26 Jun The evolving global life sciences landscape: Part 2
In the second part of their conversation, Bristows Co-head of Life Sciences, Marek Petecki, joined Marsden’s Jonathan Bower to discuss how life sciences investing has evolved since Covid. Their conversation explored changing investor expectations, the growing influence of regulation and geopolitics on capital flows, and the different approaches taken by UK, US, and European investors when negotiating deals.
Jonathan Bower: You act for both funders and founders. Have you noticed a change in the way that deals are being funded since Covid?
Marek Petecki: I think the world we live in post-Covid is a more complex and risky place, and one of the changes I’ve noticed in investors’ approaches to deals is that they’re much more focused on whether or not founders and startup companies have foreseen and addressed those downstream risks and uncertainties in the business model and the way they’ve put together their business plans. Before, and maybe even during Covid, there was a willingness to embark on something on the basis of some very exciting science, and perhaps a belief in the individuals involved. I think now investors are looking for more depth and more developed thought processes to how those downstream risks and commercial issues are going to be solved.
Jonathan Bower: Is that primarily about obtaining more clinical data through more rigorous testing, or are there other markers along the deal process that they’re looking to see before moving forward?
Marek Petecki: More data is always better. I think investors are increasingly shifting their focus further down the regulatory pathway, wanting ideally to invest in assets that have been a little bit more de-risked. That said, they’re still prepared to invest early, but they want a better appreciation of how the regulatory pathway and the commercial pathway have been thought through and any potential risks mitigated.
It’s a more challenging and competitive environment, but still one in which great science can get funded. But that (the science) is just the start of the conversation now. It’s not necessarily the end point, which gets you investment. And certainly when you look further down the track to larger rounds, crossover rounds, and exits, the companies that are breaking through have got much further down the development track than perhaps was the case five years or more previously, when we saw companies IPO or exit at an earlier stage in their development cycle.
Jonathan Bower: Are foreign investment regimes or screening regimes like the Biosecure Act or the COINS Act becoming a bigger factor in venture transactions?
Marek Petecki: Definitely, almost all jurisdictions now have some sort of foreign investment screening process, which wasn’t necessarily a feature five to 10 years ago. The venture community has got very accustomed to dealing with those now, and it generally involves baking in that regulatory approval process into your timeline for funding, or ensuring that you’ve thought about it well enough in advance that you’re confident that either for structural reasons or because of the nature of the technology you’re not within the relevant regime.
It’s become a question of planning and timing rather than a real obstacle to investment, but the COINS and Biosecure Acts are not constraining inbound investment but looking to regulate outbound investment and flows of capital from the US to elsewhere. This has the potential to be more disruptive, because up to now we’ve lived in a fairly globalized investment environment, where capital is free to circulate and find the best investment proposition and the best science.
What we’re seeing now, particularly from the US, is an attempt to regulate that process more closely, for geopolitical reasons, and I think that does have the potential to be more disruptive and quite complicated.
Jonathan Bower: In China, they’re looking to greater streamline their regulatory process. If you can get a drug to market quicker by going to China for the data and for the research, do you think that’s going to be one of these factors where you start seeing other countries trying to limit the amount of capital that’s being invested into the region?
Marek Petecki: That’s an interesting point. I think the question of regulatory equivalence and the extent to which regulators in one country will recognise data that’s been generated in another and signed off by another country’s regulator is something that again has a geopolitical dimension to it. Regardless of the integrity of the regulatory processes that are going on in China to approve new medicines coming to market at all stages, I think you will see increasing reluctance, certainly from the US, to allow companies to rely on that data, because it implies a shift of activity and a movement of an important part of the pipeline of drug discovery and development from the US and Western Europe to China. This is an ongoing trend, and one that is of concern, particularly to the US.
Jonathan Bower: What difference do you see between the UK, US, and European investors when negotiating deals?
Marek Petecki: All investors, wherever they come from, are very focused on valuation, on the business model, and on clinical and regulatory milestones, both insofar as they unlock further capital, but also insofar as the company’s got good data that it can point at to support the investment proposition.
European investors tend to be a little bit more focused on the governance structure at the shareholder level and will often negotiate at some length contractual provisions such as information rights, consultation rights, and veto rights at the board and shareholder level. Part of that is driven by the fact that many of the larger European investors who are writing the bigger investment tickets have got some state funding, and alongside that, requirements from relevant state bodies to report and share information, and exercise a certain level of governance which some, for example US-based companies, might find over-intrusive. US investors, having bought into the business plan and the science, are in my experience more likely to build a board that they’ve got confidence in, and then by and large let them get on with it, relying more on their engagement with the company at board level via their board seats. Continental European investors are more likely to want to be privy to a lot more information flow at the shareholder level. UK investors perhaps sit somewhere in the middle.
Part 1 of the conversation can be read here.