By Danielle Silva, Director of Research, LSN

Government Pensions have been investing in private equity funds for decades, but have now been increasingly moving towards direct investing into companies over the last couple of years. Like family offices, government pensions have suffered over the past two years because private equity funds have by and large displayed discouraging performance. It no longer makes sense for government pensions to continue to pay these managers fees if they are unable to help these pensions attain their mandated return targets. For this reason, government pensions are moving towards direct investments because of their familiarity with the private equity and co-investment space, and are moving towards investing in the life science sector due to the current nature of the M&A space within the sector.

Government pensions have long-term investment horizons. Historically, they have set high percentages for their target asset allocation to private equity funds due to the long-term nature of these investments. Recently, however, many have re-assessed these investments, and since many pensions have dabbled in co-investing in the past, and usually have seasoned private equity specialists in-house, a good number of pensions have moved towards direct investments in order to achieve a better ROI than they would gained through indirect investments in private equity via a fund.

Pensions also have increased control over investment selection by making direct investments. Through direct investing, pensions also have greater transparency regarding how a portfolio company is doing financially. Pensions are thus able to quickly come in and make changes to a struggling company in order to make it profitable again, whereas if they were investing in a company through a fund, they may not know about the financial issue, or may not find out about the situation soon enough to make changes that would rectify the situation. The end benefit is the increased transparency that direct investing affords government pensions helps them to more easily reach their targeted return rate.

Government pensions have been attracted to the life science sector for a number of reasons: One of the most notable reasons is the potential for a large exit; companies that government pensions are acquiring could be great potential merger or acquisition targets for pharmaceutical or large medtech companies. Government pensions, along with many other new investors in the space (such as family offices) have recognized this, and have increasingly started to allocate to the space.

Government pensions are also longer-term investors who have a longer investment horizon than other types of investors and larger allocation sizes, so they have the ability to bring a product from the discovery/development phase all the way to market.

The trend in the space has been towards larger government pensions moving towards direct investments in the sector, because these types of pensions have teams internally that have private equity experience and have had experience with co-investments in the past. Many smaller pensions typically use consultants who chose private equity funds on their behalf; many of these pensions have not yet begun to invest directly within life sciences. Larger government pensions it seems will continue to ramp up their direct investments in the life science space, and perhaps as smaller pensions begin to see the benefits of this strategy, they too will start investing directly in the space with the aid of their investment consulting firms.

2 Major Investment trends in Life Sciences in 2013, and what’s driving them

By Max Klietmann, VP of Research, LSN

In recent months, LSN’s research team has interviewed a large number of investors that are increasingly targeting their investment criteria in two key areas: orphan drugs and targeted therapies & companion diagnostics. This article seeks to explain exactly what defines these spaces, and what makes them so attractive given the current environment.

Trend 1: Therapeutics Targeting Orphan Indications

Orphan diseases are rare diseases defined by the FDA as having fewer than 200,000 afflicted persons in the United States – an approximate incidence of 1 in 1,500 people. These indications were historically unattractive due to the limited number of target patients, but now enjoy significant regulatory advantages due to incentives granted by the FDA.

The resulting benefits of targeting an orphan designation include a faster regulatory path, decreased regulatory scrutiny, and premium pricing. As attractive as this may have been historically, it is becoming even more interesting from an investment perspective today as many industry experts believe that FDA regulation is likely to become more restrictive in coming years, and cost pressures will force down the prices of many therapeutics that do not enjoy the “pricing buffer” that orphan drugs do. This is an important consideration for investors, especially in early stage companies, since the nature of the FDA during preclinical trials today may be very different from phase III trials a few years further down the road.

Trend 2: Targeted Therapies & Companion Diagnostics

The second major trend of high interest to strategic investors across the board in the coming year is targeted therapeutics & companion diagnostics. The concept here is also driven by regulatory pressures, and aims to carve out “micro-indications” within major disease categories. For example, if a firm is seeking to develop an oncology therapeutic targeting breast cancer, they have the opportunity to target only a specific subset of patients who exhibit a specific biomarker that correlates to a higher efficacy rate for the paired therapeutic. Essentially, this comes down to finding a target niche within an indication, which yields the best possible clinical results, expediting the regulatory path. Once the drug has made it to market, early trial data can be recycled as the indication scope is expanded to cover more populations while the company enjoys an active revenue stream.

Fundamentally, both of these trends reflect a growing understanding among investors in life sciences that the days of “hot-potato-ing” an asset on to the next investor are over. The industry requires long-term investors with a genuine willingness to bring drugs to market, and therefore, the active capital is streaming towards those product areas that are not targeting the blockbuster indications, but can make it to market fastest. The trend for 2013 is most certainly “bunt to market” rather than “swing for the fences.

By Alejandro Zamorano, VP of Business Development, LSN

Every successful business starts with an idea that is commercialized and brought to the marketplace.

At the core of an academic researcher’s role is to be unbiased arbitrator of the natural world. As a result, academic institutions often prevent academic researchers from taking financial positions in their discoveries within the confines of the institutions.

Consequently, few academic researchers take a lead role in actively commercializing their discoveries. Since lead investigators lack the incentive to commercialize their discoveries, this responsibility of commercializing assets is assumed by an institution’s tech transfer office.

Tech transfer offices play a major role in the industry by providing a marketplace for these emerging technologies. The most active bidders for technologies have been emerging biotech companies and sophisticated private equity firms that have been busy compiling assets in anticipation of big pharma’s patent cliff. By giving the assets to third party developers, it liberates the institution conflict of interest while still retaining a vehicle that enables financial rewards. These licensing agreements usually come in the form low upfront payment, a 1-3% downstream royalty, and a buyout option.

For example, by taking a look at the NIH – which has had one of the most prolific tech transfer offices in the past two decades – one can gain insight into the inner workings of traditionally obscure sectors of the industry. In 2011, the NIH generated $97m in payments from commercialized technology that NIH had out licensed. This revenue was generated from 411 technologies, with the top 20 technologies representing around 73% of the total revenue. In that same year, the NIH executed 197 licensing agreements with 82% US companies of which 52% were considered small business. In addition, of technologies out licensed by the NIH in 2011 22% were companies that were in-licensing technology from the NIH for the first time. Issuance for first-time recipients has been trending upwards for the past five years indicating a shift over the past several decades.

Despite the success of a few tech transfer offices in the industry, the majority of tech transfer offices suffer the lack of a centralized database to sort through academic assets. The inability to easily search through technologies is hampering the growth of the life sciences industry by limiting visibility to interested bidders. As a result, interested bidders usually obtain their technologies by leveraging their personal contacts, which tend to be regionally focused.