ESG funds, family offices and the great wealth transfer could be great pools of patient capital for biotech, if we can address their priorities
By Dennis Purcell, Founder and Principal Advisor, Aisling Capital
March 14, 2022 10:37 p.m. GMT
For years, the health of biotech capital markets has been measured by the degree of involvement of generalist investors: the more capital they allocate to the sector, the higher valuations rise. Conversely, when they withdraw, biotechs collapse. We don’t have to keep going through these boom and bust cycles. New sources of capital are emerging that our industry could tap into to wean off our reliance on generalists. However, attracting this capital will require biotechs to recognize the shifting winds that want to see real commitments in areas such as social impact and health equity.
Driven by the advancements of the past decade, the industry is about to enter a new era of evolution and maturation. By almost any measure, biotechnology has grown tremendously in recent years.
We’ve had more approvals, more clinical trials, more new ventures created, and more capital available to the industry than ever before. Biotechnology now represents 16% of the Russell 2000 by number of companies and 13% by dollar amount, making it the largest sub-sector in the index. Among non-SPAC IPOs over the past two years, biotechnology accounted for about 20% of the total.
However, many investors do not know enough about the activity of the stocks they hold, and we need to provide more knowledge and transparency if we are to attract the long-term owners needed to avoid boom/bust cycles.
Three types of capital could help fuel the industry in the next phase of development. They are large in size, have longer time horizons and are interested in impact investing.
First, we are going to experience a massive intergenerational transfer of wealth, often referred to as the great wealth transfer. At the same time, family offices have established themselves as important sources of financing, representing an important entrant into the biotechnology sector. Additionally, environmental, social and governance (ESG) funds have become a powerful force in financing new technologies and are beginning to penetrate the biopharmaceutical investment space.
How quickly biotechs can understand and respond to new funding sources and their priorities can determine whether they can emerge from boom/bust cycles.
New capital, new priorities
Over the next few decades, the great transfer of wealth will take place. Baby boomers – people in their fifties in the mid-1970s – will transfer $30 trillion in assets to the next generation, primarily millennials.
How will these children and grandchildren spend and invest this new wealth? What are their priorities?
Surveys show that millennials embrace diversity, break the social norms of their parents’ generation and seek to shape politics. For example, 83% of millennials are adopting alternative investment strategies, such as digital, venture capital and collectibles, and want to have a positive impact on the world.
Their parents’ traditional portfolio of stocks and bonds doesn’t appeal to them as much. Biotechnology should be an ideal investment opportunity for this generation, but it may take work to convince them.
The challenge of creating health equity could also be seen as an opportunity to change public opinion and attract a new generation of investors.
A dramatic shift in private investors is also occurring with the massive increase in family offices participating in biotech; about 10,000 family offices manage a total of $6 trillion versus $4 trillion in hedge funds today. It is patient and multigenerational capital.
More than half of family offices said healthcare is a priority for impact investing and a good sector for private equity investing. These families invest in R&D across the continuum from philanthropy to direct investment.
Finally, compared to 11 trillion dollars in 2018, more than 18 trillion dollars are now invested in ESG funds. These funds consider financial returns, social and environmental good, corporate responsibility and climate risk among other factors in their investment criteria.
Currently, more than 500 institutional investors and 400 fund managers use ESG criteria in their investment analysis and decision-making process, and major pharmaceutical companies, including Pfizer Inc. (NYSE: PFE), Novartis AG ( SIX: NOVN; NYSE: NVS), Merck & Co. Inc. (NYSE: MRK) and Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; Tel Aviv: TEVA) — have already issued sustainability bonds to investors. More than $1 trillion of ESG bonds were issued last year, representing 11% of the total bond market. These numbers will certainly increase considerably.
Together, the great wealth shift, family offices and the rise of ESG investing represent a massive pool of capital that fits well with our industry’s mission, but we need to be proactive if we are to become an investment opportunity. attractive long term for this capital.
A path to acceptance
Four priority areas could help our industry be accepted by the broader investment community: ESG adoption, educational awareness, commitment to diversity and health equity , and making medicines accessible and affordable for all.
As the number of funds integrating ESG criteria into their investment thesis continues to explode, ESG issues will only grow in importance. It’s not just about the value to society and patients of the products we provide, but also how we make those products, including our impact on the environment.
We must place ourselves in front of this curve. Currently, 70% of all preclinical biotech companies have no ESG disclosure, while more than 90% believe disclosure will become more important starting this year, according to a Fenwick & West report.
The metrics for measuring ESG criteria are ambiguous, as extra-financial metrics are taken into account in the rating and competing rating agencies give different scores. The Fenwick & West report suggested that biotech companies decide for themselves what to report, create an oversight structure, assign specific internal tasks, and find the reporting platform that works for them. It would be very interesting to become a leader in this field given the capital involved.
Raising public awareness of education is key to countering the currently dangerously low trust in science.
We will not be able to attract a wider range of investors if we ignore this. Instead, we need to be much more active in our interactions with the public and as thoughtful and transparent about our science as possible.
“We have to have the public on our side; they will not invest in or benefit from these breakthroughs if this is not the case.
Gene editing, cell therapy, RNAi and other new modalities are huge breakthroughs in our ability to fight disease, but as we’ve seen before, like with GMO foods, we have to have the public on our side; they will not invest in or benefit from these breakthroughs if they do not.
One way to do this is to become more visible in our communities. Some biotech hubs, such as Boston and Philadelphia, are already leading the way by engaging in community action projects and mentorship programs.
Generally, however, it is the hospitals that have been the most visible and supportive of their surrounding communities. It is no coincidence that hospital approval ratings are very high in the communities they serve.
The growing chorus of calls for diversity and health equity must also be heard, not just at the board and C-suite level, but across our organizations.
It is increasingly recognized that good governance – the G in ESG funds – includes not only a duty to shareholders but also to all of a company’s stakeholders. This means achieving the goal of fair hiring practices at all levels.
Increasing the diversity of clinical trials is also an immediate priority. The numbers are staggering. A study in JAMA noted that 93 precision oncology trials of breast, prostate, lung and colorectal cancer therapies enrolled 8-11% African American patients and 1-6% Hispanic or Latino patients . Not only are ESG funds and millennial recipients of the great wealth transfer placing a high priority on diversity, but the FDA and its advisers are also taking the issue more seriously. For example, when retinfalimab, Incyte Corp.’s anti-PD-1 mAb. (NASDAQ:INCY), was rejected by the FDA advisory committee (ODAC), they cited the lack of diversity in clinical trials as one of the reasons for their lack of confidence. in drugs.
There are myriad reasons to fix this problem now, the possibility of becoming more attractive to an untapped pool of capital adds financial incentive to the list.
The challenge of creating health equity could also be seen as an opportunity to change public opinion and attract a new generation of investors. A landmark study two decades ago by the National Academies Institute of Medicine pointed to the glaring fact of poor outcomes and higher mortality rates for minorities in almost all medical conditions. Twenty years later, progress is insufficient.
Finally, pricing has been and will continue to be central to evaluating our industry and the willingness of these new types of investors to participate. The value we bring to patents and the savings to society in healthcare costs have yet to be fully understood.
Organizations like ICER and NICE dominated the conversation, despite flaws in their methodologies. As an industry, we must continue to strive to ensure everyone has access to our medicines, work to address affordability, make co-payment reduction a priority, ensure that are available in a timely manner and be an integral part of the debate on insurance reform. Each of these topics deserves a much more detailed discussion of strategy.
Biotechnology has become an integral part of the US economy, and we are heading into the next phase of maturation. The capital is there to allow us to continue to make incredible advances in science and, ultimately, in the lives of patients. Taking steps to deliver on that promise can be a prerequisite for accessing capital.
Dennis Purcell founded Aisling Capital and was previously Senior Managing Partner. He is now the firm’s senior advisor.