Improving access to public market funding for life science companies
UKSPA’s conference at Warwick University saw a discussion chaired by association board member Prashant Shah, CEO of the O2h Group, on funding the UK’s life sciences sector from public markets.
It involved a head-to-head between Marcus Studdard, head of primary markets and the AIM small stock market at the London Stock Exchange, and Mick Cooper, life sciences specialist at the Office of Life Sciences, which sits within both the Department of Health and Social Care and the Department for Science, Innovation and Technology.
Introducing the duo, Prashant said: “Like a lot of people, I’m a little bit worried about the transition of life science companies into full-fledged homegrown success stories, seeing some early-stage companies from the Cambridge area sometimes not making it onto the public markets and sometimes getting acquired by US companies.
“To support those early-stage companies and help them make it onto the public markets led me to the Cambridge Stock Exchange project, which is a decentralised bit of thinking of how we can bring capital into the ecosystems to support those companies, nurture them and keep them homegrown.”
Turning to Mick Cooper, he asked: “Do we have an issue in the UK in terms of supporting companies all the way through the continuum onto the public markets?”
Mr Cooper said problems arose around Series B funding. The second stage of venture capital financing, it is a type of equity-based financing where investors provide capital in exchange for preferred shares to help a company scale its operations, expand its market reach, and further develop its products or services
“There isn’t a huge amount of difference between the UK and US up until Series B, but then it just it just flattens out. In the UK the median IP raise is basically the same as a series B round, whereas in the US they’d be looking to raise five times more that than that, and that does cause issues.
“So yes, I would say there is an issue and this is one area where there’s a lot of government focus – and has been for some time – on scaling up companies.”
There had been a series of initiatives to access some of the huge amount of capital in the London markets, he said.
“In the UK there’s a lot of focus on Oxford Nanopore, which is one of the few companies that is scaling up on UK capital rather than being very dependent on US capital, which is a rarity.”
Marcus Studdard said: “I don’t think there is a single gap – I think there are probably multiple gaps and they go all the way back to seed capital.
“The real tragedy is that we have amazing levels of innovation and research in the UK, so we’re not lacking the talent. We’ve also got one of the world’s biggest financial markets and pension fund industry.
“For a whole variety of reasons, though, our UK pension funds have been allocating less and less to equity. 25 years ago over 50% of UK pension funds were allocated to equities. That’s now less than 4%.
“Whether it’s in life sciences or other sectors, we are starving our companies of capital.
“There are multiple factors causing this: partly regulation, partly risk appetite, partly an ultra-low interest rate environment for a long time.
“Regulation has been almost exclusively focused on delivering the lowest cost outcomes for savers and pension holders, whereas what we need is value for money – and we ae seeing that shift take place.
“If you look at value for money you then start thinking about how you get outside returns rather than just matching your liabilities against income flows. It’s also part of the shift from direct benefit to direct contribution pensions.
“There’s a whole variety of reasons, but we are where we are and we need to recognise the fact that in the UK we’ve done a lot of the hard work in starting these businesses.
“Taxpayer funds de-risk a lot of these businesses through tax breaks and so on. Then, when some of those companies are at the point of delivering the highest returns, the really sad thing is that quite often US private equity or Asian family offices are picking up these de-risked businesses.”
“Things like the Mansion House compact are only a start and there are lots of challenges about how that is deployed. At least there is a recognition by the 11 largest DC funds that not only is there a challenge, but there is an opportunity here.
“I think we do have gaps and I think we’ve also got huge opportunities. In the public markets we have over 130 healthcare businesses. In the first half of this year, the UK life sciences industries in the FTSE sector index actually outperformed the US equivalent – the sub sector index of the S&P 500.
“But the public markets are not going to be able to work as effectively as they could do if we don’t get businesses at a certain level of maturity and scale that have gone through the early stages.
“From a Stock Exchange perspective, we’re not looking at the public markets in isolation – we are an investor in the FLOWW platform, and there’s the PISCES crossover platform. I think there is a much greater focus on not only how we get the capital in, but how do we make sure that there are the right markets and products throughout that life cycle to really support these businesses going forward?
“It isn’t an easy fix. There are lots of different bits that need to be put together and coordinated to have the desired impact, but there is actually a clear focus.”
He added: “There are lots of different bits being looked at. One is creating the financial ecosystem and fortunately London has all the players that are needed for companies to flourish. But it’s also making sure that we’re helping companies get to there in the right place.”
“It’s a case of making sure we’re getting the environment correct. It’s also trying to help companies be successful where we can, bearing in mind that there are strict limits as to what the Government can actually do in places.
“There’s also the case that picking winners is a very tricky thing to do, trying to find that right balance to encourage and enable winners to come through.”
Marcus Studdard raised the issue of the attraction of the US for the biotech sector. “There is absolutely no doubt that NASDAQ is a very broad and very deep capital market and has been very good at supporting life sciences businesses.
“However it is very domestic. Since 2014, there have only been 15 UK life sciences businesses that have gone to NASDAQ, two of which – Bicycle Theraputics and Immunocore – have done very well. But actually four have delisted, nine are trading down and the average performance of that group of UK businesses that have gone to NASDAQ is -88% on their IPO price.
“So it’s not necessarily the panacea for everyone.”
Turning to the UK, he said his regional UK team were often talking to companies up to a decade prior to their IPO. “The most frustrating thing is where you’re talking to a business that you know has got really good growth prospects and could be a fantastic public company a little bit later down the road.
“Then the company gets sold, quite often too early – subscale – and the driver is that early-stage investors, founders or employees, want access to liquidity. They want to sell their shares.
“We’ve been working with the FCA and the Government for the best part of three years on a whole new sort of regulatory structure that will allow companies to stay private but have periodic access to liquidity.
“So they can either come to the London Stock Exchange or there will be other operators of these PISCES platforms. They could elect to be traded quarterly or half yearly, so they would issue information prior to a trading event and then we would use our auction and trading infrastructure to bring together over the course of the day as many buy and sell orders.
“The company would be in control of the timing of that and in control of the parameters at which that those trades would take place. So it will provide that access to liquidity for investors in these companies, but it will put the company at the centre.
“Because at the moment there are platforms out there globally that will allow investors to bilaterally trade between themselves. But the challenge for the company and the other shareholders in those companies is quite often those trades can take place at 40%, 50% or 60% of the perceived valuation of that business, which causes a huge headache for the company and for the other investors.
“This is genuinely innovative in the UK and something that could make a big difference to relatively small to very large companies, to allow them to continue to scale.
“And in the context of pension fund reform, if you’ve got more institutions that want to invest at an earlier stage but want some kind of assurance about liquidity, it should help the greater set of those investors become crossover investors.
“On one level, it sounds really simple. It is actually fiendishly complicated. So this is something that’s really ambitious and something we’re really excited about.”
Prashant Shah called the proposals “truly exciting”
“I think in the UK the life cycle to build out a life science company is much longer than the USA because we get shallower capital less frequently. And the larger capital comes in earlier in the UK. They won’t accelerate so early-stage investors are naturally more cautious in the UK to come in because they may not get an exit.
“Also the founders get stuck and then they need an exit. So I think this is a genuinely ground-breaking initiative. We’re looking at it with a with a lot of excitement in the seed stage arena.”
Mick Cooper added: “When people talk about the underperformance of smaller companies in the UK, actually, that’s not because there’s a problem with the quality of the regulation, or the quality of the markets, or even the quality of the companies.
“I think one of the problems is that they have been starved of capital. I think with the infrastructure we’ve got and the pipeline of companies we’ve got, if we could just change the balance it wouldn’t take a huge amount. There is well over £3 trillion of pension fund capital; a very small proportion of that would really start to get things moving and build momentum. You would then see the returns.”
