The strategic challenges of the French Healthtech sector – health, innovation, sovereignty – are undeniably its best assets for growth. How did this sector thwart the predictions during the Covid crisis and how did it find its financing?
French Healthtech raised more venture capital funds in the first half of 2020 than in 2019: showing agility in its search for funding
Despite the absence of IPOs on Euronext in this sector for the past year, stock markets have not weakened (with several private placements, public offerings and equity financing lines), although small-capitalization companies have been left struggling to provide liquidity. The sector appears highly resilient in times of crisis.
The challenges related to health – inclusion of digital and data to offer new predictive, personalized and improved treatment solutions – are opening up market prospects and attracting investors.
Digital health companies have naturally expanded their activities: teleconsultations, diagnostic tools, monitoring solutions for patients and practitioners. Besides, a significant number of Biotechs have immediately reoriented part of their R&D towards Covid-19.
Without downplaying the obvious difficulties that the companies have encountered globally (such as halted clinical trials and supply difficulties), it is encouraging to note that French Healthtechs are gaining in maturity and have shown great agility in adapting their financing to the situation, fueling a virtuous circle in the French ecosystem which has itself produced innovative solutions.
A toolbox proposed by the French State
All the “tools” offered by the crisis situation have been used: short-time working, teleworking, delays in payments and remittances of social and tax contributions, accelerated reimbursement of the R&D tax credit, recourse to “PGE” (additionally, companies technically “in difficulty” are now eligible for specific loans distributed by Bpifrance), activation of aid from State and regional solidarity funds. New measures have also been introduced: repayable advances and subsidized loans, and the PSPC Covid-19 call for projects via Bpifrance.
Redesigned financing rounds
The financing rounds (€449 million compared with €306 million in the first half of 2019) took place nevertheless. Initiated before the lockdown, they continued sometimes more chaotically and with delays extended by more thorough due diligence due to investors’ caution.
This was an opportunity to redesign the legal structuring of the rounds: insertion of MAC (material adverse change) clauses between signing and closing and from one investment tranche to the next; tranching on the basis of multiple milestones; challenging negotiations on valuation leading to ratchet mechanisms down or up between financing tranches; exacerbated sensitivity on representations and warranties, good and bad leaver clauses and discussion in relation to the granting of management incentives.
Founders demonstrated their entrepreneurial spirit to reassure more protectionist investor syndicates.
The use of innovative new types of investments
The historical shareholders responded either by participating in the rounds or by granting more shareholders’ loans and bridge financings than usual, via bonds convertible into shares. Negotiations focused on the discount for conversion into shares in the next round and the fate of these bridges in the absence of a round.
Bpifrance supported these bridges with its seed fund French Tech Seed (convertible bonds) and the recently re-brokered French Tech Bridge, in a more capital-intensive approach between two fundraisings (convertible bonds or with an equity kicker in the form of equity warrants).
The European Investment Bank continues to make available loans with equity warrants up to €40 million.
The European Innovation Council (EIC) has launched a highly selective program, EIC Accelerator, with a budget of €80bn, which grants financing to innovative companies with high potential: several French Healthtechs have been selected.
The combination of these tools certainly makes the legal structure of the rounds more complex, but allows for patience in order to build the next one.
Where some deals would have been financed solely by VCs, corporate venture funds (CVCs) frequently invite themselves to the negotiating table, despite their specific requests (veto rights on decisions involving their competitors, enhanced information and compliance rights, rights of first refusal or option in the event of an M&A). The French ecosystem shows ingenuity in reconciling the typologies of investors by integrating their industrial constraints, compensated by their long-term investment and their ability to offer strategic partnerships. In this respect, we can see that all the Corporate now have their own venture arm: Merck, Takeda and Danaher, for example, took part in significant rounds in France this semester.
Partnerships with Big Pharma have been maintained and even accelerated, particularly for Biotech, which focuses on innovation in immuno-oncology, neurology, gene therapy and the treatment of rare diseases. These partnerships are becoming sources of equity financing and/or upfront and milestone payments.
More and more Healthtechs are seeking a direct listing on the Nasdaq, despite the very selective criteria of this market and the scale of the project (6 to 9 months, tedious drafting of the F-1, extremely thorough accounting work). Is this proof of the sector’s maturity or deficiency in our French financial markets?
New players in a growing market and the return of the M&A
French, European and American crossover funds continue to be created to help Healthtechs avoid the pitfall of a premature IPO, while private equity giants are increasingly interested in the sector and are raising funds of unprecedented size (Blackstone: $4.6bn).
More than 20 leading pharmaceutical companies have announced the launch of the $1 billion AMR Action Fund (Antibiotic Resistance Action Fund). Still, the French ecosystem suffers from a lack of French funds to finance the growth and emergence of Healthtech champions.
Special Purpose Acquisition Companies (SPACs) have recently been listed on the Nasdaq, raising funds to acquire targets that could potentially include French Healthtechs, whose valuations remain very attractive. It is predicted that in this growing context, M&A operations should come back due to the need for consolidation to reach critical size and the low capitalization of some Healthtechs on Euronext, as evidenced by the three takeover projects launched this summer by foreign players.
 EY Barometer of Venture Capital in France (1st half 2020)
 « Prêt Garanti par l’Etat », i.e. French State-guaranteed loan
 « Projets Structurants pour la Compétitivité spécifique à la crise sanitaire », which is a support mechanism financed by the French Future Investment Program
 Sofinnova and Forbion Growth for instance
 Integragen, Medicrea and Genkyotex