One of the perennial questions asked with respect to the UK and European fund landscape is why the life sciences sector is not as large and well-funded as in the US by professional investors. Europe has scores of credible and world-leading universities, non-profits, and small and medium-sized SMEs, yet funding and support is often hard to come by. Issues that have been identified in the European market are: (i) that there is not a deep enough pool of capital to fund significant R&D work and (ii) life sciences investors in Europe are not willing to tolerate the low ‘hit rate’ with respect to risky life sciences investments.
According to the Tufts Center for Study of Drug Development, as of their November 2014 publication, the cost of developing a successful drug is now nearly $2.6 billion (€2.3 billion), consisting of an average out-of-pocket cost of $1.4 billion and time costs (expected returns that investors forego while a drug is in development) of $1.2 billion. These are huge sums, and go some way to explaining the ‘funding gap’.
However, there are signs of a change in sentiment in the European life sciences investment sector.
CONFIDENCE IN ACADEMIA
Firstly, there is a growing supply of long-term investment being invested into UK academic science, overtaking traditional venture capital. This type of investment aims to align the investment with the length of time it takes to develop the science in the biotech industry; forgoing quick returns in the hope of securing larger profits at a later date. Oxford University alone has spun out nine companies this year, reflecting a growing trend toward commercialisation and the strength of the science. Three such companies were OxStem, Vaccitech and Evox; all biotech companies that received capital injections from Oxford Sciences Innovation Fund, whose backers include high-profile City investment companies such as Invesco and Lansdowne Partners..
In addition, the ‘patent box scheme’. introduced in the UK in 2013, has had an positive impact. A company that elects to fall under the scheme may have its profits earned from their patented innovations, and certain other IP rights, taxed at a lower level of corporation tax. To date, 639 companies have benefited by a total of £335 million (€390 million) as a result. Under the current rules, the scheme applies to patents granted by the UK Intellectual Property Office, the European Patent Office and also those granted by certain other states in the EEA.
Big pharma companies have also been engaged in alternative development and funding structures. An example of this is the Apollo Therapeutics Fund, which was formed in January 2016 and created in tandem with Cambridge University, University College London and Imperial College and backed by the likes of GSK, AstraZeneca and Johnson & Johnson. The aim of Apollo is to advance academic preclinical research from these universities to a stage at which it can either be taken forward by one of the industry partners following an internal bidding process or be out-licensed.
Finally, a growing number of life sciences companies have tapped the equity markets for growth capital. Mereo BioPharma Group, a clinical stage drug developer, announced on June 6 that it is set to join London’s AIM market as it raises £14.8 million (€17.2 million) through a share sale.
In summary, there are a number of positive trends in the life sciences sector but there is still a need for a much bigger funding pool and for a greater appetite for risk before Europe can compete with the US on a level playing field.
Marcus Young is counsel at King & Spalding
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