By Shreya Saraf, Engagement Manager; Vivek Mittal, Partner; and Siuwah Michael Tang, Senior Analyst
Financing and deal activities are lower in the months following a crisis, as is evidenced by the 2001 downturn as well as the financial crisis of 2008. While we expect to see a similar pattern with the COVID-19 crisis across industries, the life sciences industry may be able to mitigate that flight of capital and instead drive a redistribution of capital to infectious disease and vaccines through timely financing and operational strategies.
The 2001 Recession
The ‘black swan’ events of 9/11 came on the back of the Y2K scare and pushed the economy into a recession. Similarly, the SARS-CoV-2 pandemic has accelerated the 2019 slowdown and plunged the economy into a steep recession. The life sciences industry saw a ~30% overall decline in M&A activity as early as 6 months after the crisis, while biopharma saw only a ~10% drop in M&A funding. The sectors that felt the impact most significantly were MedTech and Digital Health & IT with high double-digit drops in funding.
Financing for biopharma remained fairly robust through the 2001 downturn, driven by an increase in financing for essential and time-sensitive therapeutic areas including oncology, cardiovascular, and infectious diseases.
Financing for respiratory products saw a temporary 10-fold spike immediately after the 9/11 attacks, perhaps catalyzed by the vulnerabilities and unmet needs exposed in the treatment of first responders for the inhalation of toxic dust that cost the city of NY >$6B. The COVID crisis might trigger similar spikes for ventilators, masks and other PPE as well as for digital health tools that seek to address the surging mental health crisis. A sudden liquidity crunch might have driven rapid consolidation in generic products post 9/11. We might see another influx of capital towards generics in 2020, driven by the increasing pricing pressures and an effort to reduce dependence on China.
Chronic conditions like metabolic diseases, along with elective or non-essential areas like orthopedics, implants, imaging, and dental products saw a sharp decline in financing and M&A activity. The 2020 downturn is likely to see an even steeper decline with mandatory deferrals of elective and non-essential surgeries globally.
The 2001 downturn also drove a shift of financing from higher-risk private ventures to investments in more stable public markets. M&A deal structures fell from ~40% cash-only deals down to ~10% cash-only deals but made a quick ‘V shaped’ recovery within a year, with the majority of deals moving to a combination of cash and stock.
This quick ‘V-shaped’ recovery in 2001 was a result of concerted efforts through expansionary monetary and fiscal policy along with security measures that restored ‘normalcy’ to American society and way of life. The country bounced back to the same level of air travel in as early as 6-8 weeks. Unlike the rapid confidence-building measures put in place after 9/11, the US government’s response the COVID-19 crisis has been too little, too late. The global nature of this pandemic, long timelines for vaccine development, and high uncertainty from prolonged social distancing makes such a rapid recovery highly unlikely.
The Great Recession in 2008
The 2008 financial crisis was a systemic failure driven by an over-leveraged housing market that led to a global recession. The life sciences, like all other industries, felt the impact. Public and private fell 45% in the first six months and another 54% in the next six months before a strong recovery over the 12-18 months following the crisis. The biopharma sector, in particular, witnessed a 65% growth in funding compared to pre-crisis levels while devices saw an increase of 38%. Medtech funding came back to pre-crisis levels. Diagnostics and Digital Health & IT did not recover until much later. The value of M&A deals in the industry fell by ~40% in the first six months, driven by a 80-90% decline in MedTech and devices but only a ~10% fall in biopharma. As the recession deepened, however, all sectors of the industry continued to decline even 18 months post-crisis.
Across therapeutic areas, oncology remained the most robust with 15-30% declines in funding for a year followed by a sudden influx of capital to 3x that of pre-crisis funding, fueled by stable demand as well as high growth in approvals and revenues before the crisis. Other therapeutic areas with relatively inelastic demand like cardiovascular and immunology also recovered within 18 months. Large consumer health players took advantage of the cash shortage and depressed valuations, as is reflected in the rapid consolidation seen in the space soon after the crisis.
Financing for tissue regeneration and transplants, women’s health, and dermatology saw a very slow recovery, reaching <60% of pre-recession funding levels even 18 months after the crisis. M&A activities in non-essential or auxiliary areas like implants and ophthalmology fell to 10% of pre-crisis levels and struggled to recover. This observation from the Great Recession further strengthens the hypothesis from the 2001 crisis that the non-essential MedTech sector will see a steeper decline in funding and a slower recovery than other life science sectors even in 2020.
Despite extreme expansionary monetary policy measures in the US, the shift from private to public investment as well as all-cash deals to a combination of cash and stock was even more pronounced in the 2008 recession due to the high uncertainty from loan defaults, bankruptcies, and high unemployment. The mounting uncertainty from a rapidly spreading virus with no treatment or vaccine and global social distancing measures in 2020 does not bode well for the economy. With direct visibility to these timelines, the biopharma sector can mitigate this impact by taking advantage of lower interest rates and planning new financing and M&A activity to maximize the returns on their investments.
The Great Lockdown of 2020
Global social distancing measures in the Great Lockdown of 2020 are shutting down the real economy. As a society, we have never done this before. As this impact bleeds into the financial economy, it will likely lead to a banking sector crisis with higher unemployment, defaults on loans, and bankruptcies. Compounded with the lack of confidence-building measures, the recovery path from this crisis will possibly resemble a ‘U shaped’ recovery as seen in the Great Recession rather than the more desirable ‘V shape’ as seen in 2001. Most recessions are usually associated with one major shock. Here, however, we may have aftershocks from the recurrence of the virus or from repeated social distancing measures, suggesting the possibility of a ‘W shaped’ recovery for the global economy. Further, the market may also witness temporary bouncebacks or shocks based on updates from promising clinical trials like Gilead’s remdesivir or Moderna’s RNA-based vaccine.
The life sciences industry could witness a more stable ‘U shaped’ path with a quicker ‘V shaped’ recovery for specific segments like vaccines and diagnostics. The diagnostics industry will emerge as a winner – we can expect to see an influx of capital as companies rush to develop a host of COVID-19 diagnostic kits that will fundamentally change the global approach to infectious diseases. As in other crises, biopharma is likely to remain resilient and could recover in the second wave of investments as the pandemic is curtailed and the vulnerabilities in other chronic conditions are further exposed. Digital technologies will enable recovery across sectors as we witness a shift in treatment paradigms. The MedTech sector will arguably dip even more than in previous crises with a halt on elective procedures and a shift of capital to lower margin products like ventilators and PPE, following a deeper ‘U shaped’ recovery.
Global economies look to the life sciences to streamline research and development and accelerate the development of diagnostics, vaccines, and therapeutics. The optimization of manufacturing processes and supply chains will be necessary to meet the unprecedented challenge of scaling up and delivering these products globally while reducing dependence on China. Vulnerable populations that once sought refuge in the now-overwhelmed healthcare system look to the industry to provide much-needed patient support through digital health innovations including telehealth and mental health tools.
Timely and appropriate financing and M&A activities will allow companies to build capabilities in digital health and technology and strengthen supply chains that will deliver solutions to this global crisis and mitigate the impact of the downturn on the life sciences industry.