GHO Capital will use the money raised to invest in healthcare, including outsourced service providers, which are seeing demand from smaller biotechs, according to a Jefferies analyst.
GHO Capital raised €975 million ($1.1 billion), which exceeded its €800 million target, and is 50% larger than its 2015 maiden fund. Fund II LP is the largest specialist private equity fund dedicated to European healthcare, according to Preqin data.
GHO plays in the mid-market space, targeting deals with an initial enterprise value of around €100-500 million. Though for particularly attractive prospects, the company says it is able to stretch this budget. Since it was founded in 2014, the London-based investor has grown its total assets under management to €2 billion.
In the first quarter of 2019, Fund II has made two investments: Sterling Pharma Solutions, a small molecule API development and manufacturing services provider in the UK, and BioAgilytix, a Durham, NC-headquartered contract research organization (CRO).
While the company doesn’t specifically back the biotech companies developing individual therapies, it invests in the outsourced services providers on which many of the smaller biotech companies rely. And the need for these services is only growing, as drug development becomes increasing complex—and expensive.
“As a general trend, small companies are increasingly the source of innovation,” Jefferies analyst David Windley tells Xconomy. “And they don’t want to sell their compound to big pharma too early and not maximize value, and may try to bring it to market themselves, and to do that they need service suppliers to do the work.”
Currently, about 55-60 percent of Phase 2/3 clinical trials are outsourced, Windley says.
From a category standpoint, immuno-oncology is a huge area, he says, and one in which many are investing. “Oncology is now ranging to about 40% of the drug pipeline, many think it’s heading to 50,” adds Windley. “Immuno-oncology is a meaningful chunk of that, half or more.”
The gene and cell therapy space specifically, with unique logistical and manufacturing challenges, also is an area to watch, as the supply chain will need to develop and evolve, notes Windley. “So, there are some opportunities for investment to drive that,” he adds.
At GHO, 35 percent of its investments are in the outsourced services space, 25-30 percent in medtech, and 30 percent or so in pharma/biotech, according to the company. Only 10 percent of its deal flow is in patient service, though this space represents nearly half of all private equity deals.
Generally, what the investor is looking for is not something that relies on a single product, market, or customer:
“If you have a high-quality platform and a good reputation in the market then clients will follow,” a GHO spokesperson tells Xconomy. “If you can provide additional, synergistic adjacent services then with a strong reputation for quality and the right team in place, the path to growth is simpler.”
GHO estimates that healthcare globally is growing at roughly 5% per year. Under this umbrella, the company looks for subsets that are growing at double the market rate. Among these areas is regulatory affairs, which the company estimates is growing at 15% per year—driven by regulations and an increasing burden on pharma to increase quality, efficacy, and safety.
Windley notes that companies are increasingly offloading their regulatory dossier maintenance as well. Parexel, a CRO out of Research Triangle Park (RTP), NC, built its consulting business around this model, and Syneos Health (NASDAQ: SYNH), also in RTP, last year made moves to increase its capabilities in this space with its acquisition of Kinapse in the UK.
“Through focused work on the regulatory affairs space, we identified an opportunity to create the transatlantic leader in quality, compliance, and regulatory consulting,” GHO’s spokesperson adds. “Having invested alongside management in US-based Validant, we are looking to both expand the company internationally and also add new service capabilities to better cater to its client base.”
Earlier this month, Validant acquired DataRevive, a regulatory strategy and consultancy firm focused on novel therapeutics and biologics out of Washington and with a global client base. “Validant continues to look for both organic and inorganic opportunities to grow in Europe and the US,” the spokesperson adds.
Expansion globally also is core to GHO’s so-called value creation pillars, the company says, and it has a track record of growing businesses international through M&A.
“By way of internationalization we are able to look at investments on both sides of the Atlantic,” the company’s spokesperson adds. “Taking leading European business models to North America and also bringing leading North American businesses to Europe. Within Europe, we also look to grow internationally and can take a regional player into new pan-European markets. This can be achieved both organically and also through M&A.”
UK-based Quotient Sciences, in one example, made four bolt-on acquisitions to expand its presence across the Atlantic. GHO currently is taking what it’s learned from these deals and applying them to Sterling Pharma, which in March made its first bolt-on acquisition to gain a foothold in RTP.
The investor also backed Montreal, Canada-based Caprion Biosciences as it replicated its service offerings in Europe. The company also has added lab space in the US and made further deals to take them into Australia and China. In a similar build-out, the company is aiming to apply many of Caprion’s learning to BioAgilytix—expanding it globally and adding new capabilities.