Jan 9 Reuters Private equity firms that deemed drug development too risky for their liking in the past are increasingly investing in the sector, raising dedicated funds and coming up with deals that compensate them for the uncertainty involved.

These firms are seeking to capitalize on the growing gap between the supply of capital for clinical research and the number of drugs competing for it, eight buyout executives and investors interviewed by Reuters said.

Annual spending on pharmaceutical research and development globally is projected to rise to 254 billion by 2026 from around 200 billion in 2020, according to Evaluate Pharma, a research firm focused on healthcare.

These deals are not structured as the leveraged buyouts that private equity firms are mostly known for. Instead, the buyout firms invest in the development of the drugs, typically when they are in socalled Phase 3 clinical trials, one step away from regulatory clearance. They negotiate with pharmaceutical companies the returns they will receive in advance.

In most cases, the drug makers start paying the money back to the private equity firms when the drug is being developed, either by issuing equity, tapping cash on hand or borrowing. They also share a slice of the newly developed drug39;s revenue with the private equity firms once it39;s approved.

Blackstone Inc has been leading the charge, having made ten investments out of a 4.6 billion of a dedicated life sciences fund it launched in 2020.

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