Thriving Opportunities: PE/VC Investment Landscape in the Life Sciences Sector

In the post-COVID era, the life sciences industry has proven to be remarkably resilient. With an ageing population and rising chronic diseases, it remains recession-resistant. Private Equity (PE) firms have recognized this strength and are keen on investing in the life sciences sector. They see it as a chance to secure investments that offer stable revenue, growth prospects, and appealing exit opportunities, even in times of economic uncertainty.

In the vast field of life sciences, there's a growing interest in 'pharma services' companies. These include contract research, manufacturing, packaging, distribution, and consulting businesses. Pharma companies are increasingly opting to 'rent' rather than own these services, reducing risks in their development programs. In 2022, over half of the pharma services deals were led by Private Equity (PE) sponsors, indicating ongoing enthusiasm for the sector. Major transactions like the $8.5 billion acquisition of Parexel in 2021 by EQT and Goldman Sachs Asset Management have been noteworthy, making waves in the industry.

While these headline-making transactions grab attention, the bulk of the mergers and acquisitions (M&A) activity unfolds in the mid-market. Here, investors perceive a fragmented landscape, presenting an opportunity for a strategic 'buy and build' approach. This involves the execution and integration of multiple smaller, strategic acquisitions, leveraging the strong networks, client relationships, and reputations of smaller regional players in local markets.

The overall landscape of Private Equity and Venture Capital (PEVC) investments in the life sciences sector since 2018 has been marked by a significant influx of USD $22.1 billion, with a near-even distribution between the pharmaceutical and healthcare sectors. Post-pandemic, healthcare investments have taken the lead over pharmaceuticals. The third quarter of 2023 recorded a substantial USD $13.6 billion in PE/VC investments, a 60% increase from the same period in 2022, albeit a 5% decrease from Q2 of 2023.

“In 2023, the life sciences sector has hit an all-time high in investments, driven primarily by a surge in buyouts within the healthcare ecosystem.”

Private equity and venture capital funds are even more attracted to the sector because recent exits have shown strong returns, benefitting from ongoing positive trends in the industry. 

The PE deal value in the healthcare sector, which used to hover around $1-2 billion pre-Covid, has surged consistently in the last two to three years, reaching upwards of $4 billion. Notable transactions that highlight the scale and impact of PE investments in the sector include-

• The Singapore-based Temasek's $2 billion investment in Manipal Hospitals
• Blackstone's billion-dollar takeover of Care Hospitals and KIMs Hospitals

Turning attention to India, the life sciences sector has displayed an impressive compound annual growth rate (CAGR) of 24% in PEVC investments over the past five years. The year 2023 has witnessed historic highs in PEVC investments, reaching USD $5 billion. Growth capital investments dominated the pharmaceutical sector, while healthcare sector investments saw a prevalence of buyouts or startup investments. Noteworthy is the discernible shift towards larger deal sizes, with average deals ballooning from USD $26 million in 2018 to USD $84 million in 2023. This substantial increase is predominantly attributed to the growing number of buyouts.

The remarkable journey of the Indian life sciences sector in 2023 is captured by a record-breaking 12 buyouts, the highest ever recorded. Among these, the standout is BPEA EQT’s USD $600 million buyout of Indira IVF, solidifying its place as the largest buyout within the healthcare sector. The sector's magnetic appeal is further bolstered by the substantial returns witnessed in recent divestments, as exemplified by KKR’s USD $2 billion exit from Max Healthcare.

As the sector gears up for 2024, industry experts remain optimistic, foreseeing significant long-term investment potential. Despite short-term fluctuations, the healthcare and pharma industry promises to attract PE investors, with an estimated deal value ranging from $3 billion to $4 billion in the coming year. The stage is set for a decade of healthcare growth in India, making it a pivotal player in the evolving landscape of private equity investments and mergers and acquisitions.