Life Sciences: Industry trends & investment considerations with Nick Galakatos, Blackstone
The desk emphasizes that the growing disconnect between the demand for capital in the life sciences sector and the available supply is poised to affect investor sentiment and funding strategies significantly. Per the full note from UBS, developments such as increasing R&D costs, which now exceed $2 billion per drug, are likely to compel investors to rethink how they deploy capital in this space. Blackstone's insights underscore that while innovation fueled by artificial intelligence is augmenting drug development pipelines, it simultaneously intensifies the financial burden on drug makers. This dual trend suggests a potentially volatile environment for investments reliant on consistent capital influx.
What the desk is arguing
The disconnect between the need for increased funding in life sciences and the stagnation of capital availability creates an environment ripe for volatility. Nick Galakatos from Blackstone highlights a critical increase in R&D costs, now averaging over $2 billion per new medicine, which strains the investment landscape further as innovations emerge faster than capital can flow. This growing disparity suggests significant implications for funding strategies and investor confidence moving forward.
Further underlining the current situation is the role of artificial intelligence in drug development, which, while promising enhanced pipeline productivity, reduces the time available for securing necessary funding. The rise in innovation is becoming a double-edged sword, inducing both excitement among investors and heightened caution due to escalated funding needs.
Where it sits in our coverage
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How other firms see it
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What the calendar says
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01The life sciences sector is experiencing a critical imbalance between rising R&D costs and available funding.
02New innovations, particularly in AI, are both accelerating drug development and complicating capital funding strategies.
03Investors must remain cautious as the demand for capital outpaces supply, impacting potential returns.
Market implications
Investors should monitor how life sciences funding trends influence capital markets, particularly in the context of emerging technologies like AI that impact development timelines. As the demand for R&D capital intensifies, expect potential shifts in market sentiment affecting related stocks.
Risks to this view
A reversal of this outlook could occur if regulatory changes facilitate quicker approvals or if significant breakthroughs reduce the costs associated with drug development. Additionally, a substantial infusion of capital into the sector could realign the demand-supply dynamic in favor of more accessible funding.
ubs
Hi everyone, Dan Cassidy here. Welcome back to the UBS Market Moves podcast channel. Today's conversation will focus on trends and developments within life sciences, including a look at investment considerations in the space.
Joining us right here at the 1285 podcast studio in New York, I'm glad to welcome Nick Galakatos, Senior Managing Director and Global Head of Life Sciences at Blackstone. With that, Nick, it's great to have you here at the table. Thank you for dropping by the studio and for spending some time today with our listeners and our clients.
Nice to have you with us. First of all, thank you very much for having me. So Nick, I know our conversation for today will focus on a growing part of the economy in life sciences.
So beginning with life sciences more broadly, can you, Nick, set the stage on the broader environment and trends you are seeing with respect to both drug approval and funding? Of course. First of all, it's very expensive to develop a new medicine.
It costs upwards of $2 billion for a single medicine. And as you know, it takes a long time and a lot of capital to get there. So over time, as innovation has produced more and more exciting new medicines that can change people's lives and standard of care, we have seen an increasing separation between the demand for R&D capital to develop new medicine versus the supply of capital, the ability to fund this innovation.
And that is significantly growing. As we look at the demand for capital, innovation including now artificial intelligence, accelerating the way that we develop drugs, discover drugs, manufacture drugs, get them to patients, that is adding to the number of products that are in the pipeline. But also costs increase.
It now costs twice as much to develop a new medicine compared to what it used to cost about 10 years ago. So you have this multiplicative effect, more products in the pipelines, each of which costs more to develop. That's on the demand of capital side.
On the supply of capital, on the other hand, the major contributor to funding these products are the pharmaceutical companies and they are investing very heavily in this area. The industry overall commits about $300 billion a year to fund R&D. But that's not enough.
And the way that we look at the constraint on the supply of capital is because the commitment to R&D is a fixed percentage of sales. If the sales remain relatively flat or grow very modestly but the costs go up, then you have a gap. And the gap gets larger and larger every year.
So if we take a snapshot today, our math is that one out of three medicines in development remains unfunded. And that's where we see the opportunity for investors in the life sciences and in the business that we're in and the strategy that we take, we try to bridge this gap. And we work with pharmaceutical companies.
We work with medical technology companies. We work with biotechnology companies to help them develop these products, provide capital in the last stage of clinical development, the most expensive stage of clinical development to bridge this gap and help bring important products to patients. And we do not invest in companies.
We don't buy Merck stock or Pfizer stock. And we invest in products, typically products that these companies develop and it's their products and we share in the risk and we share in the reward of these products. When the product gets approved, we typically get paid a milestone payment, a success payment, and then we get a royalty on the product.
Market uncorrelated returns are really important in a volatile sector as we are. But the overarching message I would say about our industry is it's an innovation industry, a ton going on, exciting developments across the board for chronic diseases, for acute diseases, orphan diseases. And we're very happy and very proud and honored to be part of the process of bringing these products to patients.
Well, Nick, thank you very much for that background. Now further to your point on funding these drugs. Can you explain to our listeners how the strategies you manage drive impact by funding innovation and advancing healthcare technologies?
Yeah. So to elaborate on the snippet that I mentioned before. So we typically work with global leaders in our field to help them move these products that are very exciting and core to their pipelines, to move them to the finish line through approval and then to patients.
We're very selective in what we do. We select products that can have a real impact on patients. Maybe to translate that to dollars, maybe as a surrogate, we select products that can generate at least a billion dollars in sales every year.
And that can impact many, many patients. Just to give you an example of things that we've done that is in the public domain. I suspect that everyone in the audience knows about cholesterol, that cholesterol is bad for you.
It's the leading cause of heart disease. And currently there are effective drugs, they're called statins. You may have heard of Lipitor, you may have heard of Crestor, that are pills that you have to take one pill a day for the rest of your life.
I have yet to meet someone that takes one pill a day for the rest of their lives consistently. That's very compliant here in this area. You might be looking at one.
It's rather poor. So a few years ago we invested in a product before it got approved that lowers cholesterol 50% more than statins, and you only have to take it twice a year. And so that addresses not only the efficacy of the drug by being 50% more effective than the standard of care, but also it's one that addresses compliance.
So you don't have to remember to take the pill every day. And that's a really, really meaningful impact on patients and overall health care. So this is one that we've committed significant dollars in order to acquire a royalty interest in the product.
The product has been launched, and if you go on the web, you'll find things about Lecvio that Novartis sells. And maybe since you raised your hand, maybe that's something for you to consider as well. Something to think about for sure, though.
I do want to acknowledge the recent leadership transitions and evolving policy priorities over at the FDA. How can investors navigate the regulatory complexities and capital-intensive nature of life sciences while achieving strong risk-adjusted returns? The FDA is the guardian of public safety.
So they need to make sure that every product that they review and they let into the marketplace is firstly safe and then effective. That has not changed. These decisions are made on science and clinical data.
The people who make decisions are leading professionals in the field, very knowledgeable. And they're there regardless of political administration, and the vast, vast majority of the staff at the FDA fit that particular profile. So we do not foresee a change in that now or later.
This is standard policy. To give you an example, there is a law, the so-called PDUFA law, that speaks to how long it takes for the FDA to review products, and that's set for about a year. And that hasn't changed, for example.
And as we look at our own portfolio, we have really not seen any meaningful change in terms of the time that it takes for the FDA to review an application, a new drug application, or any other surprises. So we feel that this is something that the institution is there to safeguard safety and will continue to do so. As all of us know, we look at the news, there are tariffs, there is talk about tariffs, there's discussion about most favorite nation pricing, all of those.
Maybe a good gauge on the impact of these new initiatives by the administration, if one looks at the market, how the market reacted to that. The market is, for the most part, has not had a negative point of view on this, frankly pharmaceutical stocks have moved up the last couple of days. So these are important initiatives, but to date we have not seen any real impact on how at least investors perceive them in the context of pharmaceutical companies.
So with respect to positioning in this space, it sounds like there are quite a lot of avenues out there for one to explore. How should investors think about allocating to life sciences in today's environment? Well life sciences is driven by innovation and one really needs to focus on the upside that is associated with that.
It's a marathon to develop a new drug, it's not a sprint. So one, if you are an equity investor, you really have to look at this for the long haul. But what we do is actually bypasses that.
We invest in products and by investing in products and innovation and the success of these products, our returns are not correlated to the public market. So it doesn't matter if the market is volatile or not and that's an alternative way to invest. It doesn't mean that equity investing is not exciting, but our approach is one that is designed specifically to be uncorrelated to the public markets.
So with that, would you mind expanding a bit on how your approach provides uncorrelated opportunities that are inaccessible through public markets? Equity markets are – you can buy a share of a biotechnology company, you can buy a share of a pharmaceutical company or a medical technology company. You cannot buy a share of a product.
In products, these are contractual arrangements with the world's leading companies that specify what product we finance and how the returns originate and at what point and what are the key events, what milestones need to be met and then what is the shared upside. So it is a specialized form of investment that you just simply cannot access in the public markets. Why is now the right time to be investing in the life sciences space?
First of all, I go back to the one word that I've used probably more times on this podcast than any other and that is innovation. It is a business that is driven by innovation and it's based on innovation and will continue to do so. But it's also a business that when there is uncertainty, for us at least, for the strategy that we have, there is opportunity.
Uncertainty is whether or not an experimental drug will be an approved drug. That's one area that we actually excel in, in figuring out what is likely to be approved. The second one is this whole uncertainty between the loss of exclusivity of patents.
Pharmaceutical industry is effectively governed by patents. When they expire, there is a big discontinuity in revenues. That is an uncertainty, whether or not our partner would fill that gap, the revenue gap that is generated from loss of exclusivity.
The Inflation Reduction Act, the FDA that you talked about, Most Favorite Nation, all these three-letter words that we all speak about. So this is a collectively a very uncertain environment, the underlying current though being innovation. So this is a great environment for us to do investments whose returns are not correlated to the markets, as opposed to making equity investments.
Well, Nick, very generous with your time. And thank you again for making the trip over to 1285. Very interesting to hear about your investment process and the investment case for life sciences right now.
Before we close out, any final thoughts, takeaways, or anything you would want to reinforce to our listening audience? I think just to say, stay healthy. Great words to end on.
Nick Gallicato, Senior Managing Director, Global Head of Life Sciences at Blackstone. Thank you again for your time, sir. My pleasure, sir. to sell or solicitation of an offer to buy any security or investment in or to participate in any trading strategy with any Blackstone fund or other investment vehicle.
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