Some of the factors driving this success are long-term demographic trends, such as an ageing population and increasing instances of chronic disease. Structural shifts in the healthcare industry have also played a part, such as the increasing tendency to outsource services. However, the fortunes of groups involved in drug discovery, development, and clinical trials will also inevitably be shaped by the health of the biopharma industry, and in particular its access to capital.
DC Advisory’s global healthcare team explores these trends and what may lie ahead for sector operators >
What we’ve seen…
Judging by the momentum in biopharma VC investment, the future may be bright for the medium term. Following a record $11bn year for investment in biopharma during 2017, last year saw $17bn raised across more than 720 transactions, one of the most active years in recent memory, for both investment and subsequent M&A.
The below chart illustrates the rising deal count and capital investment into US pharma from 2006 to 2018, and offers a good indication of global trends given the centrality of the US to the biopharma industry.
Pharma has long been one of the most active fields for venture-stage investment, but recent strong exits for VC-backed businesses such as Chase Pharmaceuticals (worth up to $1bn depending on milestones), have proven a strong draw for investors, as has the buzz around breakthroughs in personalised medicine, AI and the quest to apply ‘Big Data’ to life sciences.
Investing into AI is increasingly seen as a necessity for operators wishing to remain competitive and continue innovating. Not only have pharma companies been increasingly outsourcing to AI start-ups, but they are also transforming their own data usage and digital infrastructure. For many investors, the promise of supercharging R&D productivity through AI adds extra lustre to an already attractive sector.
Could there be threats on the horizon for biopharma fundraising?
The US continues to dominate the market for VC investment in biopharma, but is now deeply connected to pools of capital around the world – overseas investors accounted for approximately half of all US biopharma venture financings in 2018. This interdependence (as ever) carries with it benefits and risks. Last year, China saw biopharma investment drop by a third between the first and second half year, despite a recent boom period for entry of new molecules into clinical trials.
This decrease may prove to have been a blip, but could also point to a possible future risk. The fall in investment seen in China was closely linked to investor concern over the US-China trade dispute and equity market volatility. But if these macro political and economic factors impact the flow of capital into biopharma, sectors including pharma services which depend on conditions ‘upstream’ may find growth harder to come by.
Pharma services is one of the fastest-growing and most attractive areas in the healthcare sector, and the long-term drivers of most pharma services markets mean this is likely to remain the case for many years to come.
Nonetheless, companies in the sector should keep an eye on early-stage biopharma investment: while momentum is strong at present, any future slump in funding would, sooner or later, have a knock-on effect.