Life investing

UK life sciences companies are in need of a serious cash injection to fund the development of potentially groundbreaking and lifesaving medicines.

However, lack of appetite from UK investors has resulted in growing numbers turning to foreign backers to plug the funding gap.

As a result, UK companies are floating on international stock markets from as far afield as Eastern Europe and Australia, while others are joining forces with cash-rich Asian investment funds which are eager to tap into the immense potential on offer in the life sciences industry.

The UK is a world leader in life sciences and a centre of excellence. UK companies have discovered and developed more leading medicines than anywhere else in Europe. These medicines, together with innovative medical technologies, have made great advances in the delivery of healthcare.

The industry, which is made up of the pharmaceutical, medical technology and medical biotechnology sectors, employs more than 100,000 people and is a key economic driver – generating more than £30bn in sales a year.

Yet raising cash to fund the development of new medicines and technologies has always been extremely difficult. It is a high risk business and it can take many years for products to complete rigorous clinical trials and launch onto the marketplace.

For start-up or very early stage companies which are looking for pre ‘series A’ funding there are a number of regional and government-back investment funds which provide anything from £250,000 up to £5m.

However those life science companies, particularly drug discovery firms, which have previously secured seed funding but are still at the pre-clinical trial stage, soon find the finances run out – and further investment is in very short supply.

Drug discovery companies require considerable funds, and for those which are still classed as ‘early stage’  - the development is up and running, there is proof of concept but yet to reach clinical trials – there is a significant funding gap.

While life sciences funding has always been difficult to obtain, the majority of venture capitalists and private equity houses that were once prepared to invest have now pulled out of ‘early stage’ funding as they view the industry as far too risky.

Despite the huge sums injected into the development of drugs, more than half – 60 per cent – fail make it to phase 2 of clinical trials.

Nevertheless, of the 40 per cent that do, a number go onto develop pioneering medicines which often bring life-changing benefits to patients. And while British investors are reluctant to provide funding, there is growing appetite among international backers who are willing to take the risk and are in it for the long haul.

Examples include drug discovery company Neurosolutions Limited which was looking to raise £2m to fund the development of its products. However, unable to secure investment in the UK, the company floated on the Australian stock exchange where investors had more interest.

We are advising a drug discovery firm which is seeking to raise EUR 10millon on an Eastern European stock market. Elsewhere, investor appetite is strong in France and across Europe as well as in the Far East, particularly in China, where a number of funds are actively seeking UK investment opportunities.

It is easy to see why UK life sciences companies are attractive to international investors. The UK boasts a highly-skilled workforce and potential collaboration opportunities with some of the world’s leading scientists and academic institutions which have generated hundreds of spin-out companies.

There are also opportunities to partner with the NHS – one of the world’s biggest purchasers from the life sciences sector – in research and development, and the UK’s business-friendly environment is attractive to foreign funders.

Of course, for early-stage companies that are desperate for funding, international investors offer a lifeline, and inward investment has to welcomed.

However, identifying potential foreign backers is often a very time-consuming and costly exercise. It involves attending conferences, networking events and working exceptionally hard to spread the word.

And for those companies that are forced to list on foreign stock exchanges, there can be a number of barriers to overcome. They are operating in different jurisdictions and the long distances can make it difficult to maintain contact with investors.

There is also the language barrier, as well as different legislative frameworks and a number of companies listed on foreign stock exchanges have found that they have had to move operations to the new country – which is ultimately taking money out of the UK economy.

The lack of appetite from UK investors is also potentially preventing life-saving medicine and technologies from getting to the healthcare sector. And while international investment is welcomed, more need to be done to encourage UK investors to back life sciences companies if this much championed industry is to remain a world leader in the field.

Simon Wallwork is a partner and head of the life science team at Manchester law firm Pannone