InLaw: David Dowling at Ropes & Gray looks at the year ahead for life sciences and healthcare

The European healthcare and life sciences sector is set for a bumper year in 2023, says David Dowling, counsel at global law firm Ropes & Gray, particularly for those willing to explore different structures or compromise if necessary.

Continued dry powder

There remains a significant amount of dry powder in the industry, whether that is large pharma or financial investors, as well as a corresponding desire to do (the right) deals. In addition, these transactions tend to be less affected by the debt markets as private equity, perhaps providing opportunities for pharma. That said, a number of private equity funds are also looking to move into the sector, either through buyouts or growth strategy, and so these present new exit opportunities for biotechs.

The impact of spin-outs

A number of large spin-outs are expected to complete in 2023. The conclusion of these transactions will free up significant further firepower for the parent sellers. In addition, these new companies will represent new entrants to the market, and will likely be looking for on-strategy targets, increasing the range of potential buyers.

Changing valuations

As 2022 ended a number of investors told us that they are keen to do deals, but that there remains a mismatch in pricing expectations.

Many biotechs may soon start to run low on their current reserves, which in turn may drive greater appetite for deals – albeit in H2 of 2023.

Alternative funding sources

Given the difficulties experienced by biotechs in raising money through standard offerings, many biotechs have relied on alternative financing structures, such as private investments in public entity transactions and at-the-market transactions, to raise funds.

In addition, many biotechs may look to licensing and collaboration deals, in order to avoid potentially dilutive funding rounds.

Importance of new technologies

In recent years RNA and CAR-T therapies (as well as cell and gene therapy more generally) were seen as having been vindicated. We expect continued and fierce competition for best-in-class assets in this sector, as pharma try to expand their foothold through M&A.

Although capacity is currently an issue, we also anticipate more venture investment as biotechs try to turn these technologies to even more indications and uses.

Continued rise of CROs

In addition to M&A activity across biotech companies, there has been increased M&A activity among contract research organisations (CROs) looking to expand their service offerings and widen their geographic presence.

Recent CRO acquisitions of contract development and manufacturing organisations, preclinical laboratories, and animal research facilities emphasise the increasing demand for CROs to provide services across the product development life cycle.

The intersection of tech and health

Funding in the health IT sector continues to increase due to the Covid-19 pandemic public health emergency. Although showing signs of market correction, digital health venture funding will likely continue at high levels.

Opportunities in real estate

Suitable real estate (particularly wet lab space) remains at a premium. This is particularly true as companies look to attract talent and so build out in regional hubs, such as the ‘Golden Triangle’ (of Oxford, Cambridge and London).

Many real estate investors and property managers are turning to this unmet need, including repurposing office space left empty after the pandemic.

ESG & medical waste

The broader healthcare industry is increasingly aware of its impact on the environment and certain communities. ESG is a hot topic generally, but particularly in the context of life sciences.

Relatedly, the management of medical waste – the waste generated as a by-product of healthcare work at hospitals, medical clinics, laboratories, research centres, dental clinics and other similar facilities – is a significant industry. The medical waste management industry is expected to continue to grow and revolutionise over the next decade.

Competition within Europe

Despite a strong academic tradition, Europe has lagged the US in terms of the scale of its life sciences industry. However, post pandemic, countries are keen to be seen as an attractive place to foster innovation and the resulting ecosystem. The UK remains the leading centre across Europe. We expect most transactions to have some nexus to the UK or Switzerland.

In conclusion, we remain optimistic about 2023. It promises to be an exciting year with the scope for a real boom in the sector in the UK and across Europe. However, we would not be surprised if it took a little time for transactions to get going as expectations and structures are readjusted.