Private equity acquires a taste for drug development
Jan 9 - Private equity firms that deemed drug development too risky for their liking in the past are increasingly investing in the sector, raising...
Jan 9 (Reuters) - Private equity firms that deemed drug development too risky
for their liking in the past are increasingly investing in the
sector, raising dedicated funds and coming up with deals that
compensate them for the uncertainty involved. These firms are seeking to capitalize on the growing gap
between the supply of capital for clinical research and the
number of drugs competing for it, eight buyout executives and
investors interviewed by Reuters said. Annual spending on pharmaceutical research and development
globally is projected to rise to $254 billion by 2026 from
around $200 billion in 2020, according to Evaluate Pharma, a
research firm focused on healthcare. These deals are not structured as the leveraged buyouts that
private equity firms are mostly known for. Instead, the buyout
firms invest in the development of the drugs, typically when
they are in so-called Phase 3 clinical trials, one step away
from regulatory clearance. They negotiate with pharmaceutical
companies the returns they will receive in advance. In most cases, the drug makers start paying the money back
to the private equity firms when the drug is being developed,
either by issuing equity, tapping cash on hand or borrowing.
They also share a slice of the newly developed drug's revenue
with the private equity firms once it's approved. Blackstone Inc has been leading the charge, having
made ten investments out of a $4.6 billion of a dedicated life
sciences fund it launched in 2020. "Over the last ten years there have been many more products
that have emerged that are really important to fund but less
funding available by the pharma companies," said Blackstone's
global head of life sciences Nick Galakatos. Among Blackstone's deals are a 300 million euro ($320
million) commitment to the development of Sanofi SA's
immunotherapy drug Sarclisa, a $150 million investment in the
advancement of Autolus Therapeutics Plc's pipeline of
cancer treatments, and a check of up to $1.15 billion to back
Alnylam Pharmaceuticals Inc's drugs for diseases
including for tackling cholesterol. Some of these deals came
with investments in the stock of the drug developers and loans
to them. As its risk appetite for drug development grows, Blackstone
has also been mulling the acquisition of companies with drugs
still in clinical trials, as long as these companies also have
some medicines that have hit the market, according to people
familiar with the deliberations. Blackstone established a major presence in the sector in
2018 after acquiring Clarus, an investment firm specializing in
clinical trial deals with $2.6 billion in assets. The strategy
was emulated last year by Carlyle Group Inc when it
acquired Abingworth, a peer of Clarus with $2 billion in assets. Carlyle is now preparing to raise a dedicated life sciences
fund, using the Abingworth team, that could amass several
billions of dollars, according to people familiar with the
fundraising plans. Carlyle made its first clinical-trial
investment last August, committing up to $170 million to back an
Opthea Ltd eye drug under development. "We are big believers in what we've called the biopharma
revolution and in the explosion of discovery and science," said
Carlyle's global head of halthcare Steve Wise. Blackstone has been presenting its bets as relatively safe
investments. It told high net-worth investors in 2021 that the
drugs in Phase 3 it invested in had an 86% approval rate. Still, Blackstone's three-year-old life sciences fund has
been off to a slow start when it comes to generating returns. It
reported a net internal rate of return of just 2% as of the end
of September, according to Blackstone's most recent quarterly
earnings. By comparison, the predecessor fund that Clarus raised
in 2018, before Blackstone took over, was delivering a 15% net
internal rate of return as of the end of September. Carlyle has not disclosed Abingworth's returns and a
spokesperson did not respond to a request for information on
them. Other private equity firms racing to get a piece of the
action include Apollo Global Management Inc, which last
year acquired a minority stake in life sciences investment firm
Sofinnova Partners and committed up to 1 billion euros in its
funds, and EQT AB, which acquired Life Sciences
Partners (LSP), a life sciences-focused venture capital firm, in
- VENTURE CAPITAL-STYLE BETS To be sure, many private equity firms participate in the
sector by just making venture capital-type investments in entire
drug companies and allowing them to use the proceeds for their
clinical trials. For example, KKR & Co Inc invested in
gene-therapy company BridgeBio Pharma Inc in an
early-stage funding round in 2016, funded the company through
its initial public offering in 2019, and continues to be its
largest shareholder. Private equity firms also provide capital to spin out drugs
into new companies. Bain Capital, for example, created Cerevel
Therapeutics by transferring Pfizer Inc's
neurology drugs under development to a newly created company in
a $350 million deal in 2018. "That is an example of taking an unloved asset out of a big
company, providing funding and a big slug of capital, and
creating a company that's got some diversity to it," said Tom
Davidson, a partner focusing on the life sciences sector at
investment bank PJT Partners Inc.
(Reporting by David Carnevali in New York
Editing by Greg Roumeliotis and Diane Craft)