Xconomist of the Week: Five Questions About Life Sciences Investing for Dennis Purcell of Aisling Capital

8/4/11Follow @arleneweintraub

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products that make them feel younger, and that make them feel healthier. We have a number of investments that have a scientific basis behind them, but that are really geared toward the consumer.

In the last year or two, life sciences has been a tough sector, especially relative to tech, where you can achieve large valuations in a small amount of time. This sector—because of the aging population, and because we have so many unmet medical needs—is experiencing increasing demand. Over the long term, that makes it attractive. But you have to be willing to be patient. It’s not an industry where you are able to get a real big hit in a real short period of time.

We tend to invest in later-stage rather than early-stage companies. Because we’re one of the largest investment firms, we can stay with our companies longer. So several of our companies already have revenues and approved products on the market. Given the difficulty in the IPO market and pharmaceutical industry, our theory is that we’re going to have to be able to support these companies longer than we’ve had to in the past.

X: What made the Adams investment so successful? It was competing in the crowded space of over-the-counter respiratory products, so how did you know it had what it would take to succeed?
DP: Mucinex has an active ingredient called guaifenesin. We had some patent protection around it. We also took advantage of an FDA regulation that says once you have an approved product, all the unapproved products have to come off the market. We ran clinical trials to prove Mucinex did what we said it was going to do. Once we got approved, the FDA required all the other makers of guaifenesin to do trials. They went off the market.

So the clinical trials, the understanding of FDA regulations, the patent protection all came together for us. We made about a 15x return on Adams.

X: Aisling has some outsource providers in its portfolio, including Quintiles and Catalent. Why is that an attractive space in your opinion?
DP: Pharmaceutical companies can’t do all their R&D in-house, so they outsource it. Large companies can run massive clinical trials, but smaller, venture-backed companies find it hard to run trials that are 15,000 or 20,000 patients, because the cost is so high. The biotech industry in particular is really struggling to come up with the right model going forward. They’ve swung to a more virtual model. Part of the reason for that is the difficulty they’re facing attracting financing. If they can outsource things, that may be a more efficient use of whatever dollars they have.

By investing in outsource providers, we’re still betting that the drugs will work, but we’re not betting on one single drug.

X: Aisling has also made some investments in generic drugmakers, which is a competitive arena. How are you approaching your investment decisions there?
DP: We think the generics industry is in a state of rapid change. As we look to decrease healthcare costs, you have to think the generics manufacturers are going to become more important. The question there becomes barriers to entry. If you can find drugs that are going to go off patent but where there are only going to be two or three generics manufacturers, you’re not in bad shape. But if 10 or 15 companies that are going to make the generic, prices are going to drop.

The overriding theme today is not only does your product have to be better than what’s on the market, but it also has to decrease costs to the healthcare system. Sometimes they come into conflict. We’ve dipped our toe into the generics. But we haven’t made big investments there yet. We’re trying to make sure we understand it a little better before we make sizeable investments there.

X: What is your top advice to individual investors who want to profit off the growth of life sciences?
DP: If you believe in the field of biotechnology, you really have to give your money to somebody who eats, drinks, and sleeps it all day. It’s very hard for the individual investor to pick a stock, because of FDA risks, clinical trial risks, and reimbursement risks. The individual investor doesn’t have access to the same information and the same experience that a professional mutual fund manager has. I think a mutual fund is the way to go.

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