The life science sector is in upheaval

The life scien­ces and health­care sector is facing simi­lar disrup­tive uphe­avals as the “clas­sic” indus­tries with the topic of Indus­try 4.0.… This uphe­aval is being driven on the one hand by ground­brea­king mole­cu­lar rese­arch and diagno­stics, which are gene­ra­ting unpre­ce­den­ted gains in know­ledge — and thus also gigan­tic new volu­mes of data — and on the other hand by consis­t­ently advan­cing digi­tiza­tion in rese­arch, test­ing and appr­oval of new active subs­tances, in diagno­stics, therapy selec­tion and sustainable pati­ent care, as well as in new digi­tal busi­ness models of “clas­sic” medi­cal technology.

One conse­quence of this deve­lo­p­ment is new areas such as perso­na­li­zed medi­cine, which pursues treat­ment concepts tail­o­red to the indi­vi­dual pati­ent, but also the use of Big Data analy­tics tools for the consis­tent analy­sis and impro­ve­ment of indi­vi­dual thera­pies or holi­stic therapy work­flows (“outco­mes”). This will have a signi­fi­cant impact on the entire health­care value chain and will also have a massive impact on the phar­maceu­ti­cal indus­try in parti­cu­lar. If we consider the share of the phar­maceu­ti­cal and medi­cal tech­no­logy indus­try in Germany’s gross natio­nal product toge­ther with the share of medi­cal provi­ders (e.g. hospi­tals), we obtain a total share in Germany’s gross natio­nal product that is almost compa­ra­ble with that of the auto­mo­tive indus­try. Simi­lar condi­ti­ons can be obser­ved in all other Western countries.

The topic must certainly be viewed in a diffe­ren­tia­ted manner and each company will have to make such a decis­ion indi­vi­du­ally. Howe­ver, there are a few clear indi­ca­tors that can influence such a decision:

The U.S. is simply the largest health­care market in the world, with the corre­spon­ding growth poten­tial; moreo­ver, the U.S. spends the most money on health­care in the world, as measu­red by a share of nearly 20% of its gross natio­nal product. Also, the majo­rity of rese­arch-based phar­maceu­ti­cal compa­nies are loca­ted in the USA. In connec­tion with this, the USA has the largest capi­tal and inves­tor market for life scien­ces in the world, with a large number of expe­ri­en­ced, profes­sio­nally opera­ting and in some cases very specia­li­zed inves­tors. The number of corre­spon­ding invest­ment compa­nies and the asso­cia­ted fund volu­mes are dispro­por­tio­na­tely larger than in Europe, so that compa­nies wishing to become invol­ved in the USA encoun­ter a very invest­ment-friendly envi­ron­ment. This also applies to seed and early-stage finan­cing, an area that is compa­ra­tively weak in Europe.
In the USA, the life science sector is one of the top growth areas. Many cities and commu­ni­ties, most of which have a very good scien­ti­fic infra­struc­ture, have reco­gni­zed this and are curr­ently adver­ti­sing attrac­tive models to attract Euro­pean compa­nies to the USA. These are not only the well-known loca­ti­ons, such as Boston or Palo Alto, but also cities such as Orlando, Florida(https://vimeo.com/120180046), or San Anto­nio, Texas.

Another important point is simply making money: Every company in the life science sector must first provide clini­cal proof of the “effi­cacy” and “appli­ca­bi­lity” of its products, and then the corre­spon­ding appr­oval proce­du­res must be successfully comple­ted. In order to earn money after­wards, the products and appli­ca­ti­ons must be paid for by the corre­spon­ding payers, other­wise only the compa­ra­tively small area of self-payers remains. Unfort­u­na­tely, in Germany, once products and appli­ca­ti­ons have been appro­ved, they still have to wait an average of another four years (excep­ti­ons excepted) before they can be reim­bur­sed by health insu­r­ers. This is a major hurdle for many compa­nies, but also for inves­tors, as the cycles before a company starts to be commer­ci­ally successful are much longer than in other tech­no­logy sectors.

In the U.S., reim­bur­se­ment proce­du­res are consider­a­bly more diverse and ther­e­fore more complex. Howe­ver, this results in a wide range of diffe­rent billing opti­ons, so that reim­bur­se­ment after successful appr­oval is gene­rally easier and much faster to achieve than in Europe. In addi­tion, large U.S. health systems, such as Kaiser Perma­nente or Adven­tist Health, are very inno­va­tive and often willing to take special paths.

The U.S. is indis­pu­ta­bly the world’s largest capi­tal market for life scien­ces and health care. The number of funds inves­t­ing in a wide variety of corpo­rate phases and their fund volu­mes is many times grea­ter than in all other regi­ons of the world combi­ned. NASDAQ is now the world’s most attrac­tive stock exch­ange plat­form for life scien­ces compa­nies, not for IPOs, but espe­ci­ally for secon­da­ries and add-ons. The world’s largest capi­tal market event in the life scien­ces indus­try is the JP Morgan Life Scien­ces Inves­tor Confe­rence, which is held in San Fran­cisco every January.

China is in the process of catching up tremen­dously. Health­care is one of the five stra­te­gic pillars in the new five-year plan of the govern­ment of the People’s Repu­blic. The sector is booming and new excel­lent start­ups are emer­ging every month in a wide variety of life science fields. The same applies to the capi­tal market. Toge­ther with our part­ner company in Hong Kong, we have just comple­ted an analy­sis of the Chinese VC market in the life scien­ces sector. In addi­tion to alre­ady estab­lished finan­cial inves­tors, such as Dech­eng Capi­tal or Tencent , we have been able to iden­tify more than 30 new VCs that have emer­ged in the last two to three years. The fund volu­mes are gene­rally in the three-digit million range.

Regrett­ably, the situa­tion in Germany and Europe is clearly lagging behind (once again). There are a respec­ta­ble number of mutual funds and invest­ment compa­nies that have achie­ved respec­ta­ble success in the past, but the number of new funds is very limi­ted. A signi­fi­cant number of the estab­lished funds focus either only on pharma/therapeutics or on later stage compa­nies. Funds that focus more on the new themes, such as new diagno­stics, digi­tal medi­cal tech­no­logy or geno­mics, are in the mino­rity. There are a few excep­ti­ons, e.g. in the UK, where a broa­der posi­tio­ning can be seen, but there are a number of compa­nies that only invest in the UK or in the spin-off envi­ron­ment of British univer­si­ties. In Switz­er­land, too, a new CHF 500 million start-up fund has just been laun­ched, which invests broadly in all new tech­no­lo­gies. Unfort­u­na­tely, there are compa­ra­tively few funds in Germany and Europe that invest in seed or early-stage companies.

About Dipl. Ing. Lutz Voelker 

Mr. Völker is Mana­ging Part­ner at aspect.partners and Head of the Health­care Prac­tice. In addi­tion, he serves as a member of the Health­care Big Data Coun­cil at Gerson Lerman Group, New York (GLG), where he advi­ses invest­ment compa­nies on invest­ments in the life scien­ces sector. He also serves as a stra­te­gic advi­sor to the busi­ness unit leader­ship of the SAP Health Group at SAP SE and provi­des stra­tegy advice to the execu­tive team of Adven­tist Health System, one of the largest health systems and hospi­tal opera­tors in the U.S. health­care indus­try with more than $9 billion in reve­nue and more than 4.7 million pati­ents annually.

As the foun­der of aspect.partners, Mr. Völker has accom­pa­nied a large number of tran­sac­tions and finan­cings. In addi­tion to manda­tes for young compa­nies in the life scien­ces envi­ron­ment, in 2015 he mana­ged various capi­tal market road­shows for life science compa­nies in the U.S. and raised €54 million in two finan­cing rounds for a U.S./European company in the life scien­ces sector. Curr­ently (August 30, 2017) aspect.partners mana­ges five Euro­pean manda­tes and one US mandate in the Life­sci­en­ces sector.

About aspect.partners

aspect.partners is an inde­pen­dent consul­ting firm based on a part­ner­ship of former indus­try mana­gers and invest­ment bankers. Our part­ners all have solid, long-term, inter­na­tio­nal indus­try expe­ri­ence as senior mana­gers, gene­ral mana­gers or as board members of inter­na­tio­nal compa­nies and have usually led inter­na­tio­nal organizations.