Healthy return: Five questions on Mubadala’s life sciences playbook

Demographic shifts and the rising cost of care in Asia have boosted interest in the market, according to the SWF’s head of life sciences for direct investments in America.

Healthcare private equity was resilient in 2022 amid high inflation and an uncertain macro environment, with dealmakers flocking to biopharma and life sciences.

The volume of dealmaking over the past five years in these two sectors has increased 110 percent compared with the prior five-year period, according to Bain & Company’s 2023 Global Healthcare Private Equity and M&A Report.

One notable name that’s often spoken about in the life sciences space is Abu Dhabi sovereign wealth fund Mubadala Investment Company. The investor backed two of the 10 largest deals in healthcare last year, according to the Bain report: an approximately $3 billion acquisition alongside EQT of Envirotainer, a provider of cold chain transport for pharmaceutical companies; and the $2.6 billion purchase of Informa Pharma Intelligence, a data and software company for clinical trials and drug development, together with Warburg Pincus.

Private Equity International caught up with Varini Sharma, head of private equity life sciences in the Americas for Mubadala Direct Investments, to find out more about its $5 billion directs portfolio in the sector and how it looks to deploy capital in the face of a downturn.

How does Mubadala invest in life sciences?

Varini Sharma, Mubadala
Sharma: there will be a flight to value assets and leaders, yet not necessarily a slowdown in activity

Mubadala is a values-based investor. Two key principles that guide our investments in healthcare are: one, increasing access to care across the system; and two, reducing the cost of care to the system itself.

The growth in this sector is fuelled by the rising cost of care, demographic shifts with ageing and continued scientific innovation across cycles.

Some key investment themes that we focus on across the various sub-sectors in healthcare include solutions and platforms that enable healthcare innovation, enhanced technology and data enablement of the sector. We’ve made a couple of investments across data assets and software businesses that create efficiencies in the system that help with automation and digitisation of systems and processes.

A third principle that guides our investment approach is business models that enable more personalised, high-quality and cost-effective care with the patient at the centre. We will continue in 2023 to invest across all these guiding principles.

Which sub-sectors within biopharma and life sciences are attractive?

We focus on key sectors that thematically align with our guiding principles. The first is outsourced pharma services, tools, instruments and technology – any non-core activity to pharma is outsourced to other vendors who have experience, expertise and capabilities. Some examples are drug manufacturing and outsourced research. Increasingly, pharma companies are also buying software to manage their very expensive clinical trials.

Our second area of focus is outsourced services and software solutions for care providers, or software that’s used in hospital systems and out-patient systems. The third area is what I’d broadly call pharma and med tech products.

Our biggest focus has been on the US and Europe and now increasingly we are looking at Asia.

What are you focused on in 2023?

We will remain firmly rooted in our key themes, and the focus will be on investments in growing markets with healthy profit pools. We will continue to back market leaders with very strong and visionary management teams. And then ultimately, we’re going to focus on assets that are poised for some form of transformation through value creation.

Investors overall in 2023 will flock to quality assets. I think investors will take a more disciplined approach to valuation and to financing, given the current market uncertainty. Everyone’s going to focus on the sensitivities. We will build around recession scenarios. We’re going to think about multiple compression and exits. Some pertinent questions to ask are: How do we build in some of this turbulence, even within market leaders? How do we work closely with our management teams to continue to drive value creation that enables us to weather the storm of 2023?

What other investment risks exist over the next 12 months?

There’s a shortage of talent. There’s a tremendous amount of capex that’s involved outsourcing this specific function. As an example, I think talent is still going to remain core to innovation in the therapeutics area. This means we are focused on investing in mission critical services and technologies that do two things: addressing the high cost of care and enabling access.

As we tie all this back to 2023, I continue to think that there will be a flight to value assets and leaders in the space. I don’t see a slowdown necessarily in activity.

I think market leaders will continue to trade at healthy multiples and we’re going to see a period over the next year or so where there will be a reduced gap between the valuation of public and private assets. That gap has continued to sustain, quite frankly, through to the end of 2022.

With financing markets being fairly closed for the next quarter or two, I think we’ll see a little bit of a slowdown in that only high-quality assets will trade. And if they have sustainable growth over cycles, they will continue to trade at a fair valuation.

How will healthcare continue to be appealing to investors?

LPs have been prudent in terms of the funds they continue to re-invest in.

I expect funds that have strong healthcare franchises to continue to be favoured. Funds that build strong tech franchises that intersect across different sectors, and particularly with healthcare, will also continue to be a focus.

The high valuations that we’ve seen in the sector – mostly in 2020 and early 2022 – will subside because you won’t have strong LP support for that. There continues to be appetite and interest in the life sciences sector, especially for high-quality assets with sustainable growth across cycles.

The rising cost of care as we move into this environment as well demographic shifts continue to persist. We’re starting to see that from a geographic perspective even in Asia, and that’s unlocking an acceleration of interest in a new market.

Lastly, it’s scientific innovation. The intersection of technology and biology in this century is going to unlock a big shift as we think about therapeutics more specifically.

It’s imperative for investors to focus on business transformation.

We are firmly of the belief that healthcare players who can develop innovative and scaled business models will create value in this environment regardless of some of the challenges that we’re navigating.

We have had a very robust and supportive global regulatory environment, which has provided the backbone for continued innovation over the past decade. And we can see that sustaining and persisting over the next three to five years.