Sander Slootweg, managing partner at Forbion Capital Partners explores the opportunities and complexities of investing in the burgeoning Life Sciences sector.

When looking back at 2020, it will always be the year of the COVID-19 pandemic, with large scale disruption to public and private markets, putting many businesses and entire industries at risk. As we head into 2021, encouraging developments regarding the availability of the first COVID vaccines have made the prospect of a return to normalcy look more and more feasible, underlining the value of the Life Sciences industry not only to its investors but also to society at large. However, the pandemic has also illustrated the challenges of investing capital in the complex Life Sciences sector, and suggests that while LP demand is increasing, this is likely to be accompanied by manager consolidation in 2021 and beyond.

The Life Sciences industry was largely insulated from the huge market disruption that occurred due to COVID-19 this year, for several reasons. Firstly, the sector does not usually follow the general economic cycle, and neither does Big Pharma, who are the typical buyers of companies in this sector. This has meant that acquisitions of Life Sciences companies by pharma have continued at a steady pace, and capital has been able to continue flowing into the sector.

Additionally, with COVID-19 being the foremost subject matter of the year, this has led to an influx of institutional and government-linked LPs who are prioritizing allocating to the Life Sciences sector in order to contribute to solving major health challenges for society at large. The ability of Life Sciences investing to align a financial return perspective with societal benefit in terms of Health and Wellbeing (SDG3 of the UN’s Sustainable Development Goals) appeals to investors who aren increasingly looking at ESG and Impact factors in their investment decisions. They are looking for companies that can produce a greater impact than a mere financial return.

At Forbion, we experienced this in form of record demand for our latest flagship Forbion V fund, which closed in December at €460M. This was both our largest fund, and our fastest ever fundraise, having been launched in early October, signifying the investor appetite for Life Sciences and ‘impact’ opportunities at this time.

Despite the fact that the Life Sciences sector has been insulated from the worst of the economic downturn caused by COVID-19, the pandemic has still brought some of the biggest issues to investing in the sector to light. Uncertainty within our industry is inherent – our understanding of human biology is imperfect, and drug development always carries risk until the drug is finally approved. In ‘normal’ times, it usually takes 8-10 years to develop a new medicine from idea to commercialisation, at an average cost of $2bn+. Every promising lead asset faces the chance that it may not work as expected and not make it all the way to market, with potentially detrimental consequences for the company developing it. However, the upside of most individual investments is quite substantial to compensate for this inherent risk. This particular risk return profile of individual Life Sciences investments highlights something that is essential for funds investing in the sector – the importance of diverse portfolios that maximise the chances of successful assets, and mitigate the risk associated with any single asset failure.

The complexities of product development also mean that a Life Sciences fund requires a deep bench of experts who understand every step of drug development in a particular disease area, before an investment can be made, including product development, clinical trials, regulatory processes, product manufacture and ‘exitability’. This is in stark contrast to technology funds where teams can be much smaller by focusing on a particular niche in their field, or a single step in the product’s lifecycle.

At Forbion, we have a highly specialised and experienced investment team that manages our funds, who are supported by our high-calibre group of Operating Partners, Venture Partners and Scientific Advisers to ensure we make best possible investment decisions. With one of the largest and longstanding teams in Europe, we continue to invest in team expansion to maintain the excellent track record of the firm.

Together, these trends mean that the outlook for 2021 looks strong for the Life Sciences industry, with a likelihood of increased capital invested. However, despite the increased capital, it is likely that due to the mentioned increasingly high barriers to entry, we will see this capital channelled into a smaller pool of managers that have the necessary scale, track record and experience to provide access to a diversified portfolio of investments and succeed in the face of the industry’s inherent complexity.