First published in our Biotech Review of the year – issue 8.

A new niche for a traditional model?

In truth, the tide has already turned. We have seen a significant expansion of Private Equity activity in the wider Life Sciences sector, not least in subsectors once considered the realm of more specialist investors. From services to generics, Private Equity can see greater value in the broader Life Sciences sector, with positive ripple effects for investors and innovators alike. What we will likely see in 2021 is not the breaking of entirely new ground, but the continuation of a swell that is already reshaping the market.

The key barrier for Private Equity investing in the Life Sciences sector has typically been the long timescales and unpredictable revenue streams from an innovation or spinout to a product finally reaching the market and generating stable income streams. For example, while the potential gains from a successful therapeutic reaching the market might be huge, the risks in the years between investment and result are also significant. The apparent complexity of the market, too, has often acted as a barrier to investor activity.

From generics, to medtech, diagnostics, pain management or the aforementioned wider services, the Life Science sector offers a multitude of options that fit the traditional investment model once past the early investment stages. New pools of money are flowing into the sector in these tiers of development, where valuations based on sales provide the financials that private equity is looking for.

A typical example of this occurred in January 2020, when Synova Capital invested in Charnwood Molecular, a leading UK provider of outsourced drug discovery services. As a services provider, Charnwood’s client base promised a regular revenue stream with which to meet any payments due to acquisition financing, allowing Synova to follow the traditional route of increasing the value of its investment before selling it on without concerns over long timescales or binary pass/ fail product approval risks.

Turning tides generate some froth

In addition to the increasing awareness of these opportunities, we see a greater appetite for risk amongst investors, perhaps helping overcome the historic reticence to invest in a sector where specialist knowledge is a prerequisite. This ‘frothy’ mood resembles the excitement in 2007 and 2008, albeit thankfully without the quick sales, overleveraging and discounting of risk that characterised the instability of the time.

Indeed, the greater appetite we are seeing amongst private equity investors is typical of a healthy investment ecosystem. Deals for generic sales or service streams allow pharmaceutical companies to clear older assets from the books, providing increased capital to invest in innovation, whether in-house or through their investment arms.

This ‘recycling’ of assets also suits established strategic investors in the sector, who see no competition with Private Equity in the early stages of investment, but benefit from the increased innovation that private equity houses are, in essence, funding.

This trend pre-dates the pandemic and has not been adversely affected by the economic disruption that characterised 2020. Rather, there has been an increased awareness of the opportunities.

Long term trends bode well

In June 2019, months before the coronavirus surfaced, European midmarket private equity group Duke Street acquired Kent Pharmaceuticals and Athlone Laboratories, manufacturers of specialist off patent/generic pharmaceuticals, from pharmaceutical company DCC Vital. Kent’s established sales channels to hospitals and pharmacy wholesalers provided a revenue stream and sales-based valuation that fit the private equity investment criteria, Kent and Athlone gained a new backer, and DCC received a capital injection to invest in new early-stage companies and products.

Investor activity more broadly continues to be strong. In the first quarter of 2020, eight biotechs alone raised $1.3bn. By the end of 2020, 71 biotech companies had gone public, with 13 of them raising more than $250m each. The biotech sector enters 2021 from a position of strength.

The continued market success of the life sciences sector, combined with higher levels of public interest owing to the pandemic, bodes well for the market in 2021. Increased investment is rarely a bad thing, and interest from Private Equity in later-stage companies is providing exciting new capital to fund greater innovation in the future.

As ever, the success of the sector rests in the hands of its astute academics, savvy financiers and expert professionals; the influx of private equity only adds new minds to this already potent mix.

Other PE Transactions in 2020: PE Seller and PE Buyer

• Apollo purchased speciality pharma company Covis from Cerberus for a price reported to be in excess of $700M
• Permira acquired a controlling stake in Neuraxpharm from Apax for $1.9 Bn

COVID-19 put on hold the reported sale of Curium by CapVest for up to $3bn to a variety of PE houses (including Nordic Capital, Bain and CVC).