Biotech’s new sources of capital want social impact, health equity 

ESG funds, family offices and the great wealth transfer could be large pools of patient capital for biotech, if we can respond to their priorities

For years, the health of the biotech capital markets has been measured by how involved generalist investors are: the more capital they allocate to the sector, the higher valuations become. Conversely when they withdraw, biotechs slump. We do not have to continue to live through these boom/bust cycles. New sources of capital are emerging that our industry could tap into to wean our dependence on generalists. Attracting this capital, however, will require biotechs to recognize the changing winds that want to see real commitments in areas such as social impact and health equity.

Driven by the progress of the last decade, the industry is about to enter a new era of evolution and maturation. By almost any metric, biotechnology has grown substantially during the last few years.

We have had more approvals, more clinical trials, more new company formation and more available capital in the sector than ever before. Biotech now represents 16% of the Russell 2000 by number of companies and 13% by dollar amount, making it the largest sub-sector of the index. Of the non-SPAC IPOs in the last two years, biotech represented about 20% of the total.

However, many investors are not sufficiently knowledgeable about the business of the stocks they own, and we need to provide more knowledge and transparency if we want to attract the long-term owners needed to avoid boom/bust cycles.

Three types of capital may be able to help fuel the industry over the next phase of development. They are significant in size, have longer-term horizons and are interested in impact investing.

First, we are going to go through a massive intergenerational transfer of wealth — often referred to as the great wealth transfer. At the same time, family offices have established themselves as important sources of funding, representing a significant entrant to the biotech sector. On top of this, Environmental, Social and Governance (ESG) funds have emerged as a powerful force in financing new technologies and are starting to penetrate the biopharma investment space.

How fast biotechs can understand and respond to the new funding sources and their priorities may dictate whether they can break out of the boom/bust cycles.

New capital, new priorities

Over the next few decades, the great wealth transfer will take place. Baby boomers — people in their mid-fifties to mid-seventies — will transfer $30 trillion of assets to the next generation, mostly millennials.

How will these children and grandchildren spend and invest this new wealth? What are their priorities?

Surveys show that millennials embrace diversity, break the social norms of their parents’ generation and seek to shape politics. For example, 83% of millennials embrace alternative investment strategies, such as digital, venture capital, and collectibles, and want to make a positive impact on the world.

The traditional stock and bond portfolio of their parents isn’t as interesting to them. Biotechnology should be an ideal investment opportunity for this generation, but it may take work to convince them.

A sea change in private investors is also occurring with the massive increase in family offices participating in biotech; approximately 10,000 family offices manage a combined $6 trillion versus the $4 trillion in hedge funds today. This is patient, multigenerational capital.

Over half of family offices have said that healthcare is an impact investing priority and a good sector for private equity investing. These families invest in R&D across the continuum from philanthropy to direct investing.

Lastly, up from $11 trillion in 2018, there is now over $18 trillion invested in ESG funds. These funds consider financial returns, social and environmental good, corporate responsibility and climate risk among other factors in their investment criteria.

Currently, over 500 institutional investors and 400 money managers use ESG criteria in their investment analysis and decision-making process, and major pharmas — including Pfizer Inc. (NYSE: PFE), Novartis AG (SIX:NOVN; NYSE:NVS), Merck & Co. Inc. (NYSE:MRK) and Teva Pharmaceutical Industries Ltd. (NYSE:TEVA; Tel Aviv:TEVA) — have already issued sustainability bonds to investors. Over $1 trillion of ESG bonds were issued last year, representing 11% of the total bond market. These numbers are certain to increase substantially.

Together, the great wealth transfer, family offices and the rise of ESG investing represent a massive pool of capital that fits well with the mission of our industry, but we need to be proactive if we want to become an attractive long-term investment opportunity for this capital.

A path to acceptance

Four focus areas could help our industry gain acceptance by the wider investment community: embrace of ESG issues, educational outreach, commitment to diversity and health equity, and making medicines accessible and affordable for everyone.

As the number of funds with ESG criteria in their investment thesis continues to explode, ESG issues will only become more important. It’s not just about the value to society and patients of the products we deliver but how we make those products, including our environment impact.

We need to get in front of this curve. Currently, 70% of all preclinical biotech companies have no ESG disclosure, while over 90% think disclosure will become more important starting this year, according to a Fenwick & West report.

The metrics for measuring ESG criteria are ambiguous, as non-financial metrics are factored in the scoring and competing rating agencies give different scores. The Fenwick & West report suggested that biotech companies decide themselves what to report, create an oversight structure, assign specific internal tasks, and find the disclosure platform that’s right for them. It would be very worthwhile to become a leader in this field given the capital at stake.

Educational outreach to the public is vital to counter the current perilously low trust in sciences.

We will not be able to attract a broader set of investors if we ignore this. Instead, we must be much more active in engaging with the public, and as thoughtful and transparent as possible about our science. 

Gene editing, cell therapy, RNAi and other new modalities are tremendous breakthroughs in our ability to fight disease, but as we have seen before, such as with GMO foods, we need to have the public on our side; they will neither invest in nor benefit from these breakthroughs if they aren’t. 

One way to do this is to become more visible in our communities. Some biotech hubs, such as Boston and Philadelphia, are already leading the way by engaging in community action projects and mentoring programs.

Generally, however, it’s been the hospitals that have been most visible and supportive to their surrounding communities. It’s not a coincidence that hospital approval ratings are very high in the communities they serve.

The growing chorus of calls for diversity and health equity must also be heeded, not only at the Board and C Suite levels, but throughout our organizations. 

It’s becoming accepted that good governance — the G in ESG funds — not only includes a duty to shareholders but to all stakeholders of a corporation. This means making good on the goal of equitable hiring practices at all levels.

Increasing diversity in clinical trials also is an immediate priority. The numbers are astounding. A study in JAMA noted that 93 precision oncology trials of breast, prostate, lung and colorectal cancer therapies enrolled 8-11% African American and 1-6% Hispanic or Latin American patients. Not only do ESG funds and the millennial recipients of the great wealth transfer put a high priority on diversity, FDA and its advisors are getting more serious about the issue as well. For example, when retinfalimab, the anti-PD-1 mAb from Incyte Corp. (NASDAQ:INCY), was rejected by FDA’s advisory committee (ODAC), they cited lack of diversity in the clinical trials as one reason for their lack of confidence in the drug. 

There are myriad reasons to fix this problem now, the possibility of becoming more attractive to an untapped pool of capital adds a financial incentive to the list.

The challenge of creating health equity could also be viewed as an opportunity to change public opinion and attract a new generation of investors. A landmark study two decades ago by the National Academies’ Institute of Medicine highlighted the glaring fact of poor outcomes and higher death rates for minorities in almost every medical condition. Twenty years later, not enough progress has been made.

Finally, pricing has been and will continue to be center stage in evaluation of our industry, and the willingness of these new investors types to participate. The value we bring to patents and the savings to society in healthcare costs have not yet been fully understood.

Organizations like ICER and NICE have dominated the conversation, despite flaws in their methodologies. As an industry we must continue to strive to insure everyone gets access to our medicines, work to solve the affordability issue, make lowering patient co-pays a priority, ensure that generics are available on a timely basis, and be an integral part of the debate about insurance reform. Each of these topics deserves much more detailed debate about strategy.

Biotech has become an integral part of the U.S. economy, and we are moving toward the next phase of maturation. The capital is there to enable us to continue to make amazing advances in science and, ultimately, in patients’ lives. Taking actions to live up to this promise may be a prerequisite of accessing the capital.

Dennis Purcell founded Aisling Capital and previously served as senior managing partner. He is now a senior adviser to the firm.