Bridging the Valley

Written evidence submitted by BioIndustry Association (BIA) (V52)

About the BIA

Established in 1989, the BioIndustry Association (BIA) exists to encourage and promote a financially sound and thriving bioscience sector within the UK economy and concentrates its efforts on emerging enterprise and the related interests of companies with whom such enterprises trade. The BIA represents innovative healthcare-focused bioscience companies, including over ninety per cent of biotech medicines currently in clinical development in the UK. BIA members are at the forefront of innovative scientific developments targeting areas of unmet medical need and this innovation will lead to better outcomes for patients, the development of the knowledge economy, and economic growth.

The BIA response

1. "Valley of death" – BIA members are clear that the "valley of death" should be considered as a loose definition. At various stages of a company’s development it will encounter funding and other challenges. This is particular to individual companies and a broad brush definition can therefore be unhelpful. However, for the purposes of this inquiry the BIA will focus upon the period between late stage discovery to pre-clinical and Phase 1 clinical development. This includes such steps as candidate selection, optimization, good manufacturing practice (GMP) and toxicology testing.

1. What are the difficulties of funding the commercialisation of research, and how can they be overcome?

2. The development of a new medicine to market takes, on average, ten to fifteen years and costs, on average, around $1bn. This represents an expensive and risky development process which is required to thoroughly prove the efficacy and safety of new medicines to give confidence to patients in the UK and worldwide.

3. This should be considered alongside the high attrition rate of potential new products in medical research whereby new compounds that enter development have only a 0.1% chance of reaching launch (see Figure 1 below).

Figure 1. Drug development timeline (source Bioscience 2015):

4. While the UK has world leading science it has been recognised that the UK has a poor record at translating this research. This could be due to a number of reasons, including the technology transfer infrastructure, but a lack of available funding for applying basic research and proving its product potential is a significant factor.

5. The declining funding environment for bioscience companies in the UK over recent years has exacerbated this problem. Traditionally, a small and emerging bioscience company will be spun-out of a university around a promising area of research which will often include robust and enforceable Intellectual Property (IP) protection. A spin-out company will typically attract initial seed, angel and early stage Venture Capital (VC) funding in which to further develop the research and demonstrate its market applicability. While understanding of the product or technology will constantly change, the company aims to develop the research to clinical development stage. At this stage, significant further funding can be obtained from VC and larger corporate entities. Partnering the product with large biopharmaceutical companies also often occurs.

6. Crucially, also at this stage bioscience companies had the option of an Initial Public Offering (IPO) and obtaining further significant funding from the market. There has been a dramatic decline in IPOs in the UK in recent years removing this exit option for investors. Such private investors are therefore faced with locking their investment away for a far longer period of time until the possibility of return. This, in turn, drives investors towards technology areas that are closer to market whereby the technology can be proven and applied faster and the potential for a return on investment is closer. Those bioscience investors that remain, both private and corporate, are also showing signs of shifting attention towards assets that are closer to market, e.g. phase II onwards.

7. Simultaneously the traditional medical research and development model is coming under strain for a number of reasons including a changing pharmaceutical environment and reimbursement pressures.

8. In answers to questions below the BIA comments in more detail regarding areas for possible government action. However, it is important to point out that the sector is already adapting to these constraints and examples of new funding models are emerging. For example, mixed VC and corporate investments at early stages of research goes someway to de-risking the investment. Government should encourage such moves and look again at tax incentives such as Consortium Relief which, due to wording in the legislation, often do not apply to bioscience funding.

2. Are there specific science and engineering sectors where it is particularly difficult to commercialise research? Are there common difficulties and common solutions across sectors?

9. The detail given above is relevant to this question. As explained, medical research, particularly bioscience, is considered a riskier investment prospect than other sub sectors, e.g. medical technology, or other innovative and hi-tech sectors. This is because bioscience products take a longer time to reach market requiring investors to ‘lock’ their investment away for a longer period of time before a potential return. The funding environment, including the vast reduction of UK bioscience IPOs, has constrained the available finance further. Funding for earlier stage research is restricted as corporate and private investors seek to pursue closer to market technologies or ‘validated’ products and technologies with clear market potential.

10. Given the incredibly complex nature of medical research, potential products and technologies do fail. This is to be expected and ensures only those innovative products which have proven their efficacy and safety reach patients. However, BIA members have stated that by necessity they are spending more of their time focused on sourcing funding. Projects and promising exploratory research is being halted because of funding constraints and not on the basis of scientific decisions.

3. What, if any, examples are there of UK-based research having to be transferred outside the UK for commercialisation? Why did this occur?

11. Biovex, a company based in the US, was acquired in 2011 in a deal which could be worth $1bn. This was one of the largest bioscience VC backed sales in history. Biovex was originally spun-out from University College London and was based in Oxford until 2005. It therefore represents a success of British science. There were clearly a number of factors involved in the relocation of the company to the US, however readier access to finance was clearly one aspect.

12. The BIA is aware of other British founded companies re-locating to the US and continuing the commercialisation of their research in that jurisdiction also. As stated, there are often multiple factors at play in any such decisions such as a desire to be located closer to the company’s target market or for regulatory reasons. It is apparent though that the easier access to finance and a more favourable public market in which to raise funds and continue development are key issues. BIA members have warned that this will continue if the funding environment does not improve in the UK.

4. What evidence is there that Government and Technology Strategy Board initiatives to date have improved the commercialisation of research?

13. Initiatives which seek to de-risk investment opportunities, whether by providing direct funding, matched funding, or through tax incentives and using the levers available to government to improve the investment framework, have positive affect.

14. With regards to TSB funding calls for example, these have often been incredibly beneficial for those companies that have made a successful bid. Recent specific TSB funding calls in regenerative medicine and for identifying biomarkers have demonstrated the government’s commitment to the UK leading in these fields. Such signals are important to the investment community.

15. Other ongoing TSB funded programmes such as Knowledge Transfer Partnerships have proven helpful in some areas and can be a useful tool in aiding the information flow between academia and industry. However, BIA members have also provided examples of situations where KTPs have been considered an administrative burden. Small levels of grant available to secure an appropriate individual for work and disagreements around IP have also been cited.

16. BIA members have also stated that broader and more open funding calls are sometimes more appropriate than therapeutic specific or technology specific calls which can limit uptake and participation. This is something the TSB could consider when implementing the BioMedical Catalyst fund recently announced in the Strategy for UK Life Sciences for example.

17. Government action to encourage private investment through the tax framework is also of vital importance to innovative sectors such as bioscience. For example, R&D tax Credits support the growth of innovative companies. As such, the Credit provides tangible and hugely valuable fiscal support for small and emerging bioscience companies.

18. The BIA has long advocated an enhancement and refinement of the R&D Tax Credits. Most recently, the BIA warmly welcomed the changes to the Credit, particularly removing the PAYE/NI cap on the value of claims a company can make. This will further aid small companies that perform large amounts of R&D and recognises the trend towards ‘virtual’ companies. The BIA also welcomes the raising of the R&D Tax Credit limits but points out that in some cases where pre-revenue companies are eligible for the cash-back scheme the effects of this change is significantly mitigated by State Aid rules.

19. Mechanisms which support individual private investment, such as Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs), are also important. Further enhancements to these policies announced in Budget 2011 are welcome. However, there are limitations to the policies which mean the incentives do not benefit all sectors. For example, EIS rules do not permit shareholder to shareholder benefits. The recently announced Seed Enterprise Investment Scheme may also lack relevance to the bioscience sector given the relatively small figures provided for and the one year duration of the benefits.

20. These personal tax incentives are also aimed at high net-worth individuals. While this is important, the BIA believe there is a need to consider diversifying the funding base (further detail given in answer 6 below).

21. Research Councils are investing significantly in basic research which ensures the UK retains an enviable and world leading science base. At the clinical research stages of translation the NIHR, through NOCRI, are also investing significantly and collaboratively through the Translational Research Partnerships (TRPs). The BIA is a strong supporter of the TRPs and believes the initiative should be given the resources and time required to produce results.

5. What impact will the Government’s innovation, research and growth strategies have on bridging the valley of death?

22. The BIA welcome a number of recent fiscal announcements from Budget 2011. The BIA also supports the introduction of the Patent Box. Beyond that, the recently launched Strategy for UK Life Sciences is most relevant to this question.

23. The Strategy contained a number of actions that have been welcomed by the sector. The actions contained within it, and the accompanying Innovation Health and Wealth report by the NHS Chief Executive, can bring benefit to all aspects of the life sciences sector including bioscience. In particular, the BIA is supportive of the principles behind the £180m BioMedical Catalyst Fund and the Early Access Scheme.

24. The BioMedical Catalyst Fund can be directed at the "valley of death" and used to aid academics and companies attempting to develop their research. The MRC and TSB should coordinate their activities to this end with the goal of increased commercialisation and translation to the benefit of growth in the UK squarely at the centre of the policy. It is imperative to ensure this money is not simply earmarked for use in the same ways as previously, but that real effort is focused upon bridging the gap and making funding available for truly translational activities.

25. Consideration should also be given to how funding calls will be made and whether these will be in an appropriate form for small and emerging companies. How the fund interacts with private investors is also important.

26. The Early Access Scheme could also be of significant benefit to small companies provided that it is designed in such a way that allows it to apply to Phase II products and further that appropriate reimbursement plans are in place.

27. The Strategy has only very recently been announced and a number of the actions will require further engagement and consultation. The detail of these policies will be important and a thorough ex-poste analysis of their affect made in due course.

6. Should the UK seek to encourage more private equity investment (including venture capital and angel investment) into science and engineering sectors and if so, how can this be achieved?

28. The BIA strongly believes that government should use the levers available to it to provide further incentives for private investment into innovative sectors. Supporting the existing bioscience funding structure through amendments to Consortium Relief, EIS and VCTs for example are important.

29. However, as well as providing incentives for high-net worth individuals the BIA would like to see mid-net worth individuals encouraged to invest in innovative UK companies. This would serve to engage the wider public with UK innovation and provide diversified funding opportunities for companies.

30. The BIA believe the government should introduce Citizens Innovation Funds (CIF) (see Appendix), based on the French Fonds Comunes de Placements dans l’Innovation (FCPI) scheme. FCPI is an incentive to encourage investment in innovation by mid-net worth individuals under which funds can be set up by intermediaries to collect capital and used to finance start-ups and innovative business ventures.

31. The scheme would be a tax free retail investment product allowing £15,000 per person per annum to be invested in funds which are targeted towards innovative SMEs. The FCPI scheme is notable for the large sums raised from high numbers of private individuals who are keen to invest in the knowledge economy in a tax efficient form without risking large amounts of their savings. In this way the government is an enabler, rather than a provider, of much needed investment.

32. The FCPI has been successful in raising almost €6bn and creating over 300 funds run by nearly 40 asset management companies. These funds have invested in over 1,000 companies including in the UK.

33. The BIA advocates framing the CIF along the same lines and proposes that 60% of assets are invested in private companies that qualify for the SME R&D Tax Credit scheme. The remaining 40% could then be invested freely. The scheme could also be set up so that research charities are encouraged to offer this type of vehicle to donors, using their investment arms, adding to the sense of venture philanthropy which is prevalent in other jurisdictions such as the United States.

34. The scheme would need to be simple and offered as a retail product to ensure ease of uptake. Simplicity would appeal both to retailers, to sell it, and for mid-net worth individuals, to easily understand it and invest. Consideration is also needed to identify the appropriate mechanisms to ensure the funds are targeted towards the right companies and at the right stage of development.

7. What other types of investment or support should the Government develop?

35. Beyond funding, there are other areas where government can provide strategic support to aid technology commercialisation, such as Technology Transfer Offices (TTOs).

36. Some BIA members have informed us of difficulties engaging with TTOs and entering agreements to purchase assets to develop. Others have informed the BIA of difficulties in forming a spin-out company.

37. Britain’s universities are recognised as a world-class source of research and innovation. Universities have a central role to play in ensuring that innovation can drive forward economic growth in bioscience and other high-tech sectors. According to the Higher Education Funding Council for England (HEFCE), the total value of knowledge exchange in UK universities was £3.09 billion in 2009-10.

38. Through IP generated at the university, a TTO might aim to create licensing opportunities for the businesses or spin-out companies in order to commercialise new technologies and innovation. Most universities in the UK have a TTO which are funded through the Higher Education Innovation Fund.

39. It is clear much good work and effective translation already takes place and it would be beneficial to build on this and aid those TTOs that do not have an adequate skills base. This would go some way to ensuring greater uniformity throughout the system.

40. Government may wish to scrutinise whether the current incentives for TTOs are the correct ones and ensure opportunities to commercialise IP are not lost.

41. Research conducted by the Advanced Institute of Management Research (AIMR) and Imperial College Business School showed that between 2004 and 2008 an increasing number of firms reported a range of problems that they consider barriers to greater collaboration with TTOs including a perceived lack of realistic expectations.

42. One action to consider would be a framework to help resolve disputes that arise where the TTO and commercial entity cannot agree a value for the IP. This could include a fund for subsidising the difference in value which could be offered on a loan basis with a view to converting the loan to equity if certain milestones are reached for example.

43. Interesting open access and easy access IP models are being developed. Recently, a new collaboration was announced between Sussex university and four other institutions to create a single, easy to search format that catalogues all relevant research and IP available for investment. Consideration should be given to building on these initiatives on a larger scale and creating a centralised portal to catalogue IP generated in universities.

44. A portal should also act as a facility for academics to find partners for commercialising research, providing them with a national technology transfer framework. The provision of expertise and support to commercialise IP for those smaller TTOs that require it can be facilitated in this way.

February 2012

Appendix

BIA Position Paper: Citizen Innovation Funds

What are Citizens Innovation Funds?: Citizens Innovation Funds are based on the French Fonds Comunes de Placements dans l’Innovation (FCPI) scheme. FCPI is an incentive to encourage investment in innovation by mid-net worth individuals under which funds can be set up by intermediaries to collect capital and used to finance start-ups and innovative business ventures.

Summary: The government should introduce Citizens Innovation Funds, a UK version of the French FCPI Scheme. This scheme would be a tax free retail investment product allowing £15,000 per person per annum to be invested in funds which are exclusively targeted at innovative SMEs. The FCPI scheme is notable for the large sums raised from high numbers of private individuals who are keen to invest in the knowledge economy in a tax efficient form without risking large amounts of their savings, with a €13,000 investment cap. The UK scheme would make the government an enabler, rather than a provider, of much needed investment in this sector.

The BIA is currently in discussion with a number of UK retail banks about how they might adopt the scheme and so far response has been positive.

Introduction:

There is a need to provide further sources of finance to small, pre-revenue biotech companies and those in other technology areas in the UK, both listed and unlisted. The Government can act as an enabler by creating the environment necessary, through the tax regime, to help raise such finance.

While tax mechanisms exist within the UK tax regime to incentivise high-net worth individuals to invest in innovative sectors (EIS and VCTs) there is a lack of incentives to encourage mid-net worth individuals to invest. Existing schemes are limited because:

· EIS often require the investor to be directly linked in some way to the company they are investing in.

· VCTs tend to invest in the least innovative sectors because the annual investment limit is too low

· VCTs predominantly invest in listed companies

· The minimum threshold for investment in EIS is too high for many to commit to.

So these existing schemes are either too small from the point of view of the company, or too expensive from the point of view of the individual looking to invest.

Citizens Innovation Funds would provide finance for innovative companies by:

· offering a simple vehicle for mid-net worth individuals to invest modest amounts in high growth, innovative sectors, tapping into philanthropic investments, currently only open to the very wealthy;

· support small, privately owned companies;

· help the UK start more new innovative SMEs to exploit the discoveries coming from the world class research base;

· provide the public with a greater understanding of the needs and risks of research intensive industries, while at the same time educate them as to the potential high rewards of success;

The FCPI has been hugely successful:

· A total of €5.5bn raised

· Over 300 FCPI funds run by nearly 40 asset management companies

· Invested in over 1000 companies, including in the UK (for example, BIA member Syntaxin)

How would it work?

The BIA would propose that 60% of a Citizens Innovation Fund would be invested in private companies that qualify for the SME R&D Tax Credit Scheme.

The remaining 40% of assets could be invested freely.

The scheme should be set up so that research charities are also be encouraged to offer this type of vehicle to donors, using their investment arms (such as Cancer Research Technology), adding to the sense of venture philanthropy.

The scheme would also need to be simple, and therefore appealing both to retailers (to sell) and for mid-net worth individuals (to understand easily and invest in).

Next Steps

The BIA is in discussions with tax experts with regard to the format of the UK version. The BIA is also in discussions with potential retailers to consider how such a system could be sold to the public at large. Finally, the BIA is working to build a broad alliance of innovative sector representatives, all of whom would benefit from Citizens Innovation Funds.

We can also take lessons from similar schemes which have been set up elsewhere in Australia and Canada to ensure that Citizens Innovation Funds are built on best practice.

Prepared 20th April 2012