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The Power of Partnerships

In 2022, life sciences companies are putting an emphasis on pursuing partnerships to de-risk their drug development process and grow their organizations. In fact, according to the 2022 BDO Life Sciences CFO Outlook Survey, 51% of life sciences companies are pursuing a strategy of gradual, continuous growth this year, and 47% of respondents are planning to pursue collaborations or partnerships for greater network value. Life sciences companies are using partnerships to put long-term structures in place that enhance growth over time.

Here's How The Industry is Capitalizing on the Power of Partnerships in 2022

What’s Ahead for SPACs

More life sciences companies are planning to pursue M&A this year, up from 25% in last year’s survey. By contrast, fewer private companies are pursuing a traditional IPO compared to last year’s 12%. 

Waning interest in traditional IPOs doesn’t mean companies aren’t going public. Instead, SPACs appear to be the preferred method to go public across the industry. When looking at the private companies that responded to our survey, in October, 18% are planning to pursue a SPAC in 2022, which is triple the number of private companies planning to pursue a traditional IPO.

Life sciences companies may benefit from choosing a SPAC because it allows them to negotiate the fair value of their drug research efforts up to that date. By contrast, the traditional IPO process, which relies on investment banks and roadshows for valuations, can lead to inaccurate valuations, given that many life sciences companies spend so much time pre-revenue.

SPACs aren’t perfect, however — many life sciences SPAC deals have fallen apart after a Letter of Intent (LOI) investigation, due to a failure to raise enough funding. Just because a company values itself at a certain amount, doesn’t mean the market will agree to pay that amount. Additionally, the immense popularity of SPACs means the SEC has indicated they will take a closer look at regulations around these transactions. Finally, companies that have gone public via SPAC may not see the strong stock performance they hope for post de-SPAC transition. So, while it’s worth considering pursuing a SPAC, it’s important to remember that SPACs aren’t a magic panacea. Life sciences companies need to weigh the risks inherent in a SPAC before deciding to abandon the traditional IPO process.

A full 80% of respondents said that data privacy breaches would be a security risk for their organization in 2022. By contrast, when asked about their top challenge related to due diligence during a SPAC transaction, only 10% of respondents pointed to IT and cyber. When pursuing a SPAC, it’s crucial to ensure you have the right cybersecurity controls in place, particularly as public companies are often under greater scrutiny than private companies. Furthermore, any life sciences company looking to acquire or partner with another company should take the time to understand that company’s cybersecurity and data privacy practices to uncover potential issues that could threaten the future of the partnership.

Opportunities for life sciences companies to expand their networks will be ripe in 2022. Based on my own work with clients, it seems like everyone is planning to make moves in the next year, whether that’s in the form of a SPAC, M&A deal, joint venture, partnership or beyond. In particular, I expect the M&A market to be hot for life sciences in the next few months. That means a lot of opportunity, but also a lot of competition. Companies looking to be acquired should prepare now to set themselves up as an attractive acquisition prospect. TODD BERRY Assurance Partner and National Co-Leader, BDO Life Sciences

Roadblocks Remain

When comparing respondents who have already gone public to respondents who are planning to go public, we see disparities in their perspectives on the process.

The top-cited challenges of companies that have already gone public are fulfilling financial reporting requirements and achieving pipeline readiness. By contrast, private companies planning to go public are more concerned with attracting the right investors and having the right executive leadership in place.

It’s possible that private companies are underestimating both the financial reporting requirements they will be expected to complete when they go public as well as the roadblocks they may encounter in achieving pipeline readiness, including gaining approval from regulatory bodies like the FDA. Many private companies go public using consultants and a lean accounting team. When it comes time to fulfill SEC reporting requirements, they find their existing teams need more support. In addition, finding talent to fulfill SEC reporting roles is extremely difficult now, as there is a shortage of workers with the necessary skills.

Companies planning to go public this year should gain an understanding of their upcoming financial reporting requirements now, along with compiling and organizing all existing financial data and documentation. Additionally, they will need a realistic picture of their road to pipeline readiness and proactively plan to address the most common roadblocks to the process. Otherwise, they could encounter expensive problems down the line.

SPOTLIGHT: Setting and achieving partnership goals

Partnerships and deals can lead to exceptional growth if you engage strategically with clear goals in mind, and life sciences companies have been taking full advantage. A full 96% of companies have made an acquisition over the past three years.

One in four life sciences companies made deals in the last three years that fell short of expectations in capturing deal synergies. How do you make sure it doesn’t happen to you?

Here are some ways to set yourself up for success in deal-making and partnerships:

• Set measurable goals. All stakeholders should define success in the same way and agree on KPIs to measure progress, in order to align on expectations for the deal.
• Do your due diligence. Understanding the full picture of the risks you’re undertaking in the proposed arrangement is key to avoiding unpleasant surprises down the road.
• Align your benefits. Ensure you structure the partnership to create equal and mutual benefit for all parties. This will drive everyone to come to the table to manage cost, risk and development.
• Create data transparency. An effective partnership or deal relies on sharing data amongst all parties. Sharing data fosters collaboration and helps everyone keep track of risk management.

Pursuing a deal or partnership?

Methodology

The 2022 BDO Life Sciences CFO Outlook Survey polled 100 life sciences industry CFOs with revenues ranging from $100 million to $3 billion in October 2021. The survey was conducted by Rabin Research Company, an independent marketing research firm, using Op4G’s panel of executives.