9 January (TradingTwist) Private equity firms who previously thought drug development research was too dangerous for them to like are investing in the industry more and more, creating specialized funds and coming up with agreements that make up for the uncertainty involved.
According to eight buyout executives and investors surveyed by TradingTwist, these businesses are looking to profit from the widening disparity between the amount of funding available for clinical development and the number of medications vying for it.
According to Evaluate Pharma, a healthcare-focused research group, annual investment in pharmaceutical research and development would increase to $254 billion by 2026 from roughly $200 billion in 2020.
These transactions differ from the leveraged buyouts for which private equity companies are primarily known. Instead, the acquisition companies fund the research and development of the medications, usually when they are Phase 3 clinical trials away from regulatory approval. The rewards they will earn in advance are negotiated with pharmaceutical corporations.
Typically, when a new drug is being developed, pharmaceutical companies begin repaying the private equity firms by issuing equity, using cash on hand, or borrowing. When the newly created medication is authorized, they also split the profits with the private equity firms. Blackstone Inc. (BX.N), which formed a specialized life sciences fund in 2020 with a capitalization of $4.6 billion, has been leading the charge, having made ten investments.
According to Nick Galakatos, global head of life sciences at Blackstone, “during the last ten years, many more products have developed that are really critical to funding but less funding is accessible from the pharma companies.”
Sarclisa, an immunotherapy drug from Sanofi SA (SASY.PA), a $150 million investment in the development of Autolus Therapeutics Plc’s (AUTL.O) cancer treatment pipeline, and a check of up to $1.15 billion to support Alnylam Pharmaceuticals Inc’s (ALNY.O) drugs for diseases including those that deal with cholesterol are among Blackstone’s deals. Some of these agreements included loans to the medication developers as well as investments in their shares.
According to people involved with the discussions, Blackstone has also been considering the acquisition of businesses that have pharmaceuticals that are still in clinical trials, provided that these businesses also have certain treatments that have already been approved for sale.
After purchasing Clarus, an investment company with $2.6 billion in assets that specialized in clinical trial deals, Blackstone significantly increased its footprint in the market. When Carlyle Group Inc. (CG.O) bought Abingworth, a competitor of Clarus with $2 billion in assets, it adopted the strategy.
According to persons familiar with the fundraising efforts, Carlyle is currently preparing to establish a specific bio-sciences fund utilizing the Abingworth team that may amass several billions of dollars. Last August, Carlyle invested in its first clinical trial, pledging up to $170 million to support an eye medication being developed by Opthea Ltd (OPT.AX).
Steve Wise, global head of healthcare at Carlyle, said, “We are strong believers in what we’ve called the biopharma revolution and in the explosion of discovery and knowledge.”
Blackstone has marketed their wagers as reasonably secure investments. In 2021, it disclosed to high-net-worth investors that the medications in Phase 3 in which it had invested had an approval rate of 86%.
Nevertheless, Blackstone’s three-year-old life sciences fund has had a sluggish start in terms of producing returns. Blackstone’s most recent quarterly earnings show that as of the end of September, it had a net internal rate of return of barely 2%. Comparatively, as of the end of September, the predecessor fund that Clarus raised in 2018 before Blackstone took over was generating a 15% net internal rate of return.
Abingworth’s returns have not been revealed by Carlyle, and a request for information from a spokesman was not answered.
Undoubtedly, a lot of private equity firms participate in the market by simply investing in entire pharmaceutical companies in a venture capital-style manner and allowing them to use the money for their clinical studies. For instance, KKR & Co Inc (KKR.N) continues to be the firm’s largest shareholder and participated in the gene-therapy company BridgeBio Pharma Inc (BBIO.O) in an early-stage fundraising round in 2016 and again in the company’s 2019 IPO.
Additionally, private equity firms offer to fund the creation of new pharmaceutical enterprises. For instance, in a $350 million acquisition in 2018, Bain Capital established Cerevel Therapeutics (CERE.O) by moving the in-development neurology medications from Pfizer Inc. (PFE.N) to the new business.
Tom Davidson, a partner at investment bank PJT Partners Inc. who focuses on the life sciences industry, said: “That is an example of taking an unloved asset out of a major corporation, providing finance and a big slug of capital, and establishing a company that’s got some diversity to it” (PJT.N).