By Dimitra Markoula, Consultant, Medical Technology & Diagnostics

It is not without exaggeration that private capital investment in emerging markets has been scarce. From fears over political uncertainty and the volatility to local economies as a consequence, to the allure of more developed markets that have already demonstrated their ability to deliver significant returns, the attractiveness of such environments has meant that raising funds has been a tricky proposition.

So, could it be that investors favouring those ‘sure thing’ markets are missing out on untapped opportunities elsewhere? This was a question that we put to Kiren Naidoo, managing director at Frontier Pharma.

Upon graduation from the University of Cape Town, Naidoo embarked on a career with financial services behemoth, Merrill Lynch. It wasn’t long before he identified what he considered to be a significant yet underserved gap in the global pharma sector – emerging markets.

“Few, if any, within the finance and banking community paid much attention to what was happening in the likes of Central & Eastern Europe, Turkey, Latin America and Africa, for instance,” Naidoo told us.

He added: “They preferred to focus on larger markets with high-value transactions, but it was clear to me that innumerable opportunities existed in those geographies that were ‘under the radar’.”

He was right. For the next few years, as Vice President of Merrill Lynch, Naidoo set about scaling these emerging markets, which he did successfully until taking the decision to co-found his own enterprise in 2016. It was a strategic move. The following 12 months saw the synchronisation of global economic expansion that was unparalleled – conditions that were ripe for secondary markets.

“The challenges and nuances facing one region versus another are not entirely unique – many are shared. One way to overcome them is to consolidate assets within smaller markets and then support their growth into larger ones,” said Naidoo. Indeed, this is a trend we have seen continue to rise within the pharma and wider life sciences industry in recent years. 

Breaking new ground

Part of the appeal of the emerging markets is that they are often fast growing with strong underlying healthcare fundamentals (e.g. ageing populations, growing prevalence of lifestyle diseases, increasing urbanisation and increasing affordability) and relatively under-penetrated, particularly as it relates to more novel products. Furthermore, they aren’t yet swarming with other VCs or PEs which presents rich investment opportunities.

Part of the appeal of emerging markets is that they can often ‘get in’ with many small-to mid-sized, often family-owned, enterprises that are primed for development – with the right investment, of course. However, this raises a question: if these investors are fostering innovation, what is the pay-off?

The answer is simple: they gain an enviable opportunity to work with a pharma company either at the beginning of its start-up journey, or when the enterprise is primed for pivoting to drive growth that has otherwise been overlooked or unachievable without VC capital. “By doing so,” Naidoo explains, “investors can offer these business opportunities and capabilities to scale that they might never have known.”

Calculated risk

Most investments in life sciences, and most other sectors for that matter, are made with an end goal: to sell to a strategic (e.g. multinational pharma company) or take the business to an IPO. Given the figures reported over the last 12 months, it is no wonder that interest in this area has been gathering pace.

Indeed, figures published by Pitchbook in 2018 show that global VC investment in the sector reached $12bn – a record year and 46 per cent higher than in 2016. In fact, this is more than the total amount invested in life sciences companies in 2012, 2013 and 2014 combined. There are a number of key reasons for this.

Firstly, with the world’s population getting bigger and people living longer, instances of conditions such as cancer, diabetes, Parkinson’s, Alzheimer’s and heart disease are increasing at a worrying rate of knots. This is driving further demand for biopharmaceutical drugs centred on personalised care.

Secondly, far more products fail than succeed, but savvy investors can also acquire established assets that are unbundled – sold off – by major pharma with a view to repurpose and adjust their capabilities. They “identify the potential in a product or company that might have been missed by other investors,” Naidoo explains.

Thirdly, there is the fact that, as Naidoo reminds us, many products have lost their patent. “Lipitor is a great example of this,” he says. “Due to generic competition, the cost of the unbranded version is approximately 10 to 20 per cent of its branded equivalent when under patent. This has increased the opportunity to both develop and copy these once-expensive drugs in a more cost-effective way; thereby making them more affordable and accessible.”

And finally, there has also been a spike in the number of early-stage bets that have paid off sooner than anticipated. Take Prexton Therapeutics as a case in point. The company initially received €40m in VC investment yet sold to Lundbeck in 2018 for a staggering €905m. This is impressive in anyone’s book, but not isolated. Chase Pharmaceuticals raised $40m and was subsequently acquired by Allergen for $1bn.

Of course, investors have to hedge their bets and consider the level of risk they are prepared to take on. In the US, as Naidoo explains, investors seem better equipped and willing to bet on clinical stage assets, but the risk is higher. While in Europe, the focus is on those with lower risk and proven capabilities. Both have their merits.

Searching for the pharma elixir

To say that the opportunities are abundant for life sciences investors in emerging markets would be a huge understatement. But both start-ups and those established enterprises who are primed for growth should focus on developing their own tools and technologies, rather than attempting to emulate the innovation seen in developed markets.

Investors aren’t seeking identikit entities, they’re searching for their panacea – the investments they will hold onto longer but will yield higher returns. The questions they get really excited by, are Where next? Who next? And What’s next?

By Private: Dimitra Markoula, Consultant

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Private: Dimitra Markoula

Consultant