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...

Private equity acquires a taste for drug development

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

  1. 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)