Foreign investors of all types were increasingly interested in Life Science (LS) companies even before COVID-19 emerged. It is no wonder that Slovenian LS companies are of particular appeal, since this highly innovative community significantly contributed to Slovenia being ranked 21st in this year’s Bloomberg Innovation Index. Some say COVID-19 catalyzed the new deals this year, but they were more likely fostered by the new investment opportunities that keep popping up with each innovative solution offered by the relatively small (and relatively inexpensive) companies in Slovenia. The race to acquire these innovative scale-ups and start-ups has become increasingly competitive.
When structuring a deal and drafting the transaction documents, lawyers need to predict the worst-case scenarios, consider all matters, and prepare for every possible development. The current pandemic increased the need for this further and now we are expected to anticipate previously almost-un-imaginable changes of circumstances. Of course, it would hardly make sense to prepare for an alien invasion or a meteor strike, but, in the current climate – which will likely last well into 2021 – the areas that buyers and sellers of LS businesses in Slovenia focus most on when making a deal seem to be:
Financing of the Transaction. Due to the economic downturn, buyers often face difficulties obtaining financing (even if pre-approved) and a seller will not venture into negotiations unless the buyers can provide assurance they are financially sound. This is especially important in the split exchange and completion steps.
IP Due Diligence. In the LS sector, especially with start-ups and scale-ups, it is the IP value that buyers most want to acquire. Due to certain pitfalls in Slovenia’s IP protection system, it is no longer sufficient to limit the risks within the SPA – if IP is not protected or is insufficiently protected, the signing stage is never reached. The focus on IP assets is so strong that our office has developed specialized tools for IP vetting in LS transactions.
Issues with Valuation. Supply and demand for LS products and services no longer seem to follow the usual patterns. This of course affects the valuation processes, and these effects were further magnified during the lock-down in Slovenia (and the EU) which severely disrupted supply chains.
Adverse Material Changes. In the current market, investor/buyer appetite is increasingly likely to change, and MAC clauses are becoming more and more complex. Buyers now want an exit strategy not just in case of lower profitability or regulatory changes, but (and this is not limited to LS) also in case the IP becomes obsolete. Even more, they wish to introduce different types and scopes of force majeure clauses that, before, were rarely included in a transaction. It is becoming more and more difficult for sellers (and their lawyers) to limit the cases in which buyers can terminate.
Increasing Numbers of Asset Deals. Rather than acquiring a distressed business, buyers seek to set up the transaction as an asset purchase, which has the advantage of allowing them to carve out liabilities and obtain only the desired assets, such as IP and tech solutions.
Foreign Investment Regime. Based on our communications with the Ministry of Economic Development and Technology, it is clear that it does not wish to hinder direct foreign investment in Slovenia, but the relevant notification has already become a standard condition precedent and does affect most transactions in the LS sector.
While the general situation in the market remains uncertain – some even say unstable – due to the potential fundamental economic and social changes in the air, there are clear indications that M&A activity in the LS sector will at least remain at the current level. For Slovenia, this is not only an important sector, but also a very lucrative one. Hopefully, recent transactions will incentivize innovation, and thus complete the circle.
By Ales Lunder, Partner, and Sasa Sodja, Attorney at Law, CMS Slovenia