Summary:
UK biotech sector in dire shape. High-profile drug failures and share prices plunges. Companies being bought up rather than listed. Does not create a sustainable sector. Problem is lack of financing, management and commercial savvy, combined with deteriorating macroeconomic environment. Not enough venture capital around and people taking risks in UK. Makes it difficult for companies to move to the later, more expensive stages of drug development. By the time economy picks up again, biotech may be eclipsed as a favoured high-risk investment by other sectors. Incentives by the government needed, but this might encourage academics to spin out more companies to add to the already large number that have yet to gain critical mass. (Published: 22/06/08)
Notes:
- past 12 months have been miserable for the UK's biotech industry
- sector has witnessed a string of high-profile drug failures
- share prices have plunged
- have been almost no public listings
- sector is shrinking as private biotech companies are bought by cash-rich pharmaceutical companies, most of which are based abroad
- Glyn Edwards, CEO Antisoma:
- "While there are some very strong companies developing - including Oxford BioMedica, Acambis and Protherics - the sector is really in dire shape"
- "We really need a biotechnology success. We have had some but in general they have been bought up"
- Celltech by UCB for GBP1.53bn ($3.03bn, C1.93bn)
- Cambridge Antibody Technology and KuDos Pharmaceuticals by AstraZeneca, for GBP702m and $210m ( GBP106m, C134m) respectively
- Piramed by Roche for $160m this year
- quality of British science not in question
- UK is currently producing more than one-third of the European Union's total drug pipeline
- Commercial biotech's perennial problem is a lack of financing, management expertise and commercial savvy
- on top of this comes a weakening macroeconomic climate in which fund managers are increasingly risk-averse
- William Powlett Smith, partner at Ernst & Young:
- "The UK has always laboured under the yoke of not having enough venture capital around and not having the people prepared to take risks"
- UK must create a better environment for companies to get their products to market and stay visible
- Aisling Burnand, chief executive of the BioIndustry Association:
- "There is a role for government to be doing more to support things at an early stage and getting companies investor-ready. Venture capital should be encouraged to come in earlier. There should be an incentive, from a tax perspective for example."
- Biotech companies are characterised by their high risk and cash burn.
- Drugs can cost $350m-$800m to develop.
- Operations must endure a series of financing rounds - from seed funding to venture capital - to move through this process.
- While many have come to the Alternative Investment Market, London's junior stock exchange, few have been successful.
- Returns have generally been so bad that investors are unwilling to finance early-stage listings.
- has made it difficult for companies to move to the later, more expensive stages of drug development
- Thus the sensible exit for private biotechs is to be acquired by a larger group.
- Aisling Burnand:
- "The trade sale route should be seen as a sign of the strength of the UK in terms of science. But it is a short-term fix that does not necessarily fit with creating a sustainable sector."
- can be argued that the only way for the industry to grow is to build up its own companies
- money from trade sales not being recycled back into the sector
- returned to their investors while others put into lower risk sectors
- Paul Cuddon, analyst at KBC Peel Hunt:
- "The UK's most prized biotech assets are being sold off to foreign companies because we cannot afford to retain them. That is not acceptable. The foreign companies get the UK science and labour force. The early-stage investors make money. But this is short term. The UK loses the ability to develop a greater labour force and profit from potentially blockbuster drugs."
- i.e. lack of commitment to commercialise has meant Britain has become a supplier of low-cost biological intellectual property to other countries
- UK biotech sector remains the largest in Europe
- second place in the world after the US
- almost 500 companies
- earnings of GBP2.6bn in 2005
- sector will no doubt stabilise when the state of the financial markets improves
- but: some analysts say it is being eclipsed as a favoured high-risk investment by other sectors
- e.g. emerging markets and commodities
- "If the market rebounds there will be a general uptick but I do think people are weary of management and weary of business models not delivering"
- UK could learn from the US experience
- biotech in US has been much more commercially successful
- US biotech companies have produced nine drugs that each sell over $1bn annually
- Liquidity is deeper, the investment community is considered to be more sophisticated and the talent pool wider
- Glyn Edwards: "In the UK we need to be able to raise substantial amounts of money when the IPO window is open. Unlike in the US, the UK tends to do smaller amounts of fundraising that allow companies only to get to the next milestone. When the window closes, they can run into real trouble."
- other initiatives Britain could consider
- Belgium has earmarked C260m ($406m, GBP206m) for early-stage research
- to nurture IP so a company is ready for the commercial process by the time it is formed
- "[In Belgium] companies are nurtured and given extensive mentoring before even reaching the public markets. As such they present a much more attractive investment proposition" (KBC's Mr Cuddon)
- danger in UK is that additional incentives might encourage academics to spin out more companies to add to the already large number that have yet to gain critical mass
- What is needed instead, say some observers, is sectoral consolidation
- This would create entities that were potentially more attractive to financiers.
- "We must make these companies more robust, so they can move along. Otherwise we are building a cycle of failure," says Ms Burnand.
