Why investment giant Blackstone is funding huge drug trials for Novartis and others

Blackstone Group LP is betting that it can use its considerable financial muscle to succeed where even the biggest drug makers need help: getting promising medications over the finish line.

Last year, the private equity giant snapped up Clarus, an investment firm that specializes in funding research for experimental medicines that were otherwise stranded when their original developers braked their studies in the face of daunting economics. The business now operates as Blackstone Life Sciences.

“The opportunity here is potentially really large,” said Joe Baratta, global head of private equity at Blackstone, in an interview at the firm’s headquarters. He said the firm wants to become a go-to source of capital for large pharmaceutical companies bringing new treatments to patients.

Developing new medicines is notoriously difficult and pricey. It takes about $2.6 billion and a decade of research to bring a drug from inception to federal approval, according to a 2014 Tufts University study. Only 14 percent of therapies that begin clinical trials reach patients, a report last year by the Massachusetts Institute of Technology found.

The final stage of research, where the safety and effectiveness of an experimental therapy is tested, is the most expensive. That means even huge multinational pharmaceutical companies must pick which therapies to shelve and which to advance.

As a result, otherwise promising drugs sometimes languish for financial reasons, creating an opening for investors with deep pockets and an appetite for risk. While late-stage studies are costly, drugs that clear earlier scientific hurdles end up succeeding nearly 60 percent of the time, according to a biotechnology industry group.

Clarus had carved out a niche in funding stalled but potentially lucrative medications. However, its relatively small size — it closed its latest fund of about $1 billion in June 2017 — constrained its ambitions, capping its average investment at about $100 million.

Enter Blackstone, the $500 billion giant staking its future in part on investing in higher-growth industries, such as health care. While the firm has done health deals before, it had little expertise in medicine. Its new life-science team, however, is stocked with executives who have brought dozens of new drugs to market, including former CEOs of Genentech and Ariad Pharmaceuticals.

“It was a very compelling argument, combining our domain expertise with Blackstone’s scale, infrastructure, and the institutional brand,” said Nicholas Galakatos, cofounder of Clarus and now head of Blackstone Life Sciences. Still, the decision to sell marked an existential crossroad for the small investment firm.

“As you can imagine,” said Galakatos, “for a small shop like ours, we did a bit of soul searching.”

Blackstone is trying to broaden its investment horizons and generate more growth at a time when many expect a longer-term increase in interest rates. Fast-expanding technology firms have attracted big bets from investors looking for juicy returns, but Blackstone’s leaders see untapped potential around biotechnology and pharmaceuticals.

“Our view was that the traditional technology private capital markets had been super well-developed, and you were seeing companies staying private for much longer,” Baratta said. “But the life-sciences industry hadn’t developed in the same way.”

In late February, the Blackstone unit launched Anthos Therapeutics Inc., its first company in partnership with Novartis AG. Anthos is developing what it hopes will be a new kind of blood thinner.

While current therapies target dangerous clots that can lead to heart attacks and strokes, they also can lead to risky bleeding. Anthos’s experimental anticoagulant would target bad clots while not interfering with the body’s normal clotting mechanism.

The potential market is large. Bristol-Myers Squibb Co.’s Eliquis brought in $6.44 billion last year, while Johnson & Johnson sold $2.48 billion of its blood thinner. Blackstone funded Anthos with $250 million; Novartis retained a minority stake.

That Blackstone’s first foray into drug development is a cardiovascular therapy isn’t trivial. Big pharmaceutical companies are increasingly focused on cancer, leaving heart disease, diabetes, obesity, and other disorders under-researched.

Thousands of diseases, including ones with large numbers of potential patients, “are not being tended to,” said Galakatos. He said Blackstone wants to work with drug makers “to spin assets out and build vertical companies in areas that are very important from the medical perspective.”

It’s not only Blackstone’s clients who stand to benefit from such work.

Life sciences “doesn’t look like everything else that they’re investing in. There aren’t multiple ways to play this from their perspective,” Baratta said. "And in the process we’re developing lifesaving products that will improve the human condition.

“That’s excellent too.”