What it's all about
I work on a range of different kinds of transaction, all involving pharmaceutical and medical device companies. We do a lot of work with private equity firms looking to acquire companies in this sector. We also work for pharmaceutical and healthcare companies themselves, primarily on merger and acquisition advice, but also on raising equity or debt financing. On each deal we do, we work alongside country and/or product specialists.
Equity fundraising in the European market for healthcare companies is somewhat less prevalent than in other sectors. Initial public offerings (IPOs) have been particularly challenging in the current environment given the recent history of unsuccessful deals in sub-sectors such as biotechnology.
However, leveraged buy-out (LBO) activity has been more prevalent in the healthcare sector than in other sectors. Healthcare companies often have business models which are less sensitive to the broader macroeconomic environment and therefore have more predicable cashflows, which makes them an ideal target for private equity firms seeking to acquire companies by leveraging their cash flows.
How it brings in revenue
On the deals in the pharmaceutical and healthcare sector in which the bank is involved, we'll typically get paid a proportion of the value of the deal (and are only paid if the deal is successfully completed).
The product specialists play a very significant role in these deals, particularly in the execution phase. However, we, as sector specialists, are also important in the revenue generation process. If you are the chief executive of a company, you want to have a discussion with somebody who understands your business and your sector. If a product or country specialist, both of whom might work across a number of different sectors, and I show up to a meeting with a chief executive, I will often lead the conversation with the client, because I can talk in-depth with them about their industry, their competitors, current market dynamics, and so on. Banks win business and generate fees through long-term close relationships with clients, and industry specialists bring these relationships to the bank.
How it works
Before a transaction happens, there's often a long period during which we're trying to build a relationship with a potential client. I probably attend 10 - 15 meetings or calls a week with chief executives, investors, and other people in my sector-specific network. I also go to industry conferences, and read a number of specialised industry publications for those working in pharmaceutical/healthcare finance.
As a client nears a strategic crossroads and concludes that they want to do an acquisition or a financing, they'll invite banks to pitch to them on what they can offer and their views on the deal, and then they'll select the bank that they want to work with. There'll then be what we call a "kick-off" meeting between us, relevant product specialists and the client, and potentially other advisors such as lawyers, accountants and PR people, during which time we'll set up workstreams and timelines. We'll then progress through these to get to the conclusion the client wants.
The extent to which we work with the product specialists on the product-specific aspects of the transaction varies on a case-by-case basis. If I have a particularly strong relationship with a client, for example, if I've known an individual working there for many years, or if the team working on the deal is small, then typically I would stay actively involved. If my relationship with the client is less strong, or if there are a very large number of product specialists involved, I would perhaps take a slight step back and be one of the team available to assist if needed.
There are issues specific to deals in the pharmaceutical and healthcare sector where our expertise is often required. Issues often come up in relation to the value of the assets held by pharmaceutical and healthcare companies. In other sectors, a valuation error might cost you 5 per cent of the value of the deal. But if you're wrong on the value of a medical device patent or of a pharmaceutical product still in clinical trials, billions of dollars could be put at stake for literally zero value. For this reason, deals in the pharmaceuticals and healthcare sector are often structured in distinctive ways. For example, rather than paying $100 million up-front to acquire a pharmaceutical company, a buyer might pay $20 million up-front and a further $80 million once a certain type of medicine has been approved for use by the relevant authorities.
I recently worked on a transaction for a diversified chemicals company with an extremely rich history. It had been a family-owned business for around 130 years, but they decided to sell off their pharmaceutical arm to concentrate on their chemicals divisions. It was fascinating to see the dynamics of the company in detail because a lot of today's leading pharmaceutical companies started out similarly, as family firms.
What I like about this sector is that the businesses are closely connected to everybody's everyday life - we all know someone who's needed a hearing aid, dental work, or contact lenses. I also find it an extremely intellectually stimulating area - you're often having discussions with people who have spent 30 years of their life doing research and development in a particular area for a large pharmaceutical company, and to be in a position to ask them questions about their work is fascinating.
The healthcare reform underway in a number of different countries in the light of the current macroeconomic situation is an extremely hot topic in the sector, and is having an impact on the kind of deals coming to the market. In the UK many companies are in financial difficulties because they can no longer sell their products to the NHS at the prices they used to charge because of cuts to NHS funding. The owners of those companies are therefore looking at options such as selling their company, raising additional finance, or making a strategic move such as going into one or more emerging markets.
There is a lot of talk at the moment about the future of the pharmaceuticals and healthcare business in emerging markets. Geographical coverage is probably where we've seen the biggest changes over the past decade in this sector. Ten years ago, we pretty much only did deals in Western Europe, but now our transactions often involve a North African country, or Russia, or China.
I think that industry specialists in general are becoming more important in the current market conditions. In a downturn, it's very important for the bank to hold on to relationships with clients, and we often have a knowledge of our sector built up over many years, and long-standing connections in the industry.