Life Sciences exposure in Technology Portfolio

A century ago, an idea of a human living past 100 years old was nothing more than a fantasy. Today, it is a product of labor of hundreds of thousands of scientists around the world developing innovative medical solutions. In modern times, the medical community is making incredible strides in addressing key needs of patients with diseases such as hypertension, dementia, cancer, and others, that previously would almost certainly be fatal. In addition, key societal needs such as the reduction in cost and increase in quality of medical care are also in focus. With the average global life expectancy at birth increasing from 65 years in 1990 to 72 years in 2017 , and modern lifestyle and environmental factors often negatively affecting our overall wellbeing, the need for medical innovation is easily relatable for everyone.

It is commonly believed that new revolutionary medicine comes primarily from large pharmaceutical companies as a result of massive R&D expenditure. Undeniably, this was the case twenty years ago, but today the picture is different. A major part of medical innovation in both drug development and medical devices is put forward by new or university/corporate spin-off companies. Such firms are typically privately held and can benefit from public grants in the very early stages, however, they later-on require a significant amount of capital to bring their product to commercial readiness.

As healthcare is a highly monitored and regulated sector, the development process of a new medical solution is lengthy and capital intensive. Taking drug development (therapeutics) as an example, the typical lifecycle of a company would include: Drug Research, Drug Discovery, Pre-clinical development, Clinical Trials (Phases 1-3) and regulatory approval stage for each geography of operations before the company can begin selling their product. As mentioned previously, this process is not only time consuming but also requires significant capital.

Just like any other technology company developing new innovative solutions, these companies seek external private funding at one point or another. As capital requirements are typically significant (Clinical trials stage may cost tens if not hundreds of millions of dollars to complete), Venture Capital and other Private Equity firms are a key source of funding for such ventures. From very early stages all the way to commercialization, Venture Capital Funds support the Life Sciences Industry by continuously providing the capital necessary to finance innovation, while serving as a bridge between startups and corporations, providing them with a much-needed patent-protected technology M&A pipeline.

The successes of Spotify and Facebook, and their investors, are well known to both general public and professional investors due to their massive user popularity and incredible valuations. Although not as popular to the masses, but definitely a lot more appreciated by their ultimate beneficiaries, such success stories are common in Life Sciences too. One such example is Inari, a medical devices company that has created a solution to venous clots that have already helped and saved thousands of people. In fact, the device has made such an impact on the lives of doctors and patients that it even has created its own twitter phenomenon of people showing off the potentially lethal enormous blood clots the device has helped to remove. Although the investment is not exited yet, it is already clear that this company will deliver great value to its investors, as well as doctors and patients.

In fact, looking at the VC returns data (Source: Preqin (March 2019), Venture Capital Funds with a core focus on Life Sciences have created and delivered strong returns to their investors, especially in Europe. According to Preqin aggregated data, European VC has delivered 45% and 48% IRRs in Early and Late-stage focused funds respectively. While their US counterparts have achieved 28% and 17% respectively. Such return distribution is driven by the fact that pre-money valuations, depending on the company, stage and type of science involved, are 1.2x to 2-3x higher in the US (Biotech in Europe: Scaling Innovation (McKinsey & Company)

Breaking down the VC returns further and taking a look at the latest EIF (the largest VC investor in the world) report on its VC portfolio, it is notable that 6 out of the 20 best performing funds in Europe (as of Q1 2019) are Life Sciences Funds. Furthermore, Life Sciences funds were able to achieve a higher average multiple on the invested capital than ICT of 1.86x vs 1.59x. This is largely due to the nature of such investments as they are less subjected to binary outcomes. This can be seen at the portfolio level: in ICT, over 50% of value is created by 4% of companies, whereas in Life Sciences 9% of the companies deliver 43% of the value. Such distribution signals much lower dependency on large winners and a lower amount of capital written off by Life Sciences Funds.

In conclusion, it is important to discuss the scale of the opportunity. European Life science companies have received $26.5bn between 2012-18, while their US counterparts received $120.5bn. This near 5x discrepancy cannot be attributed to the differences in GDP, Healthcare Expenditures, Valuations, Price Levels or any other single variable which compares the two regions alone. Instead, it can be considered as one of the many opportunities currently present in the European venture capital market. Combining the general macroeconomic and social factors with the nature of Life Sciences Investment described above, it can certainly be stated that a strong, well-diversified VC portfolio requires a significant life sciences component to stabilize VC return dispersion while unlocking the full return potential of VC as an asset class.

Share this post