Although the life sciences industry remains an attractive investment area, the healthcare sector has seen a decline in venture investments, particularly for early stage investments, as pricing pressures, stringent regulations, rising development costs, reimbursement issues and declining R&D productivity have proved significant barriers, says business intelligence provider GBI Research.
According to the company’s latest report, completed global healthcare private equity deal values exhibited a negative compound annual growth rate (CAGR) of 11.8% from 2010 to 2015, with 2010 recording a total of $33.9 billion, falling to $18.1 billion by 2015.
The continued decline in R&D productivity is one of the most important challenges the healthcare industry is facing at a global level. Blockbuster therapies, for example, have become increasingly rare, and many drugs continue to face reimbursement challenges in key markets, resulting in declining revenues for companies.
Rodrigo Gutierrez Gamboa, MSc, Managing Analyst for GBI Research, explains: “The accumulating evidence of the decline in R&D productivity adds to the uncertainty associated with innovation in the healthcare industry, which in turn reduces the attractiveness of the field for investment.”
“Despite this, a recent surge in the approval of innovative drugs, coupled with reports of companies having been more successful in the final stages of clinical testing, seems to point towards a brighter future in this regard. Indeed, the number of new molecular entities launched globally in 2014 reached a 17-year high of 46.”
If investments from private equity and venture capital (VC) firms in the healthcare industry continue to decrease significantly, it could have serious and wide-ranging consequences — not just in the healthcare sector, but in wider economies. Fewer treatment options, a sharp decline in innovation, and significant financial constraints for companies in the sector could result in job losses, important projects being abandoned, and company relocations or complete shutdowns.
Gamboa continues: “Despite the precarious investment situation, many start-up healthcare companies, particularly those in the biotechnology segment, are turning to different sources of capital and funding. Many companies are obtaining funding from angel investors, which are typically individual high-net-worth investors that provide financing through loans or equity investments.”
“Biotech start-ups – particularly those outside of the US – have had to embrace a variety of creative alternative funding sources, and move away from business models that require substantial investment. New companies often adopt a combination of funding sources such as angel investors, grants, and non-VC institutional investors.”