Memories can fade quickly. To many, the COVID-19 crisis is already beginning to feel like just a bad dream. But the fact that the world has largely been able to move on from the pandemic so rapidly reflects the incredible efforts of the life sciences industry, which developed and mass-produced vaccines at a speed never seen before in human history.

For investors in the sector, this success was bittersweet. In the immediate aftermath of the crisis, the global appetite for life sciences businesses soared; M&A activity in 2021 smashed through the all-time records. However, as the realities of a post-COVID economic environment began to bite – with slower growth and spiking inflation exacerbated by the war in Ukraine – sentiment cooled. 2022 was a much quieter year.

Increasing demand

Recently, however, activity in parts of the sector has bounced back, says Subin Baral, global life sciences deals leader at EY. “The industry’s fundamentals are so strong that despite the headwinds, it was always a question of when, rather than if, deal activity would recover,” he says. In a world where the population is ageing, demand for new medicines and treatments is only heading one way – and the economics of the public sector requires imaginative private sector solutions.

Against this backdrop, EY’s latest research charts a 35% increase in deal values globally last year, with more to come, Baral predicts. Deal volumes were relatively unchanged in 2023, with values boosted by some very large transactions. In part, that was because trade buyers led the way; the large pharmaceuticals companies, facing the ‘patent cliff’, where they lose intellectual property protections on their drugs, must constantly replenish their pipelines. Momentum for the back half of December 2023 has continued into the first quarter of 2024, with more than $40bn of deals executed, signalling a strong 2024 and beyond in life sciences dealmaking. In addition, private equity investors remained cautious, but may now re-enter the fray as interest rates look set to fall.

“Also, on the supply side, access to capital for early development-stage life sciences companies continues to be a challenge, with nearly 50% of biotech companies having less than 24 months of cash flows, creating ample opportunities for dealmaking,” Baral says. “While quality assets continue to attract high premiums, it’s a buyers’ market.” EY’s analysis shows that the top 25 pharmaceutical companies in the world have around $1.4trn to spend on strategic investment and dealmaking.

World of innovators

There are plenty of different areas of the market that investment can be spread across. In their purest form, life sciences companies are focused on developing new treatments, deploying cutting-edge biology and chemistry to fight disease. But such work requires a huge range of services from other niches of the sector. Research and manufacturing are routinely contracted out to specialists. Consultants play a critical role. Innovators in technology – artificial intelligence, for example, is increasingly used in drug development – are an important part of the ecosystem, too.

Happily for the UK, the domestic life sciences sector punches above its weight in many of these areas, says Lucy Edwardes Jones, an investor specialising in the sector at BGF, the growth capital investor. “The UK is incredibly strong on innovation, particularly where research is coming out of our universities,” she says. “The challenge for these businesses is then to prove their commercial viability – to build a credible route to market, to explore reimbursement models and to develop a regulatory strategy.”

Prior to this stage, investors such as BGF focus on investment criteria including the quality and depth of the company’s intellectual property and patents, the quality and track record of its management and research teams, as well as development-based milestones such as what progress a business has made with its pre-clinical work or in clinical trials.

Eventually, however, businesses have to find a way across the so-called “valley of death”, argues Edwardes Jones. “UK life sciences companies are often very well supported in their early stages and attract plenty of interest later on once they start to hit their commercial milestones,” she says. “It’s the bit in-between that can prove problematic.”

Indeed. Data from the UK Bioindustry Association shows that venture capital investors put £1.25bn into the sector last year; in contrast to the increasing M&A volumes, this was actually 6% down on 2022 and the lowest figure since 2019. Early-stage ventures continue to pick up smaller amounts of funding, but just six UK companies raised more than £50m last year, the UK Bioscience Association says, led by Apollo Therapeutics and Ascend Gene & Cell Therapies, which raised £210m and £105m respectively. 

Government intervention

Policymakers are doing their best to help. The government regards life sciences as a strategic industry, pointing out that the UK accounts for almost a third of all European start-ups in the sector. Last May, Chancellor Jeremy Hunt unveiled a package of measures worth £650m to promote its growth, with initiatives ranging from funding for clinical trial networks to planning reforms to boost laboratory space. A change of government is unlikely to negatively affect this approach to a crucial part of the UK economy.

The government-backed British Business Bank is also supporting the sector. Last year, it launched the Life Sciences Investment Programme, a £200m initiative managed by British Patient Capital, which is specifically designed to address the growth equity finance gap that hinders the scale-up process at many high-potential UK life sciences companies.

Much of the support has gone to life sciences businesses in the UK’s most established hubs for the sector – Cambridge, Oxford and the South East – but other initiatives are based elsewhere.

iiCON, which was set up four years ago to promote the North West as a centre for infectious disease R&D, is one example of what is possible. The initiative got off the ground with £18.6m of government funding and a target to leverage private sector funding to reach £120m, says Professor Janet Hemingway, the organisation’s founding director. In the event, it has reached £260m of investment.

Commercial help

Hemingway’s focus is on supporting companies as they commercialise. “Investors do want to back these businesses, but you need to be smart about getting your product to market quickly,” she says. “We do a great deal of hand-holding through the development process.”

Much of iiCON’s work is concerned with supporting companies through the clinical trials required to get new therapies approved. It runs seven platforms providing access to technology and equipment for companies operating in different therapeutic areas; larger firms can move straight to running their trials on the platforms, but smaller business often need help to get the trials up and running in a cost-effective manner.

Hemingway believes UK businesses that get the help they need to commercialise at pace are very attractive on the world stage. “We’ve not struggled to find international partners that want to work with us,” she says. “We should be above £300m of investment by the time we get to the end of our original five-year term.”

Big plays

“The UK life sciences industry continues to flourish, supported by the investment community and continuing political commitment, most recently in the latest budget with a £360m funding package for advanced manufacturing and life sciences,” reflects Maya Ward, investment director at Gresham House Ventures, a regular investor in the sector. And the UK has some important attributes that make it both investible and an attractive market, she points out. The NHS is a potentially valuable customer.

In practice, investors in the sector vary enormously. Large-ticket M&A has predominantly been the preserve of trade buyers, with blue-chip US pharmaceuticals companies dominating the list of large deals over the past 15 months. However, private equity provides some competition – Permira’s £703m purchase last year of Ergomed was by some distance the biggest life sciences M&A transaction of the year in the UK. Private equity, along with venture capital, is also an investor in earlier-stage deals. Syndicated deals are common too, with multiple investors collaborating on transactions.

“The UK is an amazing hotbed of talent and science, and we don’t have a problem funding life sciences companies at seed and series A stage,” says Stephen Aherne, UK leader of pharma and life sciences at PwC. “The challenge continues to be scaling up these businesses into revenue-generating enterprises that are still owned and operated in the UK.”

Aherne picks out cell and gene therapies, as well as genomics, as particular areas of expertise in the UK, although PwC’s recent UK Life Sciences Future50 report highlights a wide range of up-and-coming companies. Of the 32 drug developers that appear in the report, five are developing cell and gene therapies, 13 are pursuing small molecule technology and 13 are developing biologics. Other businesses featured include several companies using artificial intelligence to power drug discovery and enhance diagnostics.

However, UK institutions with the scale and expertise to invest larger sums in these companies as they grow remain in short supply, Aherne warns. The government’s Mansion House reforms – aimed at encouraging large pension funds and others to back UK growth stories – offer some hope for the future but, for now, most life sciences companies look overseas for scale-up investment. “The US is the main source of that investment, and many of these businesses then end up listing there,” he says.

Some may regard this as unproblematic – these companies are at least obtaining funding – but ministers clearly believe it is important to retain life sciences intellectual property in the UK.

Really patient capital

Investors in this space understand that the trajectory of life sciences ventures won’t always be linear, says Leigh Brody, an investment manager at Albion Capital and the UCL Technology Fund life sciences team. “When you’re investing at this early stage, adaptability is key because the investment life cycle may diverge from the norm,” she says. “It’s important to avoid rushed exits; biology operates on its own timeline.”

Investors such as Albion Capital bring more than just finance to the table, Brody argues. They also help early-stage companies – often led by scientists with little or no experience of building a business – to secure the skills they need to scale. That could include formal appointments to the management team, as well as informal support structures – access to advisers, mentors and other entrepreneurs, for example. 

“The entire ecosystem benefits from the collective experience of biotech pioneers and seasoned entrepreneurs,” Brody says. “It takes a collaborative effort to succeed in this field.”