As 2023 began there was a certain amount of optimism that the challenges and boom of the pandemic years were stabilising. In the end, 2023 turned out to be a reset year for life sciences and healthcare transactions, with many companies focusing on their cash position and operational performance in the face of more macroeconomic headwinds than anticipated.
In contrast, there are many structural reasons to be positive as we look ahead to an uptick in European life sciences and healthcare activity in 2024.
1. Active corporate investors: Many strategic corporate investors have now completed significant divestments (particularly in the consumer sector) and realignment of their internal R&D functions. As a result, they are now newly nimble, cash rich and looking for external innovation to fill future gaps in their pipeline. We expect large pharma and medical device manufacturers to be more active in 2024, often by first using their corporate venture funds. Of course, navigating antitrust and foreign direct investment rules will remain a key point to consider in any transaction in the sector.
2. Further corporate divestments: These corporates are likely to be sellers in 2024, as well as buyers. Higher borrowing costs now make it less appealing for pharma and medical device manufacturers to hold onto underperforming assets. These can be ideal targets for technically minded private equity funds, particularly in the manufacturing process. In addition, more disposals are expected of R&D facilities and staff, with large biotechs among the expected buyers as they look to diversify their capabilities.
3. Biotechs & venture capital: Venture capital investments have continued to be suppressed in 2023, with valuation misalignment leading to biotechs undertaking insider rounds or convertible loan notes. Many funds have raised significant dry powder that will need to be deployed in 2024. In addition, a more active pipeline of corporate buyers will give these funds confidence in a potential exit route for biotechs.
4. Clinical trial announcements: Suppressed capital markets (and the exit route they represent) have been a key aspect of the chilling effect on biotech venture fundraising. One factor that may re-awaken the capital markets is that a number of listed biotechs are expecting phase 2 and phase 3 data in 2024. Assuming positive results, valuations are likely to recover some of their recent losses. Once issuers feel that their share prices reflect their true value, many may come back to market (whether through further capital raises or M&A).
5. Increased (British) university spin-outs: There is now broad agreement in the UK (across universities, government, opposition parties, investors and trade bodies) that more spin-outs are required to boost growth. Many in the U.S. recognise that the UK (and Europe generally) is home to fantastic (and cheaper) science, which has often been able to develop thanks to non-dilutive public grant funding. It will take some time for these companies to come online, but will provide another opportunity for venture funds.
6. Real estate & infrastructure: A key aspect of this process has been a recognition that the UK needs more laboratory space, particularly in the 'Golden Triangle'. Given the continued growth in UK biotechs (and the CROs/CMOs that service them) and government support, we expect to see more life sciences real estate transactions in 2024. These are seen as high value investments, able to revitalise properties that may otherwise have struggled with other uses (such as office space).
7. New technologies and AI: It would be inappropriate to look ahead to 2024 and not mention artificial intelligence, given it has been the buzz word(s) of 2023. We expect investment in these new technologies to continue, in particular in the context of expediting clinical trials and the related review of data sets.
Overall, more life sciences and healthcare transactions can be expected in 2024. However, many of these will take some time to gain momentum, with Q1 (and potentially Q2) expected to remain quieter.
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