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February 28, 2014 6:40 pm
A cure for cat allergies might not sound like the most promising starting point for the next stock market boom.
Yet many in the UK biotech industry are hoping the planned flotation this month of Circassia – a specialist in anti-allergy drugs – will mark the return to favour of a sector long shunned by British investors.
The Oxford-based company plans to raise £200m on the London Stock Exchange in what would be the first big UK biotech listing for years.
Several others are also eyeing the London market amid tentative signs that the biotech fever raging among US investors is finally spreading across the Atlantic.
Nasdaq’s bio boom
Biotech has been among the best-performing sectors of US equity markets for more than a year, with the Nasdaq Biotech Index up 18.5 per cent so far in 2014 on top of its 65 per cent gain last year.
More than 50 biotech companies have listed in New York since the start of 2013 with dozens more in the pipeline, according to bankers.
The frenzy reflects rising risk appetite as the global economy recovers combined with a range of factors expected to boost long-term growth in the sector.
These include rising demand for healthcare from the developed world, where populations are ageing and increasingly stricken by chronic diseases, as well as from newly-affluent middle classes in emerging markets.
The pharmaceuticals industry has become increasingly reliant on smaller biotech companies to lead innovation as cost-conscious drugmakers scale back in-house research in favour of partnerships and outsourcing.
Above all, scientific advances have raised optimism over the prospects for a new generation of medical breakthroughs – particularly the ability to spot genetic mutations that cause disease and target treatments more effectively.
While these bullish arguments have fuelled the US boom, European investors have until now largely skipped the party. UK companies such as Oxford Immunotec and GW Pharmaceuticals have chosen to raise funds in New York over the past year in the absence of strong demand at home.
But Francesco De Rubertis, a big biotech investor at Geneva-based Index Ventures, says that as the US market shows signs of peaking – some newly-listed stocks have fallen below their initial public offering price in recent weeks – local interest in European biotech is starting to grow. “There is typically a 6-12 month lag after the US peaks before European investors start to say, ‘actually, there is money to be made here’.”
Index, which manages $3bn of venture capital in the biotech and technology sectors, has started to prepare several European life science companies for market, with London a potential location for some listings as well as Zurich, he says.
But if UK investors are to join the fray, many will first need convincing that this time is different to the boom-bust cycles that have characterised biotech stocks in the past. The last big surge came in the late 1990s, fuelled by hype surrounding the Human Genome Project – an international effort to crack the body’s genetic code.
Just like for the dotcom companies whose rise and fall biotech mirrored, commercial dividends proved slow to materialise and UK investors were scarred by a series of high-profile failures.
Most notorious was the scandal at British Biotech, whose market capitalisation plummeted from nearly £2bn to £40m after a whistleblower revealed that claims about a cancer wonder drug it was developing had been overblown.
The fiasco is still often cited 15 years later as a deterrent to investment in the sector – a fact that Gabriele Cerrone, an Italian serial biotech entrepreneur, says demonstrates the difference between US and European attitudes. “Americans have shorter memories,” he says. “They are quicker to see new opportunities in sectors that have blown up when Europeans are still talking about what went wrong.”
Mr Cerrone is hoping UK investors can be persuaded to give biotech another go after relocating from New York, where he made a fortune on several ventures. He was attracted in part by the government’s “patent box” tax break on innovation, which he says promises to help boost UK competitiveness.
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Two of his companies – Gensignia, which is developing a blood test for lung cancer, and Tiziana Pharmaceuticals, which is working on a breast cancer drug with scientists at Cardiff University – are readying for possible listings on London’s junior Alternative Investment Market.
Fear of failure
But Mr Cerrone admits to exasperation at the difficulty of rallying support in Europe, compared with the US. “In San Francisco you can walk into a coffee bar with a good idea and walk out with funding. In London, people think nothing of investing in an unproven mineral reserve in Kazakhstan, but aren’t prepared to take a risk on medical science.”
In many ways, the UK seems ripe for a resurgence in biotech investment. The country continues to punch above its weight in life sciences, with 14 per cent of all research papers in the past five years coming from the UK, despite it accounting for just 1 per cent of the world population.
While the closure of big pharma research and development facilities (by AstraZeneca in Cheshire and Pfizer in Kent) have prompted hand-wringing over Britain’s research base, the losses have been offset by a growing cluster of vibrant biotech start-ups in the so-called Golden Triangle connecting London, Oxford and Cambridge.
A report by EY, the consultancy, last year identified 400 biotech products under development in the UK – more than anywhere else in Europe and behind only the top US clusters of Boston, San Francisco and San Diego. A third of the European biotech companies in Mr De Rubertis’s portfolio are based in Britain.
However, while the UK has no shortage of good science, financing is harder to come by. Venture funds such as Index are less plentiful than in the US and there are relatively few fund managers and analysts focused on the sector. This creates problems for companies whose high levels of risk and complex science make them daunting to generalist investors.
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Matters will not be helped by the departure of Neil Woodford, the star fund manager and long-time biotech enthusiast, from Invesco to join a small private equity group in May, raising questions over the big stakes his Invesco funds have built in the sector.
Dan Mahony, who manages healthcare investments for London-based Polar Capital, says the European capital pool is fragmented between different countries and lacks the scale that allows US investors to shrug off inevitable failures. “The chance of a drug getting to market from a phase one trial is roughly one in five,” he says. “Americans focus on the one success. Brits will focus on the four failures. This reduces the amount they are willing to invest, which in turn reduces the chances of success.”
No company demonstrates this tension better than GW Pharmaceuticals, whose shares stagnated on Aim for a decade even as it made steady progress towards treatments for multiple sclerosis and childhood epilepsy. When the Wiltshire-based company needed cash last year to fund trials it sought a dual listing on Nasdaq to tap much greater US appetite for its shares. The stock has since soared from its offer price of $8.90 to $64.57, valuing the company at $958m.
“The US has an enormous breadth and depth of investors who are extremely well educated on biotech,” says Justin Gover, GW’s chief executive. “In the UK we were relying on generalist small-cap investors. We have an audience now that understands what we are doing in a way that was not possible in the UK.”
Go for it!
Relative scarcity of funding has made it difficult for European start-ups to emulate the spectacular growth of multibillion dollar US biotech companies, such as Biogen Idec and Gilead, whose scale has begun to blur the boundaries with big pharma. “There is a more conservative attitude in Europe,” says Mr De Rubertis. “When a company gets to $500m in size the instinct is to look for an exit rather than doubling down to try to become a $5bn company.”
A string of promising UK companies, such as PowderJect, Celltech and Spirogen have been gobbled up by bigger buyers long before reaching their full potential. This has left a vacuum between the two big UK pharma groups, GlaxoSmithKline and AstraZeneca, and the country’s small-scale biotech sector. Shire, the FTSE 100 speciality drugmaker, is one of the few companies to fill the gap but it barely counts as British after moving its headquarters to Dublin.
There is a bullish tone, however, among the new generation of companies preparing to come to market. Darrin Disley, chief executive of Horizon Discovery, a genomic research outfit that this week announced plans to float on Aim, says he wants to build the UK’s biggest biotech company. “I want to show young scientists that there are companies out there with ambition; that it isn’t just a straight choice between academia and big pharma.”
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Investors have heard these grand claims before only for the sector to under-deliver. Sceptics say the fact that European companies are belatedly jumping on the biotech bandwagon is just another warning sign that the boom risks becoming a bubble.
But Mr Mahony says this time really could be different as the maturing science around the human genome finally starts to usher in an era of personalised medicine, in which scattergun “blockbuster” treatments are replaced by precision drugs tailored for individual patients. He predicts the trend will prove as transformational as the discovery of antibiotics in the 20th century – with biotech companies at the forefront.
It will become clear in the next few weeks whether UK investors are prepared to back this optimistic vision. “I find it impossible to believe that in one of the richest cities in the world we cannot find enough people to invest in saving lives,” says Mr Cerrone, who has set up a base in Mayfair, central London, to plot his potential floats. “I’m going to give it a go, but if I fail, I don’t have to jump off a bridge. I can just go to Nasdaq instead.”
UK suffers from lack of scale
Gaining exposure to UK biotech is not easy for smaller investors – there are not enough listed companies to support dedicated funds of the kind commonplace in the US, or adequately to diversify the risk of investing in individual companies.
Broader healthcare funds do exist, such as one run by Dan Mahony at Polar Capital, but these tend to be global in nature and are often dominated by big pharma.
Invesco Perpetual’s star manager Neil Woodford was a big fan of both big pharma and smaller operators; his funds hold big stakes in small biotechs such as Oxford-based e-Therapeutics. However, it is not clear if his successor, Mark Barnett, will prove as committed after Mr Woodford steps down this spring – and in any case, the funds are so big that the biotech exposure is proportionately small.
Perhaps the best proxies are two listed technology incubators which help commercialise science coming out of UK universities.
IP Group, a FTSE 250 constituent, has dozens of medical start-ups among its 70-strong portfolio, including Oxford Nanopore Technologies, a DNA sequencing company.
Aim-listed Imperial Innovations, meanwhile, owns 20 per cent of Circassia, the allergy drug company planning to float this month, as well as other life science spin-offs from Oxford, Cambridge, University College London and Imperial College.
Direct investment in individual stocks is notoriously risky in the sector given that only one in five early stage clinical trials leads to a successful drug. But several companies have survived previous biotech busts to establish a following, including BTG, which is in the FTSE 250, GW Pharma and Abcam and Vectura.
More adventurous investors could buy shares (or ETFs) in Nasdaq-quoted biotech firms, but doing so introduces an element of foreign-exchange risk, and many brokers will require you to register with the US tax authorities before trading US shares.
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