Navigating Trends in Life Sciences Fundraising and Corporate Transactions

Our Life Sciences Legal Forum offers a series of quarterly sessions focusing on hot topics within the life sciences sector. In a recent webinar, we took a step back to consider trends and challenges in life sciences fundraising and corporate transactions. Our expert panel brought together Zickie Lim, head of Mills & Reeve’s award-winning venture capital investments team, James Foster, a corporate partner focusing on life sciences and technology M&A, and Emma Plaxton, a corporate partner with particular expertise in assisting listed companies. They joined head of Life Sciences team, James Fry, to share their insights on investment trends, mergers and acquisitions (M&A), and capital markets.

Investment Trends

Zickie Lim commented on market conditions for early-stage and follow on funding. After an active year in 2021, investment into life sciences has been relatively subdued, although the UK continues to be an active generator of life sciences startups, averaging 130 new businesses each year since 2022. Despite a decrease in the number of early-stage deals, the average amount raised per deal has significantly increased. For instance, seed deals saw a 24% increase in average deal size in 2024 compared to 2023. This trend is also evident in Series A deals, where the average amount raised per deal increased by 53.4% in 2024 compared to 2023. 

Significant investments have been made in later-stage rounds, such as Isomorphic Labs raising £449 million and Verdiva Bio securing £327 million. These deals highlight the growing interest in AI tools for drug discovery and therapies for obesity and cardiometabolic health. Pre-money valuations have stabilized and are trending upwards, with later-stage venture capital deals showing comfortable increases.

In terms of deal structure, Zickie discussed the trend of increased tranching and milestones in larger investment rounds, reflecting a higher risk environment and continued investor caution. Investments are often divided into three or four tranches, contingent on achieving specific commercial milestones. These milestones need careful crafting, ensuring they are both challenging and objectively measurable to prevent investors from easily withdrawing from subsequent tranches. We also see a resurgence of "pay to play" clauses, which penalise investors who fail to subscribe to their tranche by converting their shares to ordinary or deferred shares, or by stripping away certain investor rights.

Companies should be prepared for thorough due diligence, ensuring that their IP, team credentials, and market opportunity are well-documented. Larger rounds often involve multiple investors, so managing these relationships effectively is crucial.

Mergers and Acquisitions (M&A)

James Foster provided an overview of M&A activity and went on to consider some specific issues and their practical implications. Overall deal activity remains subdued due to various factors, including rising geopolitical tensions, regulatory uncertainty, stock market volatility, higher interest rates and industry-specific challenges like US drug pricing reforms. Much like 2024, the year started with the announcement of a blockbuster deal (J&J’s $14.6 billion acquisition of Intra-Cellular Therapies), but initial optimism has given way to increasing caution, with M&A activity generally concentrated on mature companies. The looming “patent cliff” continues to drive big pharma demand for high-quality assets.

James highlighted several important themes in dealmaking. In general, transaction timelines are much longer and deals are more likely to abort during the due diligence phase. This increases the importance of phasing the release of information, both technical and legal, to ensure that more commercially sensitive information is provided only when there is a high degree of certainty that a deal with proceed. It also underscores the importance of having well-drafted non-disclosure agreements with potential buyers. The main utility of an NDA is the ability to seek an injunction to stop the improper use or sharing of confidential information. As such, if arbitration is the default dispute resolution mechanism in an NDA (something we’re seeing more often), it’s important to ensure that the parties still have an express right to seek a court injunction. For his final point on the theme of extended deal timelines, James noted that auction processes often taken up to nine months from initiation to sale completion and suggested starting the conversation with advisors at least a year before an intended exit or the end of a company’s cash runway (even if a further raise is possible).

Shifting to the commercial terms of transactions, James remarked that there haven’t been discernible changes in the past year (particularly given the reduced deal flow) except around two points; the structure of consideration (purchase price payments) and post-sale compensation arrangements for key individuals. The slowdown in dealmaking means that companies are often at a later stage of their development when they are acquired, but despite being more mature and therefore less risky, upfront payments are proportionately lower with more of the overall purchase price subject to earn-outs and milestones (which is of course common during an M&A downturn). He noted that getting milestone drafting right is as important as ever. James also flagged that there’s more scrutiny of the post-sale compensation of founders and senior executives. In short, the pay and incentive packages are less generous and have more performance-related elements.

Finally, James noted that pressure on budgets is likely to lead to increased levels of “legal debt”, with companies unwittingly creating (avoidable) legal issues that will have future remediation and tax costs due to not seeking appropriate legal input. Problems relating things like intellectual property protection, key commercial contracts, employee options and hiring overseas can have a significant impact on the value achieved in (and, in extreme cases, the viability of) a sale process, particularly where they are fundamental to a business or have significant tax implications. He emphasised the importance of companies using their internal and external legal counsel to help them navigate the pitfalls and to understand how to make the most of the budget and resources that are available.

Capital Markets

Emma Plaxton considered public market trends. The IPO window has been nearly closed since 2022, but there are now signs of improvement. Successful life sciences IPOs and planned listings, like Caris Life Sciences recently surpassing a targeted $5.3 billion valuation on its Nasdaq debut, are encouraging. 

In terms of preparation and planning, companies considering an IPO should start early. We recommend starting to prepare at least 6-12 months ahead, focusing on audit readiness, management team and board composition, financial models, and due diligence.

Investors will be looking for companies with clinical proof of concept data, upcoming data catalysts, and strong insider support. Developing comprehensive financial models to effectively communicate the equity story to potential investors is key. 

Transatlantic Dynamics

The US continues to be a very important source of capital and potential acquirers when it comes to life sciences investments and deals. UK businesses may wish to consider establishing a presence in the US, leveraging UK strengths, and working with financial advisors to access US capital markets. It was noted that many US investors are used to investing in UK companies and so “flipping” into the US usually isn’t necessary to secure US funding. 

Companies seeking US investment will need to develop a deep understanding of the US market, including as regards product demand, pricing, and the regulatory landscape. Establishing a US presence and building strong relationships with local partners is key.

Emma raised an important point about the common assumption that a US market listing is always the preferred option for an IPO. While it might be ideal for many life sciences companies, especially those with a strong US presence, it is not necessarily the right choice for all. For smaller growth companies, being a bigger fish in a smaller pond can be advantageous. For example, the average market cap on London’s AIM is £94 million, compared to £668 million on Nasdaq. Emma also highlighted that companies can use AIM as a stepping stone to Nasdaq and that US investors frequently invest in London-listed companies. The key here is to engage with investors through conferences and networking, rather than relying solely on a US listing.

Getting the Fundamentals Right

The webinar underscored the importance of getting the fundamentals right (with help from internal and external legal teams), whether for early-stage investment, an M&A process, or an IPO, so that a company can be ready to make the most of opportunities when they arise.