Published: May 10, 2023
The past several years have been record-breaking ones UK biotech investment – but the UK needs to use its full financial firepower if it is to become a global leader.
The UK biotech sector is on the rise. According to new data from the BioIndustry Association (BIA) and Clarivate, 2021 was the highest year on record for investments into UK biotech and life sciences companies. An unprecedented £4.5bn was raised in public and private financings, which is up sixty-percent and by £1.7bn over 2020 sums.
While venture capital financings totaled £2.5bn, an increase of 81% from 2020, the real story was IPOs. These totaled £1.3bn, a more than fourfold rise on the year before.
“There is great opportunity to turbo-charge the UK’s biotech and life sciences sector and capture more of its economic value for the UK by building better connections between the UK’s financial institutions and our innovative scaling businesses,” said Steve Bates, CEO of the BIA.
The news comes at a turbulent time for the UK, which is being buffeted by a cost of living crisis alongside the pandemic and the fallout from Brexit. However, the biotech sector has been a consistent bright spot. During the pandemic, the UK played a leading role in genomic sequencing and vaccine development, while cell and gene therapies are booming.
The government has also been working hard to position the country as a global hub for life sciences. Since ratifying its ten-year Life Sciences Vision, a joint government-industry initiative that works to create a supportive environment for innovation, the sector has been on a tear.
“Already, UK biotech financing has multiplied tenfold in the last decade, but we have capacity to absorb much more and join Boston and the Bay Area as one of the world’s top science superclusters,” said former prime minster Boris Johnson at a JP Morgan healthcare conference.
Everything to play for
Chris Sahota, chief executive of M&A firm Ciesco, believes there are opportunities for both the larger multinationals and smaller innovators to attract investment for their work.
“The government has aligned with industry and academia to fund research into understanding and treating rare diseases for at least the next decade,” he tells EMEA Finance. “In oncology and haematology, there will be opportunities for the UK to produce world-leading work, especially as its big players expand into new geographies and acquire smaller biotechs.”
A notable example was AstraZeneca’s US$39bn buyout of US-based Alexion. As well as expanding its presence in immunology and rare diseases, the British drugmaker will now have scope to create lucrative new hubs in Boston.
Other notable transactions have included Oxford Nanopore’s £350mn IPO, which was preceded with a £195mn fundraise; and Excientia’s £158mn Series D fundraise.
Immuno-oncology company Crescendo Biologics has entered into a $750mn partnership with vaccine pioneer BioNTech, and UK biotherapeutics company Adaptate has been acquired by the pharma giant Takeda.
Sahota adds that, in some ways, the pandemic has offered the much-maligned pharma industry an opportunity to rebrand.
“The need for medical research and development had almost a halo effect on the companies looking to provide a return to normality, and society at large has recognised the value of the industry in ensuring health and stability around the world,” he says. “Pharma proved to become a very creative and innovative sector and, with new financial backing, is likely to keep the momentum going.”
Tim Rea, expert in life sciences at the investment firm BGF, takes the view that Covid-19 has accelerated investment activity by reminding us how much a health crisis truly costs us.
“It is our hope that the legacy of the pandemic is sustained investment into R&D that will leave us well positioned for the next crisis,” he tells EMEA Finance. “The entire healthcare sector globally is facing unprecedented change over the next decade, and the resultant opportunity has attracted entrepreneurs with a desire to make an impact. The UK’s deep, long established commitment to underlying scientific R&D adds world-class fuel to the fire.”
Challenges and weak spots
Although the situation is largely positive, with the UK leading Europe in many metrics, there is still a way to go in some respects. According to McKinsey, the UK has issues translating its world-class science into commercialised products. It also lags behind the US and China when it comes to average early-stage biotech funding ($21mn per UK biotech, compared to $36mn for the US and $45mn for China), and struggles to fund later stage development.
What’s more, there is a perception that UK investors may not be that well versed in biotech, especially compared to the specialist investors on the other side of the Atlantic. It may be the case that more and more UK biotechs are opting for IPOs in the UK, however, many eschew the UK in favour of the US.
This is not altogether surprising, considering the level of share trading for life sciences companies on the LSE is often limited. In a particularly galling statistic, companies listing on Nasdaq will typically achieve a valuation 20-30% higher than those listing in London.
“While the UK is absolutely phenomenal in the very deep capital markets, the US unfortunately still has a slightly higher number of biotech specialists,” said Vaccitech CGO Georgy Egorov, following the company’s US$110mn listing on Nasdaq.
These issues are not unknown to the UK government, which is looking to overhaul the onerous regulatory requirements around its stock exchange. It is also conducting a review into its R&D tax relief system; setting out a new approach to artificial intelligence; and reforming data protection laws to make it easier to use data for research purposes. These regulatory reforms, and others, could make the UK more attractive for life science researchers and growth stage companies.
However, there are plenty of unknowns going forward, with some analysts suggesting UK IPOs may fall across the board. A recent report from EY cited a number of prevailing headwinds, not least inflationary pressures, interest rate rises, supply chain issues, and weaker consumer spending. This may lead to a weaker equity market, which muddies the outlook for dealmaking in the life sciences sector.
“It is crucial that IPO-bound companies adopt a resilient and flexible strategy that can adapt to shifting market conditions and geopolitical tensions,” said Helen Pratten, EY strategy and transactions partner.
Opportunities for investors
Rea at BGF argues that while the UK’s life science market is attractive from an investment perspective, investors need to get better at spotting key subsectors and understanding emerging trends.
“This goes beyond the Golden Triangle of London, Oxford and Cambridge,” he says. “In order to harness the full potential of the UK life sciences sector, a generalist and nationwide approach to investment is needed to identify trends across a range of different sectors and regions.”
BGF itself focuses on the mid-level market, having made over 30 investments in this space over the past three years. It is particularly interested in the technology specialisms that are emerging in regional hubs, such as Scotland and the North West, and believes there are clear investment gaps outside of drug development. Its current portfolio spans diagnostics, medtech and digital health, as well as services, software and tools supporting therapeutic development.
“To meet ever-rising public expectations, the industry must stay at the forefront of innovation,” he says. “[The sector] is likely to see major developments that will reshape the life sciences sector – AI and machine learning, for instance, are set to have a huge impact on drug development – and we expect to see continuing innovation in digital health solutions. Diagnostic technologies and medtech have been poorly supported generally and in many cases we see funding gaps beyond very early stage support.”
According to the LSE, the UK’s life sciences sector generates £70bn in turnover per year, employs 240,000 people, and is the largest biotech cluster outside the US.