Strategic Investors Aggregating Early Stage Assets

29 Jan

By Max Klietmann, VP of Research, LSN

Recently, two major trends have surfaced in early stage life sciences investment; the concept of the virtual pharma and private equity aggregation of early stage portfolios. According to several conversations I’ve had with these two categories of investors over recent months, these entities are beginning to employ a new strategy to take advantage of the plethora of promising early stage assets available. The basic idea is to grow a synergistic portfolio around a specific silo (indication, technology, etc.) over time. These portfolios of complimentary assets can then be brought directly to market (via third party distribution) or sold into large pharmaceutical companies, whose pipelines are increasingly suffering from a myopia leaving significant market opportunities unaddressed.

The concept is quite simple and intuitive: In the case of a virtual pharma, a group of highly seasoned life sciences and pharma experts raise capital to buy a portfolio of promising early stage academic assets, vet them, and shepherd them through clinical trials via a very lean model relying heavily on CROs and outsourced development. By focusing on only fast-moving, highly promising assets (and strategically divesting those that aren’t), a very lean pipeline is maintained. This keeps capital allocated exclusively on getting product to market as quickly as possible. Then, either through licensing or third party distribution via a rent-a-salesforce, the products are sold into the marketplace.

Similarly, highly strategic mid-market PE investors (who typically invest in large scale opportunities closer to phase II or III) are making very small $1-5 million investments spread across a very broad range of very early stage assets, including academic laboratory research. The assumption is that by maintaining a hands-on approach and scrupulous focus on performance, a fund is capable of maintaining a portfolio of companies that not only have a promise of success on an individual basis, but as a collective whereby the whole is more valuable than the sum of its parts.

This approach allows investors to follow big pharma and provide solutions to upcoming pipeline gaps. It is also a more attractive opportunity for buyers down the line, because it is a fully integrated and curated portfolio with a strategic orientation towards marketability. The end result is a more efficient flow of capital through the industry, stronger drug development pacing, and an improved return profile for equity holders in life sciences companies that constitute the portfolio constituents.

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