On 2 June 2015, One Nucleus organised an event hosted by Charles Russell Speechlys and the London Stock Exchange together with Hume Brophy, MedCity and BIA, recapping key feedback messages from the 2015 Future of Healthcare Investor Forum that took place in early 2015.
A lively panel and audience discussed where the UK/European healthcare sector has been, is now and is headed compared to the US. The mood was buoyant and attendance was high, and it is now planned that a series of similar healthcare investment trend events will be held on an ongoing basis.
The expert panel, chaired by Mark Howard from Charles Russell Speechlys, included Daniel Mahony, Polar Capital, Chris Mayo, London Stock Exchange, Paul Tomasic, RBC Capital Markets and Mary Clark from Hume Brophy.
- 2015 has already become a record year for total life science equity financings in the UK at close to $2.7bn YTD, which already exceeds the annual high in the last decade of ~$2.5bn in 2007, which was dominated by two large deals compared to a much higher number of transactions in 2015.
- Follow-ons strong: 2015 has seen big numbers (in both dollar and numeric terms) for follow-on financings in both the US & Europe/UK, with strong offerings on AIM disproving the traditional criticism that it is hard to raise follow-on capital in that market.
- Tech transfer & crossover funds have been a key driver of equity capital raising in the UK contributing to ~54% of a figure just over $2.5bn. They are now a key supplier of company funding in both the private & public equity markets, complementing interest from corporate venture capitalists and current enhanced appetite from generalist investors.
- Fewer IPOs in 2015 globally, compared to prior years, especially in the USA with a skew towards larger companies and bigger single offerings. The UK saw 27 IPOs in Q1 2015 across all sectors, raising $5.5bn and ranking first globally in terms of money raised with an average deal size of $200m vs. $74m in 2014. Investors have been avoiding smaller, riskier and illiquid issues in 2015 so far.
- Investors have been rewarded richly, especially by smaller healthcare companies in the UK, with YTD FTSE AIM All-Share healthcare returning nearly 29% by end May 2015, and NASDAQ Biotech ~20% compared to returns of ~6% from the high market-cap skewed FTSE All-Share Healthcare Index, +8% from the FTSE All-Share and +7% from NASDAQ overall.
- Despite strong performance and a higher risk-appetite, small cap life sciences companies, particularly in the USA, are at a disadvantage. It is hard for them to differentiate their investment case. In 2014, for example, 53% of US biopharma IPOs with a $250m targeted pre-money equity value or below priced below the initial filing range. Additionally, the performance of these companies from IPO through May 2015 is a median of -1% compared to +73% for biopharma IPOs above the $250m threshold.
- A US listing is not necessary for European/UK companies to attract US Investors. US investors are active participants in UK mid cap life science companies, in some cases representing the majority of the free float ownership. US ownership represents almost a third of the shareholder base for the UK market as a whole. There are tried and tested mechanisms for accessing US investors at IPO without a US listing.
- Exciting future areas: Digital Health, Alzheimer’s & Diagnostics. This topic elicited a vigorous response. In Digital Health, it was argued that the UK could have a strong position owing to the Oxford-Cambridge-London triangle (and other areas) pulling together programmers and clinicians in a way unequalled elsewhere. Healthcare infrastructure in every region globally is cash-constrained and governments, especially those running nationalised healthcare, need efficiencies which IT and digital efforts can help progress. This includes making use of personal data for diagnosis, monitoring, home care and prevention. A lot of this is being done in some of the UK’s academic institutions already and can be exported to the USA. Others talked about how the UK/Europe have made progress in Alzheimer’s R&D and those more minded to consider what may appeal to investors cited diagnostics as an underappreciated hot-bed which caters to European investors who are cautious on binary product development risk and happier with commercialization risk.
- Is tech transfer/crossover as a funding stepping-stone sustainable for development of a mature sector? The general view was a resounding “yes”, although we need to see more mature companies emerge successfully from tech transfer portfolios as standalone UK listed companies in their own right.
- For healthcare to become a greater proportion of equity portfolios/stock market in the UK, we need our small caps to mature into a stable group of mid-cap, main-market sized companies.
WHAT CAN HELP PUSH THE UK LIFE SCIENCES SECTOR ALONG AND INCENTIVIZE COMPANIES TO COME TO THE UK?
- Reduced listing costs. The US listing process is still cumbersome and can cost 15x-20x a European listing. One still wants good governance but anything to ameliorate listing costs would be positive. Points favouring the UK include the fact that deal research can be done and AIM listing prospectuses don’t have to be approved by the listing authority but by the NOMAD adviser. The costs of listing and the ongoing costs of staying listed are far more onerous in the US than in the UK.
- Deep Grant funding system as in France to help emerging companies. It was acknowledged that the BIA has done a great job of lobbying the UK government for grants so far including the Biocatalysts.
- Stop regulating investment further (as distinct from deregulating) because regulation implementation fosters long periods of inactivity.
- More crossover investors who can straddle the transition between private & public companies are needed.