The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses investing in the life sciences. It is authored by Tim Loveland and Leah Eubanks.

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Issues and Trends in Life Sciences Investments

By Tim Loveland and Leah Eubanks

As the life sciences investment market gets more crowded, recent changes in the industry have shifted investors’ focus to new opportunities in outsourcing, quality, and consumerization, according to experts who spoke on a panel at the 15th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20th.

The panel of experts included Ben Daverman, Managing Director, GTCR, LLC, Brad Hively, Principal/Operating Partner, RLH Equity, Barrett Polan, Investment Analysis, Hayfin Capital Management LLP, and Phil Smith, Managing Director, Duff & Phelps. The panel was moderated by Kim Susko, Management Consulting Director, RSM US LLP.

Here are 3 key takeaways from the discussion:

1. The life sciences industry is experiencing a dramatic shift to outsourcing as operational and regulatory demands emerge that often go beyond internal capabilities. The pharmaceutical outsourced services market alone is valued at over $150 billion today and is anticipated to continue to grow as pharmaceutical companies face increased drug development and discovery costs. A more challenging FDA regulatory framework and market changes (such as virtual biotechnologies for early drug development) have resulted in a substantial increase in the number and cost of clinical trials and challenges to keeping expertise in-house. Many pharmaceutical companies have opted to eliminate their R&D functions in their entirety and outsource services such as early drug development. Medical device companies often outsource product development, manufacturing, clinical work, and branding and marketing. Examples of outsourced industries for healthcare providers include revenue cycle management, practice management services and equipment. Investments in outsourced companies are increasingly competitive and some models may put negative pressure on returns with higher-than-expected development costs and less control over regulatory compliance. However, there continue to be significant new opportunities for growth and increased efficiency.

2. Quality is still king for managing drug and device risks. Smart investors continue to prioritize companies with strong quality improvement and risk management cultures as a top-of-mind issue both as a point of diligence and as a means to measure and define a company’s value. In the medical device space, for example, the FDA no longer simply reviews medical devices and approves a pre-market approval or 510k submission. Instead, the regulatory process for pre-market approvals for new devices can be extensive, unpredictable and lengthy and associated clinical trials may not be successful. In addition, reimbursement changes and a heightened awareness of drug cost have forced manufacturers and distributors of drug and device products to obtain more and better-quality data to avoid extensive regulatory scrutiny. However, there are ample opportunities for investment in quality and risk management support. Pharmaceuticals and dietary supplement companies heavily outsource quality data and control services and even sales and promotion functions to assist in marketing claims regarding the quality of their products. The importance of quality metrics and testing continues to be a pathway for growth in drug and device.

3. Investors may find value in the consumerization of devices and pharmaceuticals. As the market shifts to consumerization of biological data, companies which have seen significant growth often do so by treating patients like consumers. GlaxoSmithKline recently announced a $300 million deal with 23 and Me to further commercialize the latter’s genetic data to identify patients with certain rare disorders for drug development and clinical trial design. Various market players are attempting to commercialize FDA-approved platforms for gene therapy using CRISPR and other genetic tools. Technological developments such as wireless telemetry, which is used to monitor patient physiological parameters over a distance, provide additional opportunities for consumerization. For patients with chronic diseases, insurance companies, employers and medical device companies have all focused on increased consumer engagement as a way to manage patient health through incentives and lower healthcare costs. Investors may find tremendous value in companies that increase consumer engagement, add value and provide a pathway or support for increased consumerization.