PE’s Drug Addiction

Health & Education

A trend we’ve recently highlighted is the shift of Private Equity (PE) firms into drug development. Historically deemed too risky, the biomedical sector has seen a surge in PE investment, driven by dedicated funds and deal structures that mitigate risk. This raises a question: should biopharma investments be treated like a roller-coaster, unpredictable and thrilling, or should we adopt a more measured approach to this investment transition?

The biopharma industry, encompassing both biotech and pharmaceutical companies, is involved in the discovery, development, and manufacturing of drugs and therapies for various diseases and health conditions. Given the sheer scale of operations and the costs associated with the sector, it’s surprising that PE firms have been hesitant to back it in the past decade.

However, the average cost and time to bring a new drug to market is substantial, running at over $2billion and 10-15 years respectively. Each investment in the sector carries the risk of failure at many critical points of development. The process is not only expensive but also highly competitive, with challenges such as patent expiration, pricing pressures, regulatory environments, and scientific complexities. Only a small fraction of drug candidates make it to the market, with even fewer becoming commercially successful.

The PE pivot towards biopharma in recent years has been supported by a growing market size, driven by increased demand for healthcare, an aging population, the emergence of new diseases, and advancements in science and technology. The sector was valued at $333.09 billion in 2022, and is expected to reach $856.1 billion by 2030, growing at a CAGR of 12.5%.

PE firms add value to these companies by providing capital, expertise, network, and strategic guidance to help biopharma companies overcome their challenges and achieve their goals. PE firms have been investing in different stages of the biopharma value chain, such as discovery, development, manufacturing, and commercialisation. Moreover, PE firms can venture into different verticals within the biopharma market as a whole, including therapeutics, diagnostics, devices, and services.

PE firms are now beginning to capitalise on the growing gap between the supply of capital for clinical research and the number of drugs competing for it. The deals are not structured as typical leveraged buyouts, instead, firms invest in the development of the drugs, typically when they are in Phase 3 clinical trials. In most cases, the drug makers start paying the money back to the private equity firms while the drug is being developed, due to the extensive development time most products require. A slice of the newly developed drug’s revenue is also with the investor once it is approved.

So, should we buckle up for the roller-coaster ride or adopt a measured approach? Perhaps both—embracing the thrill while navigating with strategic precision. The PE-biopharma partnership promises exciting twists and turns, fueled by science, capital, and a shared vision for a healthier tomorrow.

By Ella Bertrand on 08/02/2024