Key Sections
Advances in life sciences are remaking our understanding of illness and disease. In this Q&A, Sandip Agarwala and Kevin Raidy of Blue Owl Healthcare Opportunities discuss the latest trends in the sector.
As the life sciences sector faces challenges like limited traditional capital, IPO windows closing, and federal funding cuts, alternative strategies like private capital and royalty monetization are gaining importance.
Unlike other sectors, life sciences remains comparatively specialized. The domain requires significant expertise and networks as well as an active approach.
Emerging trends such as radiopharmaceuticals and genetic-level understanding of diseases are transforming treatment approaches and creating new opportunities.
Q: What are the key issues you see in life sciences investing right now?
Sandip: The number one issue is there’s a scarcity of traditional capital in the markets. For life sciences companies right now, the IPO window is all but closed. That has a spillover effect on follow-on markets and the markets for convertible debt financing. We'd certainly rather have a more healthy and functioning market, where quality companies with good products can access capital in many forms, but the current market conditions are actually a tailwind for our life sciences credit and royalty strategy, as our form of private capital becomes more important to companies. It demonstrates to companies the value of diversifying away from potentially an all-equity structure.
Kevin: For the equity markets, we feel we're in a great spot to be a thought-leading scaled capital provider of equity. And we feel we can get a lot more for our money than we've ever gotten, so the risk-reward relationship has gotten much better. The biotech equity markets were in a downturn for several years before this year, and now that's been compounded by policy changes like FDA turnover. It really has led to a condition where we feel like there's never been a more opportune time to put capital to work.
Q: How are tariffs—or the threat of them—affecting the life-sciences industry and your investments in it?
Sandip: Generally speaking, life sciences is one of the sectors that has enjoyed very attractive gross margins. A potential increase in manufacturing costs for active ingredients, or even finished products manufactured offshore, will likely have a modest impact on the gross margin profile of the product, but it's absorbable for most commercial businesses so we expect a limited impact of tariffs on our portfolio.
Another key issue is the potential implementation of Most Favored Nation pricing by the administration. The goal is to bring down drug prices in the US by referencing the price of these drugs in several countries outside of the US. While we could benefit from a near-term reduction in drug spending for Medicare and Medicaid, there is a risk of a longer-term impact that is maybe not being given enough emphasis: If pharma companies are generating less revenue, they will have less profits to reinvest into R&D. The long-term effect of this could be a slowdown in the development of drugs. It's something we're closely monitoring.
Q: Federal spending on drug development is now being cut significantly at the NIH, the FDA, and at universities. How do you see this affecting life sciences over the next several decades?
Kevin: I think it's clearly going to reduce the amount of basic research that happens, and that has some longer-term effects. It takes five-plus years for that kind of research to even result in the formation of a company, so there’s little to no impact on our investing strategy today. But go out 10 years and you certainly could have a reduction in the number of companies that are created in the sector.
Sandip: In the short term, academic and research institutions will be facing unexpected budget cuts because of the reduction in NIH funding. Many of these institutions have intellectual property that has been licensed to pharma companies and ultimately resulted in FDA-approved products. That often results in royalty income back to these universities. These academic institutions may now be more inclined to monetize those royalties or other financial assets to offset those budget cuts. We are seeing an uptick in interest from academic institutions saying, "We’ve enjoyed having this annual royalty from this drug, but in face of these cuts, maybe I need to consider monetizing that royalty and bring forward the capital today.”
Q: Why did Blue Owl decide to get into life science investing, and how does it support the firm's overall long-term strategy?
Sandip: One of the reasons I find Blue Owl to be an exciting platform is that we are constantly looking for opportunities to grow and leverage our knowledge base to expand into new areas. The firm’s direct lending practice built up a lot of expertise lending to software companies. That leads to a robust strategy in technology that now spans up and down the capital structure: We lend, we invest in structured equity, and we even have late-stage venture capabilities.
The growth in our tech practice allowed the company to see an opportunity in our second-largest sector for direct lending, which is healthcare. As we built a life sciences team and began investing in credit and royalties, we further broadened that strategy to include equity with Blue Owl Healthcare Opportunities. We now have capabilities across the capital structure, just like we've done in tech, and our teams are able to share our domain expertise, our network, and our deal flow with one another.
Kevin: One thing I'd add is, unlike a lot of other sectors, our sector is extremely specialized. That means it's not easily replicated in a passive manner. A lot of large pools of capital have gone passive with ETFs to get exposure to certain industries or themes, and in life sciences you really have not been able to do that. We believe this investors are looking for specialists and alternative managers in this sector, and we think that will increase in the future.
Q: Last question: What is most exciting to you right now in the life sciences?
Sandip: One of the areas that we’re both really interested in is an emerging part of oncology called radiopharmaceuticals. There are several products on the market that take a radioisotope, combine it with a binding agent, for example, like in prostate cancer, and the binding agent finds the prostate cancer cells, delivers the radioactive material, and kills the tumor in a very targeted fashion. These life-saving medications are getting out to a broader set of patients and it’s really changing the standard of practice. It’s an area I find fascinating and I think is poised for a lot of growth.
Kevin: One broader theme which ripples through everything we both do is the genetic level of understanding of disease pathology and treatment. When we all started in this business, we discussed cancer in terms of the tissue of its origin. You had breast cancer; you had kidney cancer; or pancreatic cancer. Today, we’re more likely to talk about what the genetic driver is. Do you have a BRCA2 mutation? Do you have a KRAS mutation? And on and on. It’s a level of information that we just didn’t have not that long ago. And so now the ubiquity of that information and the inexpensiveness of obtaining it is really changing the way we can look at and treat disease.
Interviewees
Sandip Agarwala
Sandip is a Managing Director at Blue Owl and a member of the Direct Lending Investment Team. In his role, he focuses on life sciences credit, royalty and growth equity investments.
Kevin Raidy
Kevin is a Senior Managing Director at Blue Owl and the Head of Healthcare Opportunities. In this role, he oversees all private and public investment activity related to Healthcare Opportunities and sits on the Fund’s Investment Committee.
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