Invest in Life Sciences? 5 Trends Private Equity Should Know

The life science industry is experiencing a new era of innovation with the many new drug modalities such as cell and gene therapy. 

While technological advancements offer far-reaching opportunities for life sciences organizations, the financing landscape has shifted away from the sky-high valuations of a few years ago, when funding poured into life sciences companies of all sizes. As elevated interest rates have made it more difficult for life sciences organizations to compete for capital, private equity funds are ready to deploy the cash on their balance sheets and offer an alternative source of funding. 

Below are five life science trends our PE clients have been experiencing.

Risk exposure and economic uncertainty threaten deals

Fund managers who invest in life sciences companies indicated their top challenges to closing deals were risk exposure uncovered during due diligence (such as cybersecurity concerns, financial information, and liabilities litigation) and economic uncertainty. 

When it comes to risk exposure, there’s been an uptick in litigation across industries and life sciences is no exception. Fund managers want documentation on possible legal exposures and previously settled lawsuits. The life sciences industry has always been at risk for class-action lawsuits around pharmaceutical products but it now must address the increasing possibility of environmental class action lawsuits.

Additionally, economic uncertainty may cause an asset’s value to fluctuate from quarter to quarter, requiring revaluation multiple times resulting in extended negotiations and deal closure delays.

ERP integration is the top post-M&A operational challenge

Many of our client fund managers who invest in life sciences companies say technology and enterprise resource planning software (ERP) integration is their top post-M&A operational challenge. If private equity funds are conducting tuck-in deals, they may find the acquiring company uses a different ERP system from the target company. Moving data to a new system can be a huge operational challenge. The acquisition of the new entity may prove too large for either legacy system, necessitating a new ERP system (and a significant investment). 

PE firms are mildly optimistic about life sciences assets

While the industry is still highly valued, PE leaders don’t expect the high valuations from 2020-2021 to return any time soon. Additionally, companies that focused entirely on COVID-19 vaccines and treatments in 2020 are now struggling to gain traction, and leveraged businesses face high costs of capital from elevated interest rates. 

Also, as the development of advanced therapies — such as cell, gene, and mRNA therapies — grows, the U.S. Food and Drug Administration is grappling with personnel constraints. This is partly due to the difficulty finding qualified professionals who understand how appropriate regulatory guidelines apply to new drug therapies. 

ESG risk management is integral to deal close

Some fund managers investing in life sciences say they have turned down an investment opportunity because of environmental, social, and governance (ESG) concerns. Companies need to recognize some PE fund managers will only invest in companies with high ESG ratings. Alternatively, funds may ask companies to disclose their decarbonization plans before moving forward with a deal. Life sciences companies should be prepared to disclose their ESG ratings information and/or decarbonization plans when pursuing PE investment. 

PE funds help life sciences portfolio companies monitor cash and solve procurement issues

One of the main ways private equity firms provide value to their portfolio companies is offering guidance on improving cash flow, with a common strategy being debt recapitalization. 

• Fund managers investing in life sciences say their top value creation lever is cash flow optimization.
• With regards to operations, fund managers investing in life sciences say their guidance on procurement is most valuable to their portfolio companies.

For life sciences companies, PE investment typically leads to greater purchasing power in procurement. PE funds may have vendor agreements offering discounts on vendor services to portfolio companies and will likely have specific expertise on global supply chain management.