30 juillet 2020
Synapse - July 2020 – 5 de 6 Publications
There has been an increase in private equity (PE) investment in the life sciences sector over the last few years. Some of these investments include:
These transactions reflect the breadth of PE investment types in the life sciences sector, however there are trends in the investments PE funds are making in life sciences businesses.
Many PE firms have funds dedicated to investment in life sciences assets, and the well-publicised record levels of dry powder available to PE funds means that there is more committed capital available to PE firms to invest in life sciences businesses than ever before. This suggests the trend of increasing PE investment into life sciences is likely to continue, especially as many life sciences businesses should fare comparatively well in the post-COVID-19 climate.
Given this trend, businesses in the life sciences sector are increasingly considering whether PE funds may be a good source of investment to take their businesses forward. Here, we explore some of the potential benefits and challenges for life sciences companies considering PE investment from the perspective of investee companies, as well as the emerging trends we've identified around the nature of PE investments into the sector.
PE funds are experienced and sophisticated investors, meaning that they are typically in a position to execute acquisitions quickly and negotiate in a balanced manner. Sellers of life sciences businesses dealing with inexperienced buyers may be frustrated over how their lack of experience in dealing with mergers and acquisitions can make this process more arduous.
Post-acquisition harmonisation is generally easier to deal with following a PE buyout compared with integration following an acquisition or merger by a trade buyer where synergies are sought. This is not to say that PE investors won't try to streamline businesses, but this is usually a more straightforward process than trying to harmoniously bring two businesses with overlapping goods or services together.
PE funds align their objective of seeking a profitable return with the objectives of management teams, so managers of portfolio companies backed by PE generally have an exit horizon to look forward to, and commensurate pay outs for management if the business has performed successfully.
Furthermore, PE funds tend to have deep sector expertise and specialised market knowledge outside of the investee business's area of speciality that can help investee businesses to successfully grow and expand. For example, in the pharmaceuticals services sector, PE funds may use in-house expertise to enhance the value of businesses by improving marketing or the use of technology.
The introduction of corporate and managerial oversight by PE funds – including, in many cases, the introduction of a good independent non-executive chairman and other non-executive directors – is intended to have a positive impact on growth and facilitate the effective management of businesses without stifling the ability of managers to carry out their day to day jobs.
An example of this is that a PE fund with dedicated in-house ESG personnel might introduce an ESG policy and strategy to an investee life sciences company – protecting its reputation and potentially enhancing its brand.
There are a variety of PE funds with different investment appetites, so an investor can seek a PE fund that suits its needs to a certain extent. For instance, a pharmaceutical company may require a joint partnership in relation to a specific part of its business and therefore seek an investment or joint venture relationship.
Consider Bain Capital's £350 million investment in Pfizer's jointly led spin out Cerevel Therapeutics in 2018. Cerevel Therapeutics is a niche biopharma company focusing on the development of drug candidates to treat central nervous system disorders. Pfizer contributed a portfolio of pre-commercial neuroscience assets to Cerevel.
Alternatively, PE funds may form a club to make a substantial majority investment in a well-established life sciences business with a high valuation.
Management teams of PE backed businesses must accept the sacrifice of independence in order to obtain the benefit of investment from PE. PE funds will oversee businesses in a way that management may need to adjust to, such as compilation and presentation of financials. Ultimately, a PE fund is seeking a return, so managers must accept the PE fund's need to protect its investment, especially in a downside situation.
The amount of oversight and protection required will vary depending on the PE house and the size of the stake held by the PE sponsor in the business. Generally, a PE sponsor with a higher stake in a business can expect more investor protections and information provision than a sponsor with a lower stake. The ideal is for management to have enough independence to run the business on a day-to-day basis, while still involving the PE fund on key strategic decisions and allowing the PE fund sufficient oversight on the performance of the business.
PE funds traditionally work on a model of achieving a return by selling an investee company within three to five years of investing. These models of investment are not necessarily rigid and vary between PE houses. A PE fund will always want an exit, though, in order to realise its investment.
In the life sciences sector, PE firms may be prepared to hold on to investments for longer periods of time to achieve a better return. This may occur in businesses involved in pharmaceutical drug development. However, this may explain the increasing number of investments in generic pharmaceutical companies and pharmaceutical services companies which ideally have a consistent cash flow and are less likely to involve longer investment holds to realise good returns.
Differentiating different PE funds may be difficult to do, especially for a highly sought after life sciences business. Therefore, it's important for managers of life sciences businesses to have good corporate finance advisers with expertise in the sector to ensure that they are appropriately advised on the investor that is likely to be the best fit for them. Meeting management teams that have worked with a PE investor is a good way of doing this.
The management teams of life sciences businesses must usually be prepared to invest alongside the PE firm and put their own personal funds at risk. As mentioned above, PE firms use this model to incentivise management and align interests, but it does come with risk.
The fragmented nature of biopharma services companies – with many companies having limited market share – is proving attractive for PE investors, as they can pursue buy and build models of investment. Examples of PE investment in this space include:
Another trend we've identified is PE investment in generic pharmaceuticals, including:
Aside from the points raised above, one of the reasons for this may be regular divestments by pharamaceutical companies of generics businesses that play a vital part in rebalancing portfolios.
Generic pharmaceuticals businesses are also attractive to PE funds because they represent a good opportunity for growth through rebranding, bolt-on acquisitions, and consolidation in a particular sector.
They typically have readily accessible markets and, unlike other life sciences businesses, tend to require little further investment, especially where research and development is concerned. What's more, the generic pharmaceutical sector is generally recession proof and often provides consistent good margins.
The life sciences sector is no exception to the ongoing technology revolution, either. Increasing investments in medtech and digital health are a couple of the areas that exemplify this. PE investors are familiar with the potential returns from technology, so it's likely there will be more investments in life sciences technology businesses.
The trend of increasing PE investment in life sciences businesses is likely to continue. However, this investment may be focused on certain life sciences businesses that more easily suit the PE model, such as biopharma services and generic pharmaceuticals companies.
There's great variety in PE firms and how they are willing to invest, though. Stakeholders of life sciences businesses need to understand the potential benefits and challenges of PE investment before embarking on this, especially regarding the individual circumstances of a business. Each life sciences business is unique and so is every PE firm that may be a potential investor.
par Paolo Palmigiano