The year British biotechs will come of age (The Pharma Letter)

With the rush of quarterly results from Big Pharma now past, focus moves to UK biotechs. Historically, results from these companies were mixed, frequently eclipsed by transatlantic rivals. But 2016 looks like the year in which the crown jewels of the UK biotech scene will sparkle. The question is how quickly others will join them?

Show me the money

For those that work in life sciences, long lead times and the uncertainty of medicine development are accepted and well understood. The sector has a reputation for providing solid returns over the long term and savvy investors, such as Neil Woodford in the UK, as well as many European families and foundations, realise this and allocate capital accordingly.

This provides the much needed stability and cash flow required to develop innovative medicines – without the ‘noise’ of focusing on quarterly results. Access to ‘patient’ capital, from investors that understand the timeframe and risk associated with investing in healthcare is critical for the success of a nascent biotech.

A long path with multiple steps

As capital is secured, companies can focus on the hard task of moving a product along the value chain, towards commercialisation. This transition from biotech to integrated biopharma company typically has a number of complementary and overlapping phases:

  • In-house development
  • Technology Access Deals
  • Individual Product Deals
  • Major Alliance
  • Direct Product Sales
  • Fully Integrated Pharma

At each stage, executives must make critical decisions that will determine the future success of the company – with each representing a significant value inflection point. In conjunction with major investors, executives must weigh the long-term benefits of such decisions, with the short-term value created. This creates temptation to create a ‘quick buck’ and not realise the full potential of the company.

Success can be substantial

At some point, all big pharma companies were small. Their path to success has been varied, frequently including fund raising, selective acquisitions and building internal capability. One area that is common to successful companies is that of focus. This manifests itself in concentration on specific technology or therapy areas, a determined approach to R&D and only playing where they know they can win – with Gilead as the classic example.

In less than 20 years, it has grown from small biotech into fully integrated pharma-company with a market capitalisation of $110bn. At all points it has remained focused on specialty medicine, particularly HIV and Hepatitis, and has not been tempted to diversify beyond its core capabilities.

Patient investors have been richly rewarded. As a US based company, Gilead has had access to regular capital infusions from investors that understand the timeframes that are associated with investing in the biopharma industry. Unfortunately, Europe has not been as structurally suited to raising risk capital for pharma/biotech. Consequently, the European biotech scene has evolved more slowly and in a different way.

As with so many things, the UK is somewhere in the middle – with 2016 shaping up to be the year where homegrown biotechs demonstrate some European stability with American upside.

Rough diamonds and crown jewels

With its focused approach, selective acquisitions and strong licensing revenue, the UK’s BTG stands out as a company that has the right elements in place for success. CEO Dame Louise Makin is clear that such success is a long-term game, with a strategy to match. It is a similar story with UK’s GW Pharma, in its case focusing on a unique technology platform (cannabinoid science) and finding partners to develop selected products. These two jewels in the crown have been successfully following the steps from biotech to fully integrated pharma – with investors being rewarded accordingly.

Beyond these jewels, there are some companies in earlier stages that can be considered rough diamonds. Adaptimmune, Circassia and Immunocore are typical examples. As yet not generating enough of their own revenue to have the long-term perspective on R&D that is required to succeed, but each possessing the focus, ambition and investor roster which could pivot their performance.

On paper, the UK is the ideal place for UK biotechs to mature into fully integrated pharma companies. The UK biotech scene has matured with a number of companies leading the way, with others following and learning as they grow. 2016 is the year in which we hope to see many of these rough diamonds maturing into the jewels in the crown of UK Plc.