The life science industry has emerged as a highly promising investment opportunity, consistently surpassing other sectors in terms of growth and returns over the past decade. With the COVID-19 pandemic highlighting the importance of the life sciences in driving global progress and well-being, this sector has never been more crucial. The success of the vaccines, their mass adoption, and the vast advancements in research and technology have validated this opportunity. Not only have public markets reflected this success, but alternative markets have also witnessed significant growth in life science investments.
Biotech, the fastest growing subsector within the life science industry, has consistently performed strongly, and the Nasdaq Biotechnology Index (NBI) has been outperforming the NASDAQ Composites for most of the last 10 years. Private markets have also seen similar success, with life science VC investors producing faster liquidity than their ICT counterparts, a phenomenon we can corroborate at Axon, having invested in life science startups, both directly and indirectly through our portfolio managers.
The underlying thesis of the life sciences industry has remained unchanged even as economic environments have changed. In the last 20 years alone, global average life expectancy has increased from 64.4 to 73.0 years thanks to medical advances that have enabled the treatment of previously life-threatening ailments. With an aging population, healthcare spending is becoming a more substantial portion of household budgets. With an aging and increasing global population and consequently, global healthcare spending as a % of GDP, the demand for more affordable and effective treatments has never been greater
This demand is reflected in the increase of patent approvals by the US FDA for novel drugs and medical technologies. Big pharma corporations currently have ample cash firepower for acquisitions to avoid the protracted process of in-house R&D. However, they are facing an imminent patent cliff, with patents for highly popular drugs such as Humira and Keytruda (two of the highest grossing drugs globally) due to expire in 2024 and 2028, respectively. This demands that large pharmas continue restocking their pipeline with new offerings as their previous cash generators become open to other manufacturers to start mass producing.
Increasing collaboration with life science VCs is helping to replenish big pharma’s product offering through a portfolio of biotech startups. Currently, 9 out of the top 10 biotech companies by market cap are backed by VCs. Increasing numbers of biotech startups are entering the market, with some being founded straight out of university research facilities. It comes as no surprise, for example, that 72% of drug development is led by biotech startups, who are now also the largest originator of drugs gaining FDA approvals (accounting for 31 of 50 approvals in 2021).
The life science opportunity is clear and is based on sound and parsimonious fundamentals. With corporations in the big pharma pantheon looking to adapt their cost structure and focus on what they do best – marketing and distribution, the increase of biotech developers provides a match made in heaven. This is evident in our portfolio at Axon, where we see life science managers engaging in periodic dialogue with large-cap pharma representatives to keep current on potential acquisitions for their pipeline. Global life science M&A volumes have increased almost 5-fold from $18bn in 2016 to $98bn in 2021, and historic premiums have been significantly generous, with an average of roughly 120% premium being paid in 2022 upon acquisition.
It is important to note that the life science investment universe is becoming increasingly complex and sophisticated, requiring dedicated and informed professional investors to be at the helm of these portfolios. They must also be equipped to understand the science of the underlying product offering and go-to-market strategy. With VCs becoming increasingly involved with nascent, raw medical innovation, it is they who are poised to make outsized returns in the years to come.
In conclusion, the life sciences industry represents a profitable and exciting investment opportunity that is accessible to investors. It has a long history of success and is poised for continued growth and innovation. With the help of dedicated and informed professional investors, the life sciences industry will continue to improve the quality of human life and generate significant returns for investors.
Author: Mohamed-Nuri Beitelmal – Fund of funds Manager