aug 2021
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The coronavirus pandemic has battered businesses across sectors, including pharma. Supply chain disruptions, pain on the logistics front and commercialization challenges are all playing out across geographies.
The resultant general strains in the system and a tough funding environment, compounded by high leverage at some smaller drug firms, signal that a perfect storm may be in the making for carve-out deals, distressed and surplus asset sales and resizing of balance sheets.
Of course such activity needs to factor in that most large firms and others with an M&A appetite are expected to prioritize their own core businesses, employees and critical products during these challenging times before venturing out on deal street.
And then there’s the other crucial rider - the actual global trajectory and intensity of COVID-19 hereon, and how soon the “new normal” will cease to be just that, could also significantly impact the scale and timing of any uptick in deal-making.
Salil Kallianpur, a former executive vice-president at GlaxoSmithKline PLC in India who now runs a digital health consultancy, noted that the latest International Monetary Fund report predicts that the global slowdown is likely to extend to 2021, a projection he considers optimistic since it will depend entirely on how the infection is controlled.
Cliches like “unprecedented” and “new normal” are flowing around liberally, he noted, but cautioned that when the IMF report says that per capita production has reduced by double the amount that during the 2008 financial crisis, it is unlikely the global economy will revive in a year. “Given this scenario, corporations are more likely to hoard cash and cut losses,” Kallianpur told Scrip.
Gita Gopinath , economic counselor and director, research department at the IMF, recently predicted that the cumulative loss to global GDP over 2020-21 from the pandemic crisis could be around $9tn, greater than the combined economies of Japan and Germany. “Now this is a truly global crisis, as no country is spared,” Gopinath said at a 14 April World Economic Outlook press briefing.
Kallianpur also pointed to the general scenario where the Eastern hemisphere appears to have “bent the COVID curve” much better than the west. “If China, India and the Asian tigers revive quicker than the West, we are likely to have a repeat of the post-2008 scenario where QE [quantitative easing] measures in the US will flow into these economies,” Kallianpur predicted. The US economic stimulus package runs into trillions of dollars.
Other experts emphasized that COVID-19 has caused substantial supply chain disruptions, impacting both operations and access to markets. Pushpa Vijayaraghavan, director and practice lead, Healthcare at Sathguru Management Consultants Pvt. Ltd, noted that most discretionary healthcare delivery has been deferred and will continue to be in abeyance in most countries, either due to government directives or fear in peoples' minds.
She expects the disease to result in a “depressed year” for pharma across geographic regions, though it will be less affected than several other industries.
Vijayaraghavan also sees lower appetite for high-risk investments that “aren’t EBITDA [earnings before interest, taxes, depreciation and amortization] accretive immediately”; essentially investments that entail higher risk and a longer duration of return realization are likely to be “given a miss” due to the higher focus on capital conservation.
“This could impact significant waves currently gaining momentum such as generic companies graduating to specialty pharma and traditional innovators embracing next-generation therapies such as cell and gene therapies,” she told Scrip.
Vijayaraghavan, who has had previous stints with PricewaterhouseCoopers, Ernst &Young and the University of Michigan Technology Transfer Office, explained that these investments also typically entail a higher level of technology risk and are often advanced leveraging non-dilutive public capital. “Public investments in research are also likely to be affected due to part redirection to the COVID-19 efforts and looming fiscal deficits the world over,” she added.
Similar scenarios were depicted by executives at Bain & Company, who believe that the coronavirus crisis will have knock-on effects for the broader pharma environment, including reduced funding for early-stage biotech companies and diminished demand for contract research organizations. Pharma companies, they said, will need to defer some product launches and those that go ahead could well fall short of expectations, in view of the impediments to commercializing drugs at the former speed and scale in the current environment.
The COVID-19-triggered underlying economic crisis, Bain & Co. predicted, will have a significant ripple effect on both state and national budgets. “Urgent and costly measures to shore up businesses and support individuals will force governments to contain outlays in every category, including healthcare,” Bain executives Loïc Plantevin, Jason Evers and George Eliades said in a 3 April article.
Plantevin leads the firm's Healthcare practice in Europe, the Middle East and Africa while Evers and Eliades are partners with Bain’s Healthcare practice in Chicago and San Francisco respectively.
All this pressure in the system could well spill into deal-making. Shedding non-core assets and distress sales as companies are forced to cull or revamp operations to manage liquidity can’t be ruled out, some experts have indicated.
Kallianpur said that with the US, the EU and most of the developed world seemingly impacted worse than Asia, at least so far, hedge firms, private equity companies and venture capital groups flush with low cost capital (either from the US or state-subsidized companies from China) will look for attractive companies with more sober valuations.
“However, after the SoftBank warning, it is unlikely that they will pick up 'trash'. Smaller agile companies with differentiated product pipelines that can sell at a premium in the US and make inroads into China will be valued,” Kallianpur forecast. Last week, SoftBank, a diversified Japanese communications and tech group, cautioned investors it expects to post its first operating loss in 15 years, as a result of a plunge in value of its flagship investments.
Vijayaraghavan, however, said that the liquidity crunch and economic impact will likely “drive more companies through the door” of either financial or strategic investors. She believes that moderated valuations will offer investment opportunity for larger pharma companies to explore synergistic deals that create near term value for shareholders.
“The next 18 months are likely to be more frequently dotted by opportunistic and scale-driven M&A with high near-term synergy,” Vijayaraghavan predicted.
As part of broader recommendations on possible actions for the longer term, the Bain & Co. executives quoted previously suggest that the pharma industry should explore acquisition opportunities and that lower valuations, particularly in biotech, may make some targets more “financially feasible. Review the products, companies and platforms that are part of your long-term strategy,” the executives recommended.
Then there is also the scenario where companies might consider pivoting their business models in the post-COVID-19 situation. Should that happen, Kallianpur believes more firms are likely to come onto the radar of cash-rich investors looking for good deals to cut.
“COVID-19 has shown us how corporations have actually tried hard to become socially responsible. Investors might look hard for companies that have discovered differentiation and new markets to cater to by developing new, socially responsible business models that are more sustainable,” he said, referring to interesting recent developments such as Medtronic PLC tying up with electric automaker Tesla Inc. for ventilators and competitors GSK and Sanofi collaborating for a COVID-19 vaccine.
Medtronic has publicly shared design specifications for its Puritan Bennett 560 ventilator sold in 35 countries and has partnered with Tesla, which converted a New York site used to manufacture solar power cells to make ventilators instead. (Also see "COVID-19: Medtronic Shares Ventilator Specs Amid Multi-Industry Efforts To Increase Ventilator Production" - Medtech Insight, 31 Mar, 2020.)
Nevertheless, not many expect fast-paced deal-making despite all these factors. Most see subdued deal volumes, at least in the near term.
Navroz Mahudawala, managing director of the Indian investment banking and consulting services firm Candle Partners, expects a short term (six to 12 months, he specified) slow-down in deal-making. Post that, especially in the Indian context, he expects deal prospects to “substantially improve” given the seeming “long term re-rating” of Indian pharma currently on the country's stock markets.
Mahudawala said that compared to most other sectors pharma will be an out-performer and “better listed companies' valuations” will have a positive sentiment towards deal-making. “We may see select inbound activity as more players would be keen to invest in India; however outbound would be muted in the next 12-18 months,” he predicted.
Other experts provided a similar outlook. Sujay Shetty, leader – India Pharmaceutical and Life Sciences, PwC India, noted that pharma in India is generally “in a good place” being a defensive industry and expectations of sustained high demand for medicines. Nevertheless, disruptions in the supply chain, problems with logistics and also leverage could pile some stress on the system. (Also see "COVID-19 Lock-Down: India Pharma Manufacturing Limps Along Amid Challenges" - Scrip, 8 Apr, 2020.)
“Companies that have got good cash on the balance sheet and are market leaders will be less affected, but those that have large leverage, dollar-denominated debt could struggle. There is a possibility that given the stress in the system there would be M&A opportunities for assets that are surplus to requirement - whether plants, brands,” Shetty told Scrip.
Besides, with capital being difficult to access at the moment, it will be important for some companies to resize their balance sheet, which again could lead to some M&A activity, the PwC executive added.
While no frenzied deal-making is anticipated, most experts do also envisage interesting pickings for private equity (PE) firms.
Sathguru’s Vijayaraghavan anticipates “active momentum” among PE funds that have closed their own fund-raising process and have “dry powder” to deploy. Deals, she believes, will not be scarce but she advocated judiciousness to ensure the best bets are made, whether PEs engage in minority or controlling stakes. “Some segments of the industry are likely to rebound faster than others and an active pulse on the industry’s finer dynamics will be important for superior deal making,” she advised.
PwC’s Shetty also believed that PE firms could see good opportunities, as there could be assets that are looking to build up or emerging business models that will take advantage of the new digital way of working.
“There will be pharma companies looking to acquire/scale, given the opportunities; PEs will have attractive opportunities but valuations may be on the slightly higher side, though still relatively ok, given the correction that has already taken place,” Shetty said.
Earlier this year, PwC's Global Pharma & Life Sciences Deals Insights Year-End 2019 & 2020 Outlook report said that PE had in excess of $1.7tn to invest and was positioned to transact on many of the divestitures and other businesses in the pharma and life sciences sector. Unlike in the past, the PE sector is no longer reactive but is proactively scouring for take-private opportunities, corporate divestitures and partnerships with mid-market companies, PwC said, although that assessment was prior to COVID-19's relentless spread.
Experts also anticipate interest in the active pharmaceutical ingredients (API) space, now that the pandemic has exposed the glaring supply chain weaknesses in pharma.
Candle’s Mahudawala forecast that APIs would continue to be an out-performer within the healthcare sector. “Alternate sourcing by global majors (besides China) would create outstanding growth opportunities and hence the capex [capital expenditure] cycle would continue,” he explained.
Ex-GSK executive Kallianpur also sees APIs as a good area for PE firms to look at, given the world was "rudely woken" by the Chinese supply chain breaking down during the early COVID-19 days. Many companies realized how dangerous this dependence was and how it could impact national security, he observed.
“Companies which have secured multiple sources of APIs, or those that are focusing on vertical integration or are restructuring their value chains, will be high on the radar for PE firms,” Kallianpur declared.
Finally, the online pharmacy industry, specifically in the Indian context, may also see some action. Mahudawala expects online pharmacies and offline pharma distribution to both go through a round of consolidation. Both these sectors could witness funding activity as four or five companies emerge “clear winners” in these areas, he said. (Also see "2019 India Deals - Sell, License, Brands And China" - Scrip, 3 Jan, 2020.)
Experts also believe that what could have happened in a two-three year period in the online pharmacies segment might now “fast forward”, though pending Indian regulations could be a dampener factor. (Also see "India Pharma 2020: Trends That Can Change Business Tempo" - Scrip, 8 Jan, 2020.)
“As a business model, it will accelerate and gain critical mass much faster and that presents lots of opportunity for PEs,” experts have said.
Sathguru’s Vijayaraghavan, however, appeared more cautious, explaining that AI- and digital technology-driven ventures in healthcare, including online pharmacies, will continue to have the “same appetite” as earlier, as there may not necessarily be a fundamental change in medium-term outlook. “Fundability”, she emphasized, will continue to rest on success in scaling-up and demonstrating potential for scale.
A new Coronavirus Analytic Solution including comprehensive integrated data on clinical trials, pipeline, market events and insights from across Pharma Intelligence’s suite of products, updated daily, is now available. Contact Duncan Emerton, PhD; Director, Custom Intelligence & Analytics for details (separate purchase required).
(Scrip's rolling coverage of the global coronavirus outbreak and the biopharma industry's response is aggregated here.)
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