https://cooleyma.com/2023/01/25/cooleys-2022-life-sciences-ma-year-in-review/

Activism in the life sciences industry sharply rises

2022 saw a significant uptick in shareholder activism activity. In particular, activist campaigns with an M&A thesis – including forced sales, breakups, take-private deals, “bumpitrage” and “constructivist” PIPEs – picked up by the end of the year and comprised 41% of all activist campaigns for the year. 2022 was the busiest year for activism in the past four years, and the healthcare and life sciences industry was no exception. Although specific year-end numbers are not yet available, data from the first half of 2022 showed a 26% increase in activism in the life sciences space compared to the same period in 2021.

Life sciences companies with large stock price declines (including biotechnology companies, recently de-SPACed companies, and otherwise newly public companies and “pandemic plays”) face enhanced risk of activism. Activists may be able to take advantage of high trading volumes to accumulate positions without early detection. 2022 presented a fertile environment for activist activity, with the perfect storm of declining public equity markets, undeployed capital seeking returns, and regulatory change such as the implementation of universal proxy cards in corporate-director elections. In this environment, many boards of directors of public companies in the life sciences space have recognized that structural defenses, such as classified boards, may not provide complete insulation from activist campaigns in the face of sustained and effective public pressure, and they have proactively sought to enhance preparedness by working with their advisory team to analyze the public company’s corporate governance profile, review fiduciary duties, evaluate potential strategic measures, put in place a shelf “poison pill,” and adopt a defense-oriented communications plan in case the company receives an unsolicited offer or is otherwise subject to activist pressure.

As activist activity heated up in 2022, we observed countless activist encounters behind the scenes, where companies were able to reach a private resolution, or their ongoing discussions have remained private for now. In these situations, we have seen an increasing number of first-time “activist” shareholders engage with companies amid a clear specter that a public fight could be possible at any moment.

Looking ahead to 2023

Although deal momentum in the life sciences industry showed no signs of slowing down at the end of 2021, in 2022, the industry faced unexpected headwinds due to macroeconomic factors and an array of new industry-specific challenges. Moreover, 2022 saw a marked drop in de-SPAC transactions due to increasing redemption rates and regulations and regulatory obstacles for the industry more generally continued to mount, as regulators placed increasing scrutiny on the life sciences industry and strengthened multijurisdictional collaboration, with a particular policy emphasis on drug pricing.

There are, however, reasons to think that M&A in the life sciences industry is on the upswing. The outlier years of 2020 and 2021 aside, M&A deal flow in 2022 returned to pre‑pandemic levels and remains part of an overall trajectory of growth in life sciences dealmaking. Even as the public markets continue to improve, given the continuing challenges facing many companies looking to go public through traditional IPOs or de-SPAC transactions, there may be more venture-backed private companies available for sale in structured transactions that enable buyers to manage risk. In light of ongoing risks and a depressed stock market, many public biotechnology boards also may have adjusted their expectations on exit values with expectations no longer tied to 52-week highs in 2020 or 2021. Overall, as supply chains continue to recover, markets price in the effects of 2022’s inflation and interest rate hikes, and the regulatory environment stabilizes, we are cautiously optimistic that 2023 will see healthy levels of dealmaking activity in the life sciences industry.