How Blackstone Bolted Past Rivals in Life Sciences


Illustration by II

Stephen Schwarzman saw profits where others thought medical R&D was a bottomless pit.

Some hospital visits can be good for your financial health, too, as Blackstone Group chairman and CEO Stephen Schwarzman discovered.

His epiphany came on the day he joined the board of NewYork-Presbyterian Hospital in 2016. As part of the VIP treatment for new trustees, two researchers gave presentations on the latest medical breakthroughs at the institution.

Schwarzman was wowed by the health benefits. But his other reaction was: This can be a hugely profitable business, and Blackstone should figure out how to become a major player.


“It just seemed so obvious to me,” he says.

Back at his mid-Manhattan headquarters during the weekly management committee meeting, Schwarzman had Blackstone map out a life-sciences strategy. Its goal was to marshal the firm’s resources to help midwife the development of cutting-edge medications and biotechnology procedures.

The world is witnessing startling research and technological advances in medicines, developments with huge investment implications. Gene editing, mRNA, and artificial intelligence — to mention just a few — are speeding up the discovery and delivery of new drugs and raising the prospect of neutralizing deadly diseases even before a person exhibits symptoms.

But expenses for clinical trials and other development costs are skyrocketing. This has created a yawning gap in the supply and demand for research-and-development capital.

A few firms such as Eli Lilly and Novo Nordisk are fattening up on weight-reduction drug sales. But most pharmaceutical and biotech companies have failed to raise anywhere near enough capital in the public markets and have seen their valuations plummet.

Critics point out alternative asset managers and hedge funds may not have enough to meet the capital demands for R&D in life sciences.

That channel of funding is still really small,” says Damien Conover, who follows health care and life sciences for Morningstar.

But deep-pocketed alternative asset managers couldn’t ask for a more promising life sciences landscape. And Blackstone has taken a clear lead over its peers in terms of fundraising and early returns from investments in new pharmaceuticals, including a cholesterol-lowering medication.

The firm’s strategy is to focus on lower-risk, potential blockbuster products that consume hundreds of millions of dollars or more for clinical trials needed to gain Food and Drug Administration approval. It then takes in profits through royalties on the eventual sales if those products do well.

“We’re financing the last mile of clinical development of pharmaceutical products,” says Nicholas Galakatos, head of Blackstone Life Sciences, or BXLS. And measured in terms of FDA approval, the firm has a success rate far above the pharma industry average.

Blackstone’s business model is well suited for life sciences. Its $1 trillion of assets under management are spread over more than 230 portfolio companies and massive holdings in real estate, credit, and private equity. And there’s nothing to prevent BXLS from working with professionals in any area of the firm.

“We’re able to come at life sciences from different directions,” Blackstone president Jonathan Gray says.

Even before Schwarzman’s aha moment, Blackstone was backing into life sciences through real estate, at the time the firm’s most reliable and profitable business. In 2015, Blackstone bought BioMed Realty, an owner of buildings offering laboratory and office space in science hubs, such as Silicon Valley and Cambridge, Massachusetts.

Then came the harder task: deciding whether Blackstone should take the next step by building a life sciences business from scratch or buying an established firm.

Blackstone’s head of private equity, Joseph Baratta, who led the project, spent a year coming up with the answer.

Some Blackstone businesses — including infrastructure and growth equity — were created by hiring pricey, experienced outsiders.

But Schwarzman has a well-known abhorrence of deficits. He once threatened to shut down Blackstone’s now very successful retail investment business when its startup costs created a first-year loss of $10 million — chump change for the world’s largest alternative asset manager.

Baratta’s search for a cheaper solution led to the 2018 purchase of Clarus, an investment firm that financed late-stage — or Phase III — clinical trials of medical products. Terms were not disclosed.

“Clarus was a relatively small firm that had been around for a while and had a good track record — a group of professionals who were mostly physicians and Ph.D.s, experienced clinical development people, and former heads of R&D at pharma firms,” Baratta says. “And we thought it would be hard to replicate all that on our own.”

Clarus founder Galakatos became head of the unit, renamed Blackstone Life Sciences. Today, BXLS has more than $8 billion in AUM. It has raised the largest amount of private money — totaling $6.2 billion — in life sciences. And it can rely on the parent firm to cover any additional financing needs.

Backed by Blackstone’s scale and financial heft, Galakatos expanded the Phase III clinical development strategy pioneered at Clarus.

“We focus on products that have very significant potential in the marketplace and treating patients,” he explains. “We’re looking for products that can bring in at least $1 billion in peak annual sales.”

The pharma industry’s dearth of capital is creating plenty of opportunities to locate such potential blockbusters.

Demand for R&D investment by big pharma and biotech companies is about $300 billion a year, according to Evaluate Pharma, a data collector for the industry.

While demand for R&D capital has surged by 2.5 times over the past decade, the supply has increased only 1.5 times.

The need for cash shot up for two reasons. Groundbreaking innovations have led to the development of many new products. And getting those products tested, approved, and manufactured is increasingly costly.

But cold figures don’t begin to communicate the frustrations engulfing the pharma industry and its investors. Consider the examples of Pfizer in big pharma and CRISPR Therapeutics in biotech.

During the pandemic, Pfizer gained heroic status. In collaboration with BioNTech, it developed a Covid-19 vaccine using messenger RNA, or mRNA, to translate genetic information from DNA into proteins needed to combat the virus. Then, on its own, Pfizer developed the antiviral pill Paxlovid. Its share price and revenues reached record highs.

But as the Covid panic abated, Pfizer was stuck with huge inventories of its vaccine and Paxlovid. Near-term prospects for other potential blockbuster drugs fizzled after both a revolutionary flu shot and a weight-loss pill failed to meet expectations in clinical trials. Meanwhile, patents on other profitable Pfizer drugs were expiring. And debt soared as Pfizer shelled out a whopping $43 billion to acquire cancer-drug biotech company Seagen in the hopes of creating a new revenue stream by 2030.

Pfizer’s annual revenue for 2023 declined by 41.7 percent from the year before, and by the end of April the share price had dropped to the same level where it was a decade ago.

CRISPR Therapeutics, one of the most heralded biotech firms, has also been a market disappointment.

Headquartered in Switzerland, CRISPR achieved instant fame as co-developer, with Vertex Pharmaceuticals, of Casgevy. The drug is used to cure sickle cell disease, a sometimes fatal ailment that disproportionately affects people of African descent.

CRISPR was co-founded by Emmanuelle Charpentier, who shared the 2020 Nobel Prize in chemistry with Jennifer Doudna for their development of the gene-editing technology used in Casgevy. This enables medical scientists to cut and paste double-stranded DNA to edit out genes that cause sickle cell and perhaps eventually various cancers and heart ailments as well.

Last December, it was headline news when the FDA granted approval for CRISPR’s sickle cell treatment after clinical trials showed its startling success in curing patients.

But CRISPR’s market cap and annual revenue are less than half their highs of three years ago.

The main problem facing investors is the current $2.2 million price tag for the one-time Casgevy treatment. With many health insurers declining to make such expensive reimbursements, the commercial possibilities for Casgevy remain limited.

Big pharma and the public markets are still the industry’s largest suppliers of R&D capital.

But pharma companies historically set aside up to 16 percent of their revenue for R&D and deliver the mid-single-digit dividends that attract older, more conservative investors. That leaves them strapped for additional R&D spending. And the valuations of biotech firms keep sliding as public markets focus only on the hottest tech stocks.

This means there is about a $170 billion annual gap between demand and supply of R&D capital. And products in Phase III clinical development account for half that total.

Little wonder that Blackstone executives sound so upbeat on the sector.

“That market is getting bigger, not smaller,” Galakatos says.

The industry has a 53 percent success rate in bringing Phase III medical products to market, according to Evaluate Pharma. Blackstone’s hit rate is 84 percent for the 131 medical products it has helped commercialize.

Among the most successful is a cholesterol-lowering drug, inclisiran (brand name Leqvio), that is injected only twice a year — versus the everyday statin pill.

The complexity of the process to get inclisiran to market illustrates why Blackstone has built a competitive advantage in life sciences over other private equity firms and hedge funds.

Inclisiran was invented by Alnylam Pharmaceuticals, which is both a Blackstone business partner and a laboratory and office tenant in a Cambridge, Massachusetts, building owned by Blackstone’s BioMed Realty.

To develop inclisiran, Alnylam was joined by another pharmaceutical firm, The Medicines Co. Then pharma giant Novartis acquired The Medicines Co. because of inclisiran’s potential. Given the widespread use of statins, Novartis projected annual sales as high as $10 billion for the drug.

Novartis agreed to pay Alnylam, as the drug’s inventor, up to a 20 percent royalty on inclisiran sales. But Alnylam estimated it would take about $2 billion to finance the Phase III trials required for FDA approval before the drug could be marketed. Raising that money on its own would have forced Alnylam to dramatically dilute its shareholder base.

Instead, it turned to Blackstone. The alts behemoth offered to buy half of the future royalties paid to Alnylam by Novartis for $1 billion. Alnylam raised the other $1 billion in the equity market, a dilution its shareholders found acceptable.

Sales of inclisiran began in 2022, and reached a total of $495 million by the end of the first quarter of this year. The drug is on course to record multibillion-dollar annual revenues in the next five to 10 years, Novartis says.

Blackstone has taken care not to be seen as a competitor of pharma and biotech firms. That’s the type of problem Blackstone has encountered with entrenched leaders in other industries. For example, Blackstone’s rapid ascent in private credit has created an uneasy relationship with banks.

Blackstone insists that’s unlikely to happen with big pharma firms. For one thing, given its capital constraints, the industry welcomes any help alternative asset managers can provide in the drug development process. Blackstone and pharma companies work together to design and fund clinical trials, such as those for inclisiran.

Personal relationships also play a key role. Galakatos spent the early part of his career at Novartis and maintains strong ties with the Swiss pharma giant’s senior executives. He describes himself as a close friend of Alnylam chief executive Yvonne Greenstreet.

“Pharma firms are our partners, plain and simple,” Galakatos says.

That partnership, though, could be tested if BXLS continues to recruit the best and brightest of big pharma’s staff. According to Galakatos, it’s a one-way flow: He hasn’t lost anybody from Blackstone to a pharma company.

Former big pharma senior staff now working at BXLS speak in interviews of the stultifying bureaucracy at large pharma companies and their personal desire to shepherd a medical product to market as quickly as possible.

Blackstone is by no means the only asset manager or hedge fund in life sciences.

Taking a real estate approach, Canada’s Brookfield Asset Management, the world’s second-largest alternative asset manager, has made major investments in Britain to build scientific and research hubs. Another big alts firm, KKR, has a minority stake in Catalio Capital Management, a firm that specializes in earlier clinical stage development of medical products.

Goldman Sachs Asset Management has taken a venture-fund approach. It backs existing small pharma and biotech firms engaged in preclinical and early clinical stages of products.

“We invest in companies for an average of five years,” says Amit Sinha, who leads GSAM’s life sciences investing team. “We have a bias towards scaling them privately, but they could end up either going public or being sold to a larger pharma firm.”

Blackstone insists it will continue prioritizing investments in medical products in Phase III clinical development. But it already has made a major foray into Phase II — the intermediate stage before preparing a product for FDA approval.

That’s the case with Anthos Therapeutics, a joint venture created by Blackstone and Novartis solely to develop Abelacimab, a drug to prevent blood clotting in patients at risk of cardiovascular thrombosis.

Novartis took Abelacimab through Phase I trials. These involved testing the drug for possible adverse reactions on relatively small groups of volunteers. But with R&D costs rising, Novartis turned to BXLS to advance the drug through Phase II clinical development.

Blackstone committed $250 million for Abelacimab’s further development and is the controlling shareholder in Anthos, with Novartis maintaining a small equity stake. Blackstone recruited John Glasspool, who spent a decade as head of Novartis’s cardiovascular unit, to be Anthos’s CEO.

Adding a sense of urgency, Johnson & Johnson already markets an anti-blood-clotting drug, Xarelto. It has recorded $23.7 billion in total US sales since its FDA approval in 2011.

Phase II tests of Abelacimab were successful enough to move the drug into Phase III. Blackstone hopes to gain FDA approval by the end of 2025. In head-to-head tests with Xarelto, it has shown a more significant reduction in bleeding that can occur with the use of anti-coagulants. And Abelacimab requires only a single post-operative dose good for 30 days versus more frequent doses for Xarelto.

“Abelacimab could become a paradigm shift in preventing blood clotting,” Glasspool says.

And the potential financial windfall is huge. With heart attacks and strokes as the leading causes of death in the Western world, Citi Research estimates that the annual market for new anti-thrombosis drugs could reach $55 billion by 2035.

Constrained by its commitment to investors in its funds, BXLS must continue its focus on drugs in later clinical stages. But that hasn’t prevented other divisions of Blackstone from investing in companies linked to earlier clinical stages.

In 2020, Blackstone Private Equity spent $2.3 billion to buy Precision Medicine Group, a Bethesda, Maryland-based firm that helps pharma companies conduct early-stage clinical trials. A year later, Blackstone acquired for an undisclosed sum Nucleus Network, Australia’s largest Phase I clinical trials provider.

In both cases, BXLS provided due diligence and investment advice. A BXLS representative sits on the board of Nucleus Network.

What makes Nucleus Network particularly valuable is its expertise in patient recruitment for Phase I and II trials. With so many potential blockbuster drugs in development, there is already a severe shortage of volunteers.

Life sciences’ heady mix of rising profits and life-saving altruism can recall the early enthusiasm for the environmental, social, and governance movement.

Several Blackstone senior executives have made personal commitments to life sciences. Gray, the firm’s 54-year-old heir apparent, and his wife, Mindy, have donated more than $150 million to gene-editing and other cutting-edge cancer research following the death of Mindy’s sister, Faith Basser, from ovarian cancer at age 44.

But Gray downplays the danger of an ESG-like backlash. “Our returns are tied to actually saving lives,” he says. “So, our fiduciary duty to investors and the outcome it produces are aligned.”

That kind of measured response hasn’t curbed the enthusiasm of Schwarzman, now 77. “I think this field is just going to explode,” he says. And he predicts that before he eventually retires, Blackstone’s life-sciences business “should be many times larger.”