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Raising finance during the COVID-19 crisis

What do you see as the biggest challenges facing life science SMEs at the moment?

The COVID-19 pandemic has had an impact on the entire business ecosystem. All companies and their suppliers and customers are having to respond to the pandemic by putting new processes in place and adhering to the restrictions that are required by the government and health and safety authorities. Given that business models for early and later stage life sciences companies are often focused on research and development, there has been an impact on companies’ ability to carry this out, particularly where that involves third party contractors, laboratory testing, evaluating patients on clinical trials and conducting research externally at companies’ vendors.

Where research and development is able to continue, the pace at which it is moving is generally slower. This is particularly difficult for companies that rely on funding from investors that is linked to the company meeting certain milestones. To the extent those milestones are delayed, the related funding may be delayed from investors. Consequently, companies are having to work closely with their investors and, in some cases, revisit their business plans, operational models, financial forecasts and projections to account for this new environment.

How have you seen the financing and M&A environment affected by the crisis? Are investors still investing and are licensing and M&A deals still happening? 

The first quarter of this year has seen a marked drop in the volume of M&A deals. For big corporate buyers, they tend to have a very set way of doing things. They like to put people on planes, they like to get across and see the sites that they'll be acquiring, meet people face-to-face, and they can't do any of that right now. Unless the acquisition target is “absolutely mission-critical”, for example, if the asset in question is directly addressing the pandemic or something that is very important to the health of the buyer’s business, it would be unlikely for buyers to compromise their M&A process just to make a deal. Equally, on the seller side, with mounting uncertainties in the market which would impact valuation, it would not make sense for a company to put itself up for sale at this time - unless, your business is something directly connected to the pandemic. So neither side - buyer or seller – have been particularly keen to move forward. That said, there have been recent signs of buyers being more comfortable to proceed with “virtual only” diligence processes so this may lead to more transactions closing soon.

The venture financing landscape in Q1, on the other hand, seems to be holding steady and saw deal volume and value hit its highest level in the last five years though this is likely a reflection of many companies, who were already in the midst of a financing round, recognising the urgency to complete the fundraising process as quickly as possible. Lead investors pushed hard to accelerate the syndication process as the COVID-19 crisis deepened and spread across the globe. Syndicate members were being asked to confirm their positions in three or four days whereas they might have taken a couple of weeks or longer to do so under normal circumstances. This subsequently led to a flurry of financing deals being closed in a short period of time, across most of the life sciences industry. There is likely to be some deal lag in externally led financings now as those investors with large portfolios have been supporting their current investments rather than actively seeking new ones. However, some investors have seen this as a great opportunity. Broadly speaking, investors fund great technology and great management teams and, because of the long lead times for commercialization, particularly in the life sciences industry, they are often not so focused on macro issues, especially in the earlier stages.

How do you see this changing/progressing over the next 3-6 months?

We are not expecting M&A activity to completely grind to a halt. While cross-border transactions might prove to be a challenge there will be some transactions within well-networked communities, where the buyer and acquisition target might know each other well and can conduct the transaction remotely. Also, transactions that are already in the well advanced stage and have just gone on pause because of the pandemic - the US Department of Justice had previously informed companies that antitrust reviews M&A transactions might face some delays due to COVID-related disruption to its workflow – may well pick up again. These pending transactions aside, new deals that are both initiated, diligenced and actually closed during this period of lockdown are going to be rare.

With regards to the venture financing landscape, a different scenario might emerge over the next few months, whilst people try to work out the duration of the economic recession resulting from the pandemic. For venture-funded companies that already have deep-pocketed investors on board, they should be able to manage for longer as these investors are likely to be looking to fund internally in order to look after their existing portfolio. However, companies that have been funded mainly by, say, angel investors so far and were looking to gear up for their first institutional round might face challenges. These are companies that might be looking to take their business to the next stage of growth and it’s going to be tricky for them because they aren't going to know, really, how much they're going to need to see them through and for how long. Difficulties in raising capital may lead companies to seek outlicensing as an increasingly viable alternative to fundraising. Smaller companies seeking significant upfront payments through outlicensing to big pharma may become an emerging trend in the near future.  There are also the sector specific factors at play -  the relative stability that is offered by medtech is valued by investors and is in some ways, seen as a safe haven. In any event, negotiating the details of the term sheet will be challenging in this uncertain economic environment. The conversation with regards to valuations is likely to be tricky, in particular because It's not going to be based on 2018/2019 figures. This is likely to prompt more companies in the life sciences industry to seek alternative modes of financing including convertible loan note instruments as opposed to priced equity funding rounds. It’s also important to consider the inevitable hardening of the economic terms, for example liquidation preferences, as investors are likely to want more downside protection. That conversation is beginning to evolve and there’s no doubt that it will become more pronounced over the next few months.

Does the lack of face to face interaction make it more challenging for deals to get done or are companies adapting well to the new digital norm?

Whilst both the market and companies have generally adapted and reacted very well to the new digital norm and there are some minor challenges with regards to deal execution, it is presenting more notable challenges in relation to those initial discussions that often take place between companies and investors, whereby the parties have the opportunity to really build trust by learning about each other on the personal level. It is inevitability more difficult to get the same experience from video conferences and calls. That leads to new deals being done between people who have worked together already and taking advantage of the existing networks to obtain references on those members of investment teams/management teams that are known to the market. 

Are there any specific legal processes that have become especially important for companies to consider during this time?

As a result of social distancing and general lockdown restrictions, legal processes relating to deal execution, witnessing, notarization and apostilling in particular have become more difficult. Prior to COVID-19, companies increasingly used electronic signatures and platforms such as DocuSign and these platforms have continued to be important for companies looking to execute documents that do not need to be signed in wet ink during this time. Other legal technology-enabled resources are also being used to manage transactions remotely and assist on due diligence processes. When there are cross-border transactions, any requirement to have documents notarized, apostilled or legalized poses a clear challenge, as well as the need under English law for deeds to be independently witnessed. Each of these requirements are typically reliant on a physical human presence, which is difficult during this time. Parties are having to consider the ways in which these processes can be carried out in a way that complies with underlying laws, albeit under difficult circumstances fairly early on in the deal process.  
David Mardle
Written By

David Mardle is a partner in Goodwin’s Technology and Life Sciences group with 20 years of experience advising on financings and M&A transactions in the life sciences and technology sectors. Leveraging his significant M&A experience combined with his general corporate and capital markets expertise, David now concentrates his focus on representing emerging companies providing counsel on corporate and capital markets transactions.

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