by Daniella Kranjac, Founding Partner, Dynamk Capital

Recently a startup founder reached out asking for advice as to whether they should start their seed round fundraising as planned or postpone due to the COVID-19 crisis.  The conversation led to several topics to consider: are investors actively deploying at this time, what is the outlook on valuations for early and growth stage companies, how much should you be raising to bridge this uncertainty in the market, and are purchasing patterns of leading biopharmaceutical players and innovators changing for new technologies?  

Our overarching opinion is that Life Sciences Industrials continue to be a highly resilient sub-sector of the broader Life Sciences and Biotech verticals. Small biotechs (most of whom have sufficient runway and financial backing from their VC partners) will see minimal effect as they continue to advance their development pipelines.  Large biopharma companies (the lion-share of the industry’s purchasing power) will continue to need supply of novel tools, technologies and services, whether for discovery, development or manufacturing.  In fact, we expect that any adverse effects relating to the current crises for some businesses may be entirely offset by increased demand relating to COVID-19 diagnostics, therapies and vaccines.

There are several unique characteristics to this economic downturn from both a macro growth/VC investing perspective as well as the microenvironment within life sciences which favor those looking to fundraise.   Part 2 of this two-part series will deep dive into the special considerations and recommendations for entrepreneurs during these turbulent times.  It is first worthwhile to look at the current market dynamics as compared to previous economic crises for insights and planning.         

To set the stage, this piece will specifically look at Dynamk’s focus area: life science tools, technologies and services critical to manufacturers of complex biologics, including monoclonal antibodies, vaccines, cell and gene therapies and other biotherapeutics. Recommendations prescribed are based on several factors we are using to guide our decisions over the next year:

·       We expect COVID-19 related effects to have a shorter and less pronounced impact in Life Sciences as compared to other industries.

·       Biopharma and supporting Life Science Industrials are robust and continue to be in-demand for existing therapies, but also are experiencing tailwinds with COVID-19 related demands for diagnostics, vaccines and therapeutics.

·       Life Science Industrials investments and deal levels are expected to experience minimal impacts compared with other verticals.  In the current environment, we do not expect a significant downward adjustment of multiples or deal levels.

·       Consolidation of inorganic growth M&A strategies will continue to result in Life Science acquirers paying for highly strategic assets at pre-COVID-19 levels.

·       Deal flow within our focus area may ramp up more quickly in seed round and series A as investors will have more comfort deploying lower amounts of capital.

·       Deal activity is typically lower in number for later stage and buyout opportunities. However, we expect this to be stable, or increase slightly given the opportunities in the sector, and further validated by the recent large equity raises of companies like Danaher, BD, Agilent and others.

These assumptions are based on the overall economic forecasts, our personal experience during previous economic crisis, and current input from our vast network of life science executives and strategic partners. Specifically, Evercore ISI Research recently stated they believe large Life Sciences (Danaher, ThermoFisher, etc.) will continue their high level of M&A deals to avoid working with external vendors. At the same time, they believe larger players will have greater difficulty accessing customers, providing greater opportunity for “smaller, innovative companies to become part of larger, established players” (Evercore ISI, Investor Perception Brief, June 2020).

Fundraising during crisis – what does history tell us?

While the current disruptions from COVID-19 are more extensive and impactful than other past crises, we can look back to the 2008 crisis and the 2 years following to inform what to expect during and post the current crisis.  Looking at the VC environment pre and post the financial crisis, we see a minimal effect to invested capital applied to Life Sciences as a whole, and a fairly steady deployment of capital across VC funding rounds.

From the figures above, we can see that VC investing in Life Sciences through the financial crisis was largely inline with pre-crisis levels.  It should also be noted that although the invested capital remained relatively stable, access to funding certainly tightened during this period.  Many existing firms opted to deploy their funds into portfolio companies to protect existing investments, and there were effects on terms and valuations with the number of transactions and transaction values varying significantly from quarter to quarter. We can also observe that the current crisis has thus far not slowed the capital deployed into the sector and investment amounts are on track with 2019.

Looking specifically at the Life Science market (including therapeutics) in 2008, there are some extrapolations we can make with respect to Life Science Industrials (Deloitte, The Future of the Life Science Industries 2010)

What is different this time around?

During the financial crisis in 2008, the industry actively curbed R&D costs in favor of maximizing production and sales of already commercialized therapies.  In addition, the reduced access to capital for smaller biotech companies translated to lower demand for new projects in their pipelines, preservation of capital, and delayed or redirected investments.  These headwinds were short-lived and, for most suppliers of Life Science Industrials into biopharma, their sales resumed usual volume within two quarters.  Dynamk’s Partners Daniella Kranjac, Gustavo Mahler and Venture Partner Reinhard Vogt, all experienced this first-hand as industry suppliers, start-up partners and corporate M&A leaders on the buy-side. 

When looking back to the life sciences and healthcare ecosystem back in 2008, there are several observations:

·       Legacy blockbuster drug products were losing steam with generics phasing in which caused significant cost pressures.

·       Biopharma capacity limitations were a concern at the time, with a focus on procurement of large capital equipment to support scaling manufacturing.

·       New technologies were primarily implemented if they could show a clear and immediate ROI or address capacity limitations.

·       Access to capital was very challenging during the financial crisis for all verticals given the global macro-impact that the crisis had on capital markets.

This downturn differs primarily from 2008 in that it was induced by a global pandemic rather than a financial crisis.  The main headwind experienced today by life science companies is the uncertainty in the ability of clinical trials to proceed with COVID-19 related risks and patient access.  The effects of this are yet to be determined at scale, however with that, demand for existing approved biologics and therapeutics remains on pace, driving need for continued manufacturing. There are also several other factors unique to today’s LS Industrials market that are clear growth drivers despite this crisis:

Part 1 Wrap up:

On a macro level, we are experiencing an economic shock, this time due to the COVID-19 crisis across all verticals including Life Sciences. This shock is impacting both early stage developers as well as commercial manufacturers of biologics.  Initially, some companies went into a “holding pattern” and cash preservation mode to ensure sufficient runways to weather the current uncertainty. Right now, new practices are being implemented to curtail the spread of COVID-19 and businesses are looking to new ways of working for a prolonged period.  We also believe that during the financial crisis of 2008, the Life Science market was undergoing life cycle changes unique to that time regarding reimbursements and relatively early and yet to be proven therapies complicated by a general lack of liquidity in the markets, which created inherent headwinds as compared to today.  Outlined above are several key growth drivers we believe will accelerate a rebound this time around.  When looking at patterns in VC investing during an economic decline, we see positive indicators that any downturn is highly short-lived particularly for early seed and Series A rounds.  For these reasons, we expect a strong recovery despite the severity of this economic crisis with strong market drivers specific to Life Sciences across therapeutics and Life Science Industrials with investors who are still eager to make investments in this high growth sector.  In Part 2 of this series, we consider the perspective of an entrepreneur looking to raise funding and shed light on what to expect and how to maximize her positioning to potential investors.