Performing Tenant Diligence on Life Science and Pharmaceutical Tenants
TRA has analyzed awide variety of tenants in the life science and pharmaceutical sectors, and we are always very interested in evaluating these companies and learning about forthcoming healthcare advancements. These companies can offer many exciting growth prospects, but they frequently require significant high cost tenant specific improvements as well as often being very high-risk businesses. At TRA we evaluate a number of key factors to evaluate the sustainability of these tenants.
Development Phase
Just like many capital-intensive businesses, knowing the maturity of the company’s commercialization plan reveals an important component of a company’s overall risk. Early stage companies, particularly those fledgling companies on the early path toward regulatory approval, carry significantly greater risk than those that are further along the approval pipeline to commercialization.
Capitalization
Not all firms are cut from the same cloth when it comes to capitalization. Knowing how and who is funding a business yields significant insight into its sustainability. Companies funded largely by small investors or venture capital carry significantly more risk than those backed by market incumbents or large, strategic investors with long track records.
Addressable Market
This factor seems obvious, but often gets overlooked. Life science and pharmaceutical companies develop therapies and treatments for specific health conditions. While it may seem obvious that companies developing treatments for widescale conditions have larger addressable markets than those developing orphan treatments. It also means there is greater likelihood of competition and patent risk. Sometimes companies developing orphan drugs for rare conditions have the best runway given the extended patent protections offered by regulators and the limited competition around drug development for these conditions.
Patent Exposure
Patents are the end result of significant research and development dollars following years of research. The defense of patents, particularly ones with strong commercialization potential, require significant resources. Patents by nature have a specific life span, but not all patents are created equal. Orphan drug patents are granted greater protections by U.S. regulators than non-orphan therapies. A life science or pharmaceutical company’s patent is the life blood of the business.
Competition
It seems obvious that an understanding of the competition would play a factor in any company’s long-term sustainability, but knowing how to assess the competition and a company’s place in the market requires a comprehensive understanding of all the aforementioned factors. Often times in life science and pharmaceutical companies, there is room for only one or two major players, and a company’s market position is the net sum of its development phase, capitalization, its addressable market, and its patent exposure.
Other factors like legal disputes and product liability play an outsized role in a life science and pharmaceutical company’s credit risk profile. TRA’s analysts know how to synthesize these factors, leveraging our internal credit frameworks and industry data to yield industry specific comprehensive tenant diligence. Reach out to us to find out how we can support risk analysis on your life science and pharmaceutical tenants.
