In 2018, we saw record IPOs for Life Science companies going public; a significant uptick in biotech series A round sizes; record amounts raised for Life Science companies in Europe for private companies; an influx of capital from technology investors into digital health and increased inflows of capital to Europe from the US and China. So a common question at this year’s JP Morgan healthcare conference was “Can these trends continue?” Pessimists suggest we’re at the top of the Gartner Hype Cycle, with disillusionment to come. But there’s a different take if we look at the drivers of investment and excitement. By Nooman Haque
Firstly, unlike the 90s gene therapy boom, we are more advanced in several technology areas, and there are many more of them – from CAR-Ts to gene therapy and CRISPR. Surely many of them have further to go than others, but fundamentally, what we have is not a single hype curve but several at different stages of the cycle. CRISPR, for example, has great promise, but arguably has much further to travel on a likely rocky road compared to other technologies. The emergence of digital health is not without its challenges, especially in the largely public healthcare markets of Europe. But the increasing use of technology by insurers, drug developers, patients and physicians is likely to create entirely new opportunities in the medium term whilst potentially delivering some fundamental improvements in healthcare efficiency.
Interest rates are favourable
Secondly, we are still in a benign interest rate environment, and it continues to drive investment allocation decisions towards riskier areas. In the UK, for example, regulators are exploring how pension funds can be unlocked to deploy even more funds to the sector; several leading European Life Science venture firms such as LSP, Andera and Forbion have raised record funds, providing a solid source of capital over the next two to three years. And these funds were raised on the back of good exits for these firms that were traditionally lacking in Europe. Of course, oversupply of capital brings its own risks, while arguably later-stage companies, particularly in Germany and the UK, continue to be poorly capitalised because of frictions in capital markets rather than faults in the technology.
Brexit could mean opportunity in Europe
In Europe, the political situation of course is in flux, though even Brexit could provide opportunity for the Life Science sector. Funds which have traditionally focused heavily on the UK will have to look to countries like Germany to ensure they do not over-allocate to non-EU countries if their LPs require that. Conversely, within the UK, domestic government institutions will want to double down and ensure that the UK‘s leading role as a Life Science sector is not diluted for want of capital. And given the likely continued close collaboration across Europe when it comes to fundamental science, these trends should continue to strengthen the sector across the whole of Europe in the near term.
Finally, from a financial perspective, Europe continues to present good value and a solid arbitrage opportunity for investors who can sell assets at a world price, or list at US prices.
There are headwinds, though, and Europe’s fragmented healthcare markets – exacerbated by Brexit – will always make it more challenging to compete with a centre of gravity like Massachusetts. Instead of taking a copycat approach, countries and companies should try to focus on where they excel and differentiate, whilst providing enough breadth to deliver an ecosystem that provides a source of renewable capital and talent. European financial markets are no competition to the US, and entrepreneurs (and policy makers) need to recognise that raising money internationally is not “selling out” to overseas interests. Indeed, Morphosys listed in Germany but raised over USD 200 m via American Depositary Receipts (ADRs) on Nasdaq, an illustration of how companies should think about a global pool of capital.
Governments must be innovative
As a last remedy to headwinds, European governments can be more innovative in the use of policy instruments. With procurement, for example – direct innovation in areas where public and private benefit needs overlap, thus ensuring a more coordinated approach to help patients, investors and entrepreneurs – and exploring the use of paid-for phase 3 trials in certain instances.
The short-term outlook for the sector remains positive with plenty of capital, but in Europe, as in the US, success in the longer term will require rethinking business and payer models to allow innovation to flourish.
ABOUT THE AUTHOR
Nooman Haque is the Managing Director of Life Sciences and Healthcare at Silicon Valley Bank’s UK Branch. He leads a team dedicated to supporting early, growth-stage and established multinational businesses in all sectors of Life Sciences. Nooman is responsible for expanding the bank’s business in this key sector and working with the global Life Sciences team to support companies with all aspects of their business, beyond financing. He is actively involved in the sector, sits on the BIA’s Finance and Tax Committee, and acts as a frequent panelist, writer and spokesperson for the industry. Nooman has a Bsc in psychology and an Msc in economics, both from the University of London, and an MBA (finance) from Imperial College.
Bildnachweis: Alterfalter – stock.adobe.com.