BIA City and Finance Update | February 2019
More M&A is on the horizon after a strong start to the year. It won’t be the last, with more expected over the next few months. There is likely to be a positive trickle-down effect on UK Life Sciences. Can you help with the BIA’s work for Comprehensive Spending Review? Will delisting become a trend? We discuss the jargon surrounding public and private companies and introduce the investor Mercia.
Acquisitions - The bigger, the better?
Within UK Life Sciences, Brexit is the main but not the only topic of conversation. There’s also M&A. Who will be acquired next? And at what premium? The announcement that J&J acquired Auris for $5.8bn, and that Merck & Co is acquiring Immune Design for $300m rounded off another active period for US acquisitions in early 2019. It doesn’t stop there: Roche announced on 25th February that it is acquiring Spark Therapeutics for $4.3bn in cash, a 122% premium $2bn market cap it had at the end of last week and a 19% premium to Spark’s 52 week high. This is unlikely to be the last acquisition by big pharma, which are desperately seeking innovation in order to bolster productivity and improve their return on investment. For an interesting take on this theme read Deloitte's report "Embracing the future of work to unlock R&D productivity: Measuring the return from pharmaceutical innovation 2018" here.
Will these acquisitions be worth it? In the past, some acquisitions have been successful, such as Shire’s acquisition of Baxalta in 2016. But M&A isn’t the only way companies can generate value for investors, we continue to see funding rounds for UK Life Sciences such as Puretech’s Vor raising $42m in a series A and Arix investment Harpoon Therapeutics raised $76m at its IPO valuing Arix’s stake at £31.3m.
What does this mean for UK biotech?
The positive side of continued M&A activity for smaller biotechs is the likely re-investment of cash by Venture Capital firms into newer and smaller businesses, looking for the next big return. This, coupled with a more positive outlook from US analysts who last year added c3% (or $14bn) to their pharmaceutical (non-generic) 2022 sales forecasts (Evaluate estimated that the largest forecast impact came from an uplift in Keytruda and Revlimid forecasts) suggest that the global funding window will remain open this year. This should be good news for smaller UK firms as funding trickles down through the ecosystem.
Committee Summit: highlighting the Comprehensive Spending Review
Mid-February, the BIA held its annual Committee Summit. 180 members got together to discuss the critical issues concerning them and their companies. The day saw meetings from Advisory Committees on Cell and Gene Therapy, Engineering Biology, Finance and Tax (if you are interested in joining this or another committee please email firstname.lastname@example.org), Genomics, Intellectual Property, Manufacturing, Regulatory Affairs, and Science & Innovation, as well as working groups on Antimicrobial Resistance, and Trade.
The day included an excellent plenary session on the Government’s Comprehensive Spending Review; the panel explained the complexity of this process and answered questions from members. The Comprehensive Spending Review (CSR) is the process by which the Government decides how much each government department will spend within a given period; in this case, it is expected to be 2019-2023.
The Spending Review has a significant impact on the UK’s Life Sciences sector. The budgets of Public funding bodies, such as UK Research and Innovation (UKRI) and the National Institute for Health Research (NIHR), are set through this review. This is the first CSR since the Government committed to reaching 2.4% of GDP investment on R&D by 2027. This 2.4% target includes both public and private R&D investments; both need to increase to reach the 2.4% goal. Private investment, which accounts for around two-thirds of the total R&D invested, needs to grow by around 33% to hit the target. To boost public investment, the Government has committed to spending an additional £7bn of public money up until 2021/22. This new investment makes this CSR very different from the one in 2015, which took place at the height of austerity. Read more here and here to understand how the CSR may develop. The BIA would welcome any comments or thoughts you have on spending priorities in the Life Sciences sector in the UK; please email email@example.com
Recently both Realm Therapeutics and NetScientific announced that they were going to delist their shares from AIM. Some analysts have suggested that this the start of a new trend. But that seems unlikely. These companies are delisting for different reasons – one has assets, but limited cash, the other plenty of cash but few assets.
NetScientific announced a strategic review in November 2018 citing the undervaluation of its shares on AIM. Following this review, the failure to sell the business or any portfolio companies, difficulties in raising further funds, and an analysis of the cash flow requirements for its business, management decided to reduce costs so that as much of its remaining cash as possible could be allocated to its portfolio businesses. The costs associated with being listed on a stock exchange can be burdensome and can encompass: broker fees, listing costs, legal fees, accountancy fees, investor relations to name but a few. Management, therefore, decided to delist NetScientific shares from AIM and re-register the business as a private limited company. Interestingly, the company did say that it would make arrangements for an off-market trading facility for one year for its shareholders so that some of the smaller shareholders could attempt to sell their shares privately.
Meanwhile, Realm Therapeutics, having had a difficult outcome from its phase II Atopic Dermatitis study last summer, is selling its main revenue-generating assets for c$10m gross. This means that the company will have no assets other than cash (c. $25m) and will not be trading. That leaves the company with a few options; buy other assets or distribute the cash to shareholders. However, following the asset disposal, Realm would immediately become an AIM Rule 15 cash shell, given that it would cease to be a trading business. To avoid this state-of-affairs, the company has decided it is likely to delist its shares from AIM immediately preceding completion of the asset sale.
What does this mean for UK biotech?
2018 saw several companies with failed clinical trials and many finding it difficult to raise more money too. Single asset business with a negative clinical trial and substantial cash are not automatically entitled to retain a listing on AIM. With this issue looming for other UK Biotechs, could investors and management be incentivised to ensure that companies have more than one asset? Many other UK businesses are also experiencing difficulties in raising funds in both public and private arenas. The BIA is working hard to get the government to support flexible ways for its members to raise finance.
Jargon of the month: Public or Private?
A private company is a business held under private ownership, say a Ltd (Limited) business. Private companies may issue shares and have shareholders from private funding rounds. These shareholders can be individuals such as Angels, or institutions such as Venture Capital firms. The critical point is that shares of private companies do not trade on public exchanges such as the London Stock Exchange or the Alternative Investment Market (AIM) or NASDAQ and are not issued through an initial public offering (IPO). Public companies, meanwhile, are those that have their shares listed on a Stock Exchange, probably from an IPO, and anyone can buy or sell shares in the company without going directly to the business itself.
One of the critical issues for shareholders in a private business is the limited ability to sell shares; indeed, this is sometimes impossible. It is rare for a shareholder in a private Biotech to be able to sell shares before a “Liquidity Event,” i.e. an event that allows shares to be bought or sold. A liquidity event could include the sale of the business or the listing of its shares on a stock exchange (going public aka an IPO).
Public company shareholders have the ability to sell shares to other potential shareholders in the market. However, the reality for many more substantial, institutional investors in listed UK Biotech companies is that liquidity is low, and being able to buy or sell shares in the market is often challenging. Therefore, a liquidity event can be an essential milestone for these shareholders too.
Introducing the investor: Mercia
Mercia is focused on the identification, creation, funding and scaling of high growth businesses mainly in the Midlands, the North of England and Scotland. It invests both through its managed funds headed by Mercia Fund Managers and from its balance sheet as Mercia Technology. Mercia Fund Managers comprises Enterprise Ventures, EV Business Loans and Mercia Fund Management, each of which has a specialist set of activities raising and investing debt, venture and growth capital into the Mercia portfolio.
Mercia focuses on four key technology areas: Digital & Digital Entertainment; Electronics, Materials, Manufacturing/Engineering; Software & the Internet; and Life Sciences & Biosciences. The Group benefits from 19 university partnerships and nine offices across the UK, providing it with direct access to high quality, regional deal flow. Unlike many similar investors, Mercia can invest from seed rounds of £100,000 to funding rounds of £10m. Mercia invested in Abzena and retains a portfolio of c.35 Life Science businesses including Oxford Genetics, Medherant, PsiOxus and Locate Biotherapeutics in a total portfolio of over 200 businesses.
This communication should not be regarded as investment research or marketing materials and does not constitute any recommendations to buy or sell shares.