Private equity capital and shifting investor risk appetites suggest the backdrop for healthcare deals will remain constructive believes Tommy Erdei, Jefferies’s healthcare investment banking co-head.

Healthcare has long been perceived as a major growth area, and the Covid-19 pandemic has only heightened that trend, pushing the importance of health and wellbeing up the agenda for individuals and governments alike. Layer on technological developments that create the potential for major medical advances, as well as increasing the ability for consumers to monitor and service their own health and wellbeing needs, and it is clear the health megatrend has a long way left to go.

Career history: Tommy Erdei  

2009 Jefferies, global co-head of healthcare investment banking and sole head of European healthcare group

2005 UBS, executive director, healthcare investment banking

But for Tommy Erdei, global co-head and European head of healthcare investment banking at Jefferies, it is important not to lose sight of the fact that healthcare is a broad, diverse area spanning everything from large pharmaceutical companies to specialist biotech firms, diagnostics, services and IT. “Each segment has its own drivers, but overall they remain constructive,” he says.

Breadth and depth of coverage

Jefferies has long had a specialist healthcare division and Mr Erdei has played a senior role within it over the past 13 years. It is an area that is ever-evolving and Jefferies is constantly looking at which sub-sectors are the most active and its coverage within them, he says. It is a constant consideration of having the right breadth of coverage as well as ensuring the right depth of expertise in key areas, he adds.

Mr Erdei points to healthcare IT as an area that has perhaps been less prominent, but that is starting to “gain more visibility and traction with a greater number of transactions. We already have such strong expertise in this area within the US that we’re now leveraging in the European markets too,” he says. It is also an example of the broader trend of cross-industry engagement along with Jefferies’s tech team. “There is more and more collaboration taking place between the healthcare and tech teams.”

Long-term drivers

So far, this year has proven a more challenging backdrop than 2021, with tightening economic conditions and the broader uncertainty created by Russia’s invasion of Ukraine. However, Mr Erdei believes there are some significant long-term drivers at play. “Private equity firms have raised record funds,” he says, “so while interest rates may impact equity markets and valuations, the demand side of the equation, especially for private equity is still very strong.”

Private equity (PE) is also impacting the market more broadly, he believes due to changing risk appetite, deepening expertise and a willingness to invest earlier in a company’s development lifecycle. “We’ve seen pharma companies with an innovative, research and development (R&D)-driven pipeline, and a greater willingness from PE to take on some of the clinical risk. In the past, PE would have been unlikely to take a view on an innovative pipeline and ascribe little-to-no value to products within it. But we’re seeing more frequent examples of PE taking a more considered view.”

He cites the 2019 acquisition of Galderma (then Nestlé Skin Health) by a consortium led by private equity fund, EQT, as a notable example. “At the time the company had a late-stage phase-two/three monoclonal antibody drug trial underway, and for EQT to have to have made that investment, at the valuation they paid, they clearly did the work on the pipeline and ascribed material value to it.” There have been multiple public reports that EQT is now pursuing plans to take the business public, although it has not given a specific timeframe. There are other examples of this happening elsewhere, including Nordic Capital taking a minority stake in Leo Pharma and, although the deal ultimately didn’t proceed, Advent’s 2021 bid to buy the Swedish biotech company Sobi.

“I think we are going to see more of this trend of PE moving away from a predominate focus on more straightforward areas like over-the-counter pharmaceuticals and into investing in areas of pharma where, yes there will still need to be some existing revenues, but there is a development pipeline and certain PE funds are gaining the expertise to evaluate that.” Notably, EQT recently completed its acquisition of LSP, a venture capital fund focused on life sciences “that will bring with it a very deep pool of expertise and knowledge in terms of evaluating development pipelines”.

This is a significant shift, he suggests, as in biotech there can be a high level of risk, with relatively ‘black and white’ outcomes — “a product is either going to work, and that will be a great outcome, or it won’t,” he notes.

Driving this trend, he believes, is a recognition from some PE firms of a need to broaden the areas where they can deploy capital, in order to find the most promising investment opportunities. “Somewhat untapped, to date, has been this area of pharma which has real R&D behind it, but requires the right expertise to really understand its value.” At the moment, he says, this approach is limited to a handful of companies, but “it is a sign of where things may be heading”. He even speculates that in five years’ time, PE may be dipping its toe into medium- and even large-cap pharma company acquisitions. “It’s still early days to think about those sort of deals, but down the road it may be possible,” he adds.

Shifting risk appetites is also a broader theme among investors, generally, “that have been looking for breakout returns”, he observes. Although this may shift as the interest rate environment changes, there has, he says, been an “increased willingness to take on risk”, such as investing in early and medium-stage biotech “in order to achieve strong returns”.

A clear example of this is an increase in the number of biotech companies that have gone public at an earlier stage in their clinical development lifecycle, according to Jefferies equity research published in January 2022.

Earlier biotech IPOs

Mr Erdei observes: “Before 2019, the majority of initial public offerings (IPOs) were late-stage, phase-two or phase-three biotech companies and very few phase-one or pre-clinical. In the following two years there was a shift, so that there were significantly more earlier stage companies that IPO-ed than we saw in the past.” In 2021, 30 biotech companies whose lead product was at the pre-clinical trial stage went public, compared to nine who were in phase-three clinical trials.

“That partly reflects that pharma companies have bought up a lot of companies that have reached the phase-three trial stage, so there are fewer of them around to go public,” Mr Erdei says. “But the dramatic increase in earlier stage companies going public is very telling. Traditionally, we would have been very cautious about taking a company like that public, but there are more situations where we’re doing it, as there has been real appetite there.”

The wave of biotech companies going public has also had an impact on the wider ecosystem. “The past two years in terms of biotech IPOs have been the highest on record. They raised $15bn in 2020 and $14.5bn in 2021. And that’s just the IPOs — on top of that there were equity offerings of already public companies. So, there has been a lot of cash to fund the R&D pipeline for biotech firms,” he says.

This extra capital, he notes, flows along the value chain and has also been benefitting contract research organisations (who run clinical trials), as well as contract development and manufacturing organisations (who manage the development and/or manufacture of drugs and other medical products on behalf of the company).

Covid-19 impact waning

Mr Erdei observes that certain of these companies involved in the development of Covid-19 vaccines or drugs have already seen the impact of this. “Yes, they’ve had a sort of ‘Covid bump’; [however,] the underlying economics is really being driven by the deep R&D development that’s taking place among biotechs, and the large pharmaceutical companies, to drive growth.”

More broadly, Mr Erdei believes that Covid-19 is no longer a major driver of activity in the sector. “I think it’s clear the world was able to be very resilient and able to adapt, and while there are some specific pockets of companies that will continue to be engaged in that area, people now better understand how that is going to play out ... there are clearly now a far broader set of drivers at play.”


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