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The life sciences sector experienced an explosive boom during the pandemic’s early phase, followed by a slight cooling in funding in 2022. Despite this, the Barnes & Thornburg law firm’s 2023 Investment Funds Outlook report indicates that opportunities within the sector remain plentiful.

John E. Kelly, a partner in the firm and chair of the firm’s Healthcare Industry Group, emphasized a greater need for balance, long-term planning and investor responsiveness in the life sciences sector. “There’s just a bit of a balancing act going on in the sector, with a focus on innovative therapies and delivery platforms such as gene and cell therapies,” he explained.

The report highlights substantial capital flow into life sciences funds, largely targeting innovative fields such as AI-powered drug discovery, precision medicine, gene therapy and cell therapy. More than 50% of investors commit funds ranging from $1 million to $10 million in these areas.

Results stem from an online survey carried out by Barnes and Thornburg in collaboration with Dynata in February 2023. In all, 125 participants from various finance-related roles across 29 U.S. states took part. These respondents, representing a range of organizations like hedge funds, private equity, credit and venture capital firms, contributed anonymously.

Slow and steady wins the race

Despite potential hurdles like rising interest rates and inflation, investors are maintaining a long-term growth perspective. As a result, Barnes & Thornburg expects the market to either climb or hold steady in 2023, indicating continued demand. But the complexity of the sector could lead some investors to take a more cautious stance. Kelly stated, “There’s a lot of complexity here, which might be why some investors are being a bit more cautious.”

The report notes some layoffs in biotech firms but perceives this as a potential short-term fluctuation rather than a larger, overarching trend. While the biotech industry has experienced a series of layoffs in 2023, it has not been as hard hit as the tech sector.

Finally, Kelly emphasized the significant role of AI in the sector. He said, “AI plays a crucial role beyond the science. It’s about data analysis, understanding, predicting, and modeling, which significantly impacts drug discovery, clinical trials and health outcomes.”

Challenges likely lie ahead

John E. Kelly

John E. Kelly

Despite abundant opportunities, Kelly also acknowledges that there are headwinds. “There’s a lot of things that are in the way,” he said. Kelly cites drug pricing, the regulatory environment, data privacy and security concerns as examples.

As AI and digital health technologies proliferate, maintaining robust data security and privacy measures become paramount. In addition, companies must continually adapt to navigate an evolving regulatory environment around drug approvals, pricing, and reimbursement. With antitrust enforcement in the healthcare and life sciences sectors intensifying in 2023, new risks for companies involved in M&A and strategic partnerships are emerging. Volatility in public markets, rising interest rates and inflationary pressures pose additional headwinds for funding and commercializing new therapies. However, with a proactive strategy and advanced technology platforms, companies can mitigate these risks and continue to seize the sector’s long-term growth opportunities.

LP-GP relationships in investment

Another vital aspect in the life sciences investment landscape is the evolving relationship between Limited Partners (LPs) and General Partners (GPs).

The dynamics between Limited Partners (LPs) and General Partners (GPs) are shifting, with LPs gaining more leverage as GPs compete for funding. This is impacting life sciences funds as well.

According to the 2023 Investment Funds Outlook report, LPs place increasing importance on succession planning and ESG implementation, both of which are considered key priorities when evaluating life sciences funds. However, many GPs do not yet have succession plans in place and only half factor ESG criteria into deal terms.

This mismatch highlights the need for GPs to better align their priorities with LPs’ expectations. Changes in fund terms that benefit LPs, such as extensions of investment periods and higher transparency, are also expected to increase in 2023.

Greater knowledge sharing and communication between LPs and GPs will be vital to strike the right balance and capitalize on innovation opportunities in areas like gene therapy, precision medicine and AI/ML. As Kelly noted, GPs will need to work proactively to meet LPs evolving needs related to succession planning, ESG implementation, fee structures and managing economic volatility.If they don’t, they might lose access to capital as LPs direct funds to more adaptive managers.

Investor enthusiasm for growth and innovation in the life sciences

While we might observe short-term market fluctuations, the core strength of the life sciences sector remains steadfast. Kelly asserts that larger entities have the resources to invest in promising technologies, encouraging startups to promptly establish their unique value propositions.

“There’s more pressure to bring drugs and therapies to market,” Kelly said. “The larger players are weathering this storm more efficiently, allowing the big to get bigger, while smaller players carve out their niche.” Despite economic volatility and increased competition, the life sciences sector remains a promising and dynamic landscape for both innovators and investors. As Kelly highlights, “There’s a lot there, because there is so much innovation, and it’s happening quickly.”

Startups vs. established entities in life sciences

Startups face significant pressure to swiftly bring their therapies to market. However, those with disruptive science and business models continue to captivate investor interest. According to Kelly, the intensifying competition will hasten the pace of innovation, and the ventures that succeed will reap substantial rewards. “We’re seeing that larger players are still able to make investments, acquire promising technologies, and invest in competitive R&D. However, for smaller players and startups, there’s more pressure to produce results in the clinic and in research and development,” Kelly adds.

Kelly notes, “Investors are observing this growth and innovation in the life sciences industry, and they see immense potential for extraordinary opportunities.” Indeed, the advancements made in treating diseases compared to two or three decades ago are staggering, marking an exciting era for the life sciences sector.