The Dawn of a New World

Three months into an unprecedented, tragic and mostly unforeseeable global event, here are some thoughts on its implications for Life Sciences and Healthcare (“LSH”) based on what we’ve seen so far and what we can imagine for the future.

First and foremost, health has re-emerged as a key social priority in the wake of the sudden threat it’s been exposed to: both as individuals and societies we’ve experienced a sense of vulnerability as never before since the end of WWII, and recent events are changing our entire approach to life, wellbeing and health and are resetting our priorities.

Secondly, the severe shock on the world economy has determined short-term responses from Governments and, in a more long-term view, is leading to a deep redesign of entire sectors and even to reconsidering the whole economic model that’s been our paradigm for the past century. The LSH sector will be no exception.

Finally, the recent series of events is most likely turning into an accelerator of changes (be it technological innovation, sector dynamics or social trends), while questioning some other recent trends (the sharing economy, just to name one).

With this backdrop, what are the lessons learnt and the scenarios for the LSH sector?

Short-term impact

In general terms, the LSH sector has been less impacted than others in the short term, although this is true more for its pharma / biotech and MedTech constituencies than for healthcare providers. In particular, here’s a take-out from many recent conversations with LSH players:

-         Most companies are envisaging a limited impact (if any) on 2020 financial performance, with some players even forecasting better-than-expected results.

-         Healthcare providers, however, have suffered especially in countries like Italy where the shutdown of non-essential services has been prolonged – and lost revenues are unlikely to be recovered in the short term.

-         Demand for pharma and healthcare is typically inelastic; however, once lockdown was lifted the demand for non-essential healthcare services has decreased, while demand for discretionary pharma products and food supplements is experiencing two opposite trends: a positive one due to higher awareness on prevention, and a negative one due to lower available income.

-         Differently from other sectors, few players have evidenced issues with supply chain or with operations (which were already carried out at the highest safety and hygiene standards, and often with significant impact of automation).

Long-term impact

When looking at the long term, everyone seems to convene on the key strategic themes for the industry: from the need to rethink healthcare models (public vs. private; inpatient vs. outpatient vs. homecare; central vs. local; budget-driven vs. shock-proof) to the accelerated importance of technology (telemedicine; digital devices to support tracing, prevention and diagnostics; innovative tools for clinical trials; new commercial strategies; new approach to events and conventions); from the potential redesign of the Pharma supply chain as a key defensive strategy for countries, to the relevance of research and innovation (to be adequately supported and sponsored) as a strategic differentiator for national industrial policies, and ultimately for the wealth and safety of countries.

The dynamics among patients, payers and providers are also expected to change: patients are becoming even more aware, informed, attentive and equipped with technology, payers will have do develop new (co-)payments mechanisms and will see an increasing importance of private schemes as part of a healthcare ecosystem, while providers will have to adapt their business models to the new framework.

Financial markets

From a financial market perspective, a few patterns have emerged and strengthened in the past few weeks (based on data observation and on numerous conversations with market players):

-         LSH, as a defensive sector, is increasingly appealing all categories of investors: public equity, private equity, lenders

-         Reallocation of capital towards resilient, solid sectors is a consistent trend among private equity players

-         Within this broad category, as in any other financial crisis, when it comes to specific companies “flight to quality” is the name of the game for equity and debt investors alike

-         Investors are increasingly spotting and pursuing subsectors offering consolidation opportunities, driven also by the increasing challenges that smaller players are facing (often increased by short-term dynamics)

-         New business models, especially related to the convergence between healthcare and technology, are being developed and are increasingly attracting business angels and venture capitalists

-         Public equity valuations have been more resilient than in other sectors, with certain companies (especially in the pharma / biotech space) significantly outperforming the market

-         Having said that, there is an increased interest in listed companies with an opportunistic appeal for take-private transactions

-         Public market valuations are also impacting M&A, in two ways: (i) amplifying the impact on prices of increased demand for high-quality assets from financial sponsors and trade buyers, and (ii) offering corporate buyers little-dilutive acquisition currency

-         Liquidity, which is currently the key issue for other sectors, is actually a key strength of a sector with mostly robust balance sheets and high cash flow generation

-         The significant corporate liquidity is paralleled by the unprecedented firepower of private equity funds and debt funds

-         As a result, M&A trends (unlike other sectors) remain robust in terms of both transaction volumes and company valuations

-         In fact, while a number of disposal processes have been put on hold or postponed, one-to-one situations are still ongoing (albeit at a slower pace), and the lifting of lockdown restrictions is likely to accelerate transaction activity

-         M&A might also be driven by family-owned, mid-size companies becoming increasingly aware that the complexities of the new world require a larger size: therefore, some will become consolidators (potentially opening up capital in the process), while others might choose to sell

-         Plain vanilla assets, with a linear equity story, can still be sold via competitive processes given the strong appetite supported by significant liquidity

-         More articulated equity stories, though, especially when an entrepreneur is looking for financial or strategic partners to finance growth, will require a bespoke approach, where dealmaking skills, sector knowledge, confidentiality and ability to unlock a transaction will be paramount

So, what?

It’s probably never been so exciting to be in the LSH sector, as it is at the crossroad of secular trends and is in the spotlight as the key catalyst to get the world out of the current crisis.

LSH constituencies (players, regulators, payers, patients) will – together – determine a new paradigm for the healthcare ecosystem, which is going to be ever more connected with other sectors (e.g. technology) and is contributing to redesign the way we live.

At a macro level, the way different countries will approach healthcare will impact on the wellbeing of their citizens, on their public budgets and ultimately on their international relevance; to this end, it will be key to put in place an efficient and effective healthcare system and to create a supportive ecosystem for innovation, able to attract talent and capital.

At a micro level, companies willing to drive innovation, take brave steps and emerge as leading players have an unprecedented opportunity to do so: capital and talent have rarely been so plentiful for well-run companies with solid ambitions, and the public attention on healthcare is likely to be a catalyst to improve the sector.

Time will tell how successful we’ll collectively be in turning a global tragedy into the springboard for a new, better healthcare and better world.