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Rethinking the growth capital challenge in UK life sciences

Appleton_MatthewBore_JacquelineInvestors, entrepreneurs and deal makers in the UK life sciences industry met on 28 September 2018 to share ideas on how to close the funding gap which exists for UK businesses in the period between early stage investment and IPO. At a lively panel discussion sponsored by LSX Connect and hosted by Allen & Overy this emerging feature of the life sciences investment landscape in the UK was debated and possible structural solutions proposed.

There was a consensus that there is an exciting stream of innovative life sciences businesses seeking seed capital in the UK, for which there is plenty of available funding. It is proving much harder, however, for those businesses to link up with Series A and Series B investors further down the line.

Tax incentives can tend to produce overseeding of businesses that may have an innovative product based on great science, but which cannot deliver this in a business model or at a price that their customers want. These “zombie” companies cannot move into a serious development phase and crowd the investment landscape, making it difficult for Series A/B investors to distinguish the real prospects worth backing.

The panel emphasised the imperative of looking beyond the exciting science to explore the commercial sense of a business as early as possible. A company might become a better investment prospect if the investors encourage people experienced in business execution onto the board, for example. Venture partnering may be another route for investors to weed out the bad ideas and double down on the good ones.

The panel hope to see the serial entrepreneurs that are a feature of the US West coast business environment becoming embedded on the UK scene. But they challenged the analogy between life sciences and tech investors. Tech investors want to exit as early as three years whereas Life Sciences has a 15 year exit window. Healthcare does not scale in the same way as tech companies. The UK Government’s recent strategy announcements on patient capital recognise the need to take the long view in life sciences investment, as do some high net worth investors who are investing their own money and do not need to show quick returns. Most British biotech companies are taking corporate investment, however, and this risks the chance of a too early exit of liquidity at an undervaluation.

The panel noted that funding at IPO stage seems to be readily available, so the Series A/B funding needs to be the area of focus for development. Whether through changing the tax incentives or creating more success stories through better investor/investee engagement dynamics, unlocking this funding gap is the key to delivering on a growing UK life sciences industry and the realisation of the UK Government’s industrial strategy in the sector.

Written by Matthew Appleton, Partner, and Jacqueline Bore, Life Sciences PSL, at Allen & Overy. This article was first published on Allen & Overy's Life Sciences Hub on 26 October 2018.

Editor's note: LSX would like to thank Allen & Overy for hosting LSX Connect Autumn, and would also like to give thanks to the following panellists for sharing their expertise and insights: Dr Ashish Patel, Investment Manager, Head of Research at Mercia Technologies; Jason C. Foster, Managing Director at Health Equity Consulting Ltd; Lorimer Headley, Chief Financial Officer at Sensyne Health; Michael Bloch, Counsel, and Matthew Appleton, Partner, at Allen & Overy.

 

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Allen & Overy
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Allen & Overy is one of the world’s premier law firms. We act for life sciences companies and their investors across the pharmaceuticals, biotech, veterinary, medtech, diagnostics and healthcare sectors. We support our clients to grow and evolve to be market leading businesses – maximising their opportunities and successfully meeting their potential challenges. Our clients value our deep sector knowledge and highly commercial approach, combined with our top tier cross-border service offering – whether they are embarking on an IPO or other capital raise, conducting M&A or protecting their IP.
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