Prepare for What the Markets Could Bring
Back Bay’s investment banking team took part in the annual JP Morgan Healthcare Conference in San Francisco, where there was renewed energy and optimism for the year ahead in terms of life science growth.
Among the cautious optimism at JPM, clear areas for attention and preparedness emerged for healthcare companies:
The number of companies seeking funding is still extremely high. While 2022 was a down year after the remarkable uptick in venture financing of 2021, it was still robust.
Clearly, “dry powder” is essential as funding forecasting becomes unclear. We believe that funds will focus on near-term catalysts and known data to prompt investments rather than betting on a nuanced appreciation without clear data of what could score big. Holding on to reserves rather than deploying into new investments is a critical tactic for funds to ensure adequate financing for their extant commitments.
We are seeing multiple effects from the Inflation Reduction Act impacting analysis of small molecule drugs with large Medicare populations. Acquirers and Licensors speak quietly about adjusting rNPVs down by as much as fifty percent as pricing in both orphan and broader indications can be impacted. Deal values are always negotiable, but it is critical for those of us in the middle of deals to be fully prepared with data-driven strong arguments both on valuation as well as timing of the pay-outs in structured deals.
Among the hot topics at JPM, the following stood out: cell and gene therapy, the impact of AI on drug development and selection of deals wherein prediction to greater late-stage success becomes a more important arbiter of value than we have witnessed before. Undoubtedly, this will change our counsel when it comes deal-making. Proactivity, on both value modeling and asset selection, needs to start early on the road to contemplating a transaction. As always, deals should be driven by development, commercialization and financial strategies on the front end of any board or management decision-making.
After a turbulent H2 2022, public markets seem to have calmed at the start of 2023, likely due to investors reacting to an apparent ease in inflation coming out of December’s consumer price data. The recent increase in interest rates of 50 basis points was a step down from the previous rate hikes of 75 basis points, further signaling the Fed’s confidence in grappling with inflation. Given potentially favorable market conditions, companies may be more able to access public capital, which should translate to more confidence in the M&A and partnering markets. In a capital-intensive business where the healthcare quality our innovative companies produce is central to our society’s expectations—where differentiated technologies are critical to meaningful medical advances—we look to these trends to continue in 2023.
Our work is about optimally positioning companies in the event of more attractive capital markets and being prepared if capital is constrained. A proactive strategy drives it all. Plan conservatively, move opportunistically and with designed intentions and ensure multiple contingencies are considered.
Here’s to a healthy, prosperous New Year and continued upward momentum! Be in touch.
All the best,
Back Bay’s Life Science Investment Banking Team
US Healthcare Venture Capital Fundraising defined as an approximation of healthcare investment dollars to be invested by firms that historically invest in +50% US companies