Science and TechnologyWritten evidence submitted by Dr. Andy Richards, Biotech Entrepreneur and Business Angel

Dr Andy Richards is a serial Biotechnology entrepreneur and business angel. He is currently Chairman of Altacor, Novacta, Abcodia and Ixico and is a director of Arecor, Summit Corp plc, PsychologyOn-line, Cancer Research Technology (commercial arm of CR-UK) and Babraham Bioscience Technology.

Dr Richards spent his early career with ICI (now AstraZeneca) and with PA Technology. He was a founder of Chiroscience and an executive director through to the sale to Celltech in 1999. Since that time he has invested in and helped to found more than 20 UK based biotechnology and healthcare companies including Chiroscience, Arakis, Vectura, Geneservice, Biowisdom and Cambridge Biotechnology Ltd.

He is a council member of the Biotechnology and Biological Sciences Research Council (BBSRC), a Trustee of the British Science Association, a founder member of the Cambridge Angels, and an advisor to both Vectura plc, and several Venture Capital Funds.

This submission is being made by Dr Richards in his personal capacity as a business angel and investor and is not a submission made by any of the companies of which he is an investor or a director or the organisations that he is associated with.

Background to Response

1. This submission is made, based on experience as an active angel investor, a founder and board member of both public and private SMEs and an advisor to both technology transfer organisations and venture capital funds. This experience is mostly in the life sciences and healthcare arena.

2. The financing environment for the commercialisation of science and technology projects and the financing of science and technology start-ups is constantly changing. It has been termed “the financing continuum” but is rarely a continuum and at any one time there are gaps making it difficult to finance certain sorts of companies, businesses models or technologies. It is assumed that these gaps are the subject of the “valley of death” enquiry. The funding environment is not as negative as is often portrayed and recent announcements of a series of new life-science funds targeting the UK are consistent with a healthier outlook.

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

3. The strong research base in the UK, combined with a more vibrant and active community interested in the commercialisation of science and technology has resulted in an increasing number of commercialisable projects, technologies and companies. This community is made up of entrepreneurs interested in science and technology, academics who are becoming more entrepreneurial, industrial scientists who are leaving large companies as those companies either downsize or move to an open innovation model and an increasingly professional set of technology transfer organisations. Whilst there are more and diverse sources of financing than are generally recognised, this level of commercialisable opportunity still results in a supply and demand problem such that many promising projects and companies are finance limited.

4. It is important to recognise that by no means all technology capable of being commercialised is spun out from the academic base. In my experience an increasing number (probably the majority) of UK quality investible opportunities are being initiated by entrepreneurs with a specific business in mind who then seek out appropriate intellectual property/technology from industry or academia, and very often from international sources. This is an important and positive development; as such entities when founded by experienced entrepreneurs have a higher success rate.

5. The financing environment has changed significantly from a traditional business school view of a seed financing followed by Series A, B & C venture capital financings followed by a likely IPO. If this model ever dominated it has now broken down for certain and companies/ventures are rarely set up with a view to following this financing path. In addition there is a much greater diversity of sources of private financing than are recognised. Classic venture capital only accounts for a proportion (almost certainly a minority) of investment. Important sources of investment now include corporate venture capital (CVCs) angel and high net worth individual investment, publicly quoted investment companies (eg Imperial innovations and IP Group etc.). Data on this breadth of investment sources are rarely collated effectively and this alongside a fashion by venture capital for stealth investments means that the statistics of private and venture investment levels in science and technology companies are significantly under estimated.

6. On the public markets (LSE and AIM) investment levels are easier to track and whilst there are some successful UK quoted companies (eg Shire, BTG, Abcam, and Vectura), many of the UKs more promising companies have been acquired and the appetite for investment in new home grown ventures (IPOs) has not been sustained. This is an important discontinuity in the financing continuum and is one reason why when companies reach a certain stage they are either sold or migrate to eg The US instead of raising further growth capital from the UK markets.

7. As the old sequential model of finance broke down, entrepreneurs and active early stage investors evolved financing models that were appropriate for the new financing environment. This has resulted in a whole series of resilient capital efficient often virtual companies or businesses based on “soft start” financing and early revenues rather than intensive venture investment in R&D.

8. There are now several somewhat disconnected investor ecosystems A), angel and small funds investing in capital efficient businesses aimed at early revenues B), larger venture funds backing businesses often created in stealth mode aimed at early trade sales whilst avoiding multiple financings and C), public market investors funding companies which when successful get acquired without replenishment from new IPOs. The lack of communication and transfer between these investor silos is a barrier to growth.

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

9. A number of technology areas typified by medical technologies and therapeutics, but including others as well have characteristics that make gaining sufficient investment a challenge when the financing environment is unfavourable, these have all or some of the follow characteristics:

High technical risk and uncertainty eg drug discovery or therapeutic development.

The need for a strong intellectual property position (both established patents to protect, as well as access to patents to gain “freedom to operate”).

A heavily regulated value chain eg medical.

High development costs or technical proof of principle that occurs late in development.

When there is no early potential of revenues particularly where the value chain is dominated by a small number of big customers eg energy, pharmaceuticals or healthcare systems.

A proposition that requires global market access to achieve a return on investment.

10. Alongside new medicines and medical technologies in other areas where higher financing levels are critical for commercialisation include novel materials, new forms of energy generation etc.

11. Gaining investment for new ventures can be particularly difficult when there is no established financing community in that sector or where interested investors are diffuse and are poorly connected. Such sectors in the UK include novel foods and agricultural biotechnology and certain aspects of bioenergy. These more challenging ecosystems are hampered further when there is a lack of entrepreneurs with experience of that sector.

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

12. There are numerous examples of where UK based research has been transferred outside the UK for commercialisation. Good examples would be the Solexa DNA sequencing technology which was migrated to the US and then commercialised by Illumina. Antibody success stories which originated in the UK provide further examples. Leading antibody products originated in the UK which were all commercialised by non UK corporates include Humira now the world’s leading selling drug marketed by Abbot; Campath launched by Genzyme (now Sanofi) and Cimzia commercialised by UCB. In addition, the leading early UK companies in antibodies Celltech and Cambridge Antibody technology (CAT), whilst having successfully achieved IPO’s on LSE were both acquired by larger pharmaceutical companies before products could be launched.

13. It is typical in sectors with long development cycles, such as in new medicines, for technologies or products to be passed through multiple companies before they reach the market. (Campath is an excellent example). Products or technologies (or in many cases companies) are acquired by or licensed to a succession of companies with a greater access to finance and a greater market presence. At times the London stock markets (LSE and AIM) have been less supportive of aggressive growth propositions than the US Nasdaq (and some other European exchanges) thereby restricting the growth and financing options for UK companies. Consequently companies have often been sold early in the UK.

14. This passing on from one company to the next in the value chain until a product reaches the market is typical. Each transaction in itself can be seen as a commercialisation event even through a product has not reached the market. This should not always be looked on in a negative light providing that capital, technology, expertise and people are recycled back in to the sector. The antibody example is again useful here where the next generation of antibody companies Domantis (already sold to GSK) Pangenetics (already sold to Abbot), Kymab, Bicycle and Crescendo, all having been spawned in one way or another from the earlier successes/ventures.

15. In addition to financing barriers, the other main reason for transferring research outside of the UK for commercialisation is to access more receptive large markets. In the medical world the uptake of innovative products in the UK is both low and late and hence the UK market is a relatively unattractive place to initiate marketing and commercialisation of a new product.

4. What evidence is there that government and technology strategy board initiatives to date have improved the commercialisation of research?

16. Continued strong support by government for the science base is a key aspect that must be maintained. The strength of the science base in providing skilled scientists, scientifically literate entrepreneurs and technologies to be commercialised are at the heart of the opportunity. In the medical and therapeutic fields ensuring that this extends into an innovative culture of translation with the NHS is a challenge but a prize worth fighting for.

17. Government driven incentives such as R&D tax credits have had a sustained impact and the recent introduction of “patent box” incentives should be significant. Refinements to both of these would be welcome.

18. Mechanisms to encourage and support private investment such as the EIS scheme have provided an important stimulus particularly to the angel community and this has helped the start-up phases of businesses as well as the growth phases of those with relatively capital efficient business models. Further refinements to EIS, such as the recently announced Seed Enterprise Investment Scheme, and moves to ensure that EIS is targeted towards real growth companies and not “investment schemes” that just exploit the tax benefits are also welcome.

19. The TSB (Technology Strategy Board) is an important body set up to engage with applied technology and commercialisation. The existence of such an organisation is very positive, however, its strong established links to the engineering community has often made it seem less orientated towards the life sciences where its criteria of “close to market” innovation is often less appropriate for life sciences. In this latter area it may be useful to consider innovations that are “close to commercialisation” where commercialisation is some form of transaction.

20. In relation to the TSB’s SBRI scheme in the medical field, this should also be re-evaluated given the challenges of innovation within the NHS.

21. It is too early to say whether Catapult Centres are being effectively implemented and the Biomedical Catalyst fund will be a key test for both the TSB and MRC.

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

22. The Government has established a series of promising initiatives that should maintain positive momentum in the growth of innovation particularly in the life science sector.

23. Government initiatives to encourage funding and investment are particularly important and should be used to leverage other sources of investment from either inside the UK or from venture investors outside of the UK. The Biomedical Catalyst fund will have a key role in achieving this and it is hoped an effective process can be established between the TSB and MRC to ensure that the fund works for quality fast growing companies at the time when they need it, and without too much bureaucracy.

24. Government initiatives to encourage more innovation within the NHS and early uptake of innovations within the NHS could make a very significant difference to both time to market in the UK and the invest ability of UK R&D initiatives pushing forward with the “early access key” is therefore very important.

6. Should the UK seek to encourage more private equity investment including venture capital and angel investment into Science and engineering sector and if so how can this be achieved?

25. The UK Government should be strongly encouraged to seek more private equity investment into UK science and technology ventures, and whilst there is funding available the UK sector is still “innovation rich and funding poor” with too many of our quality ventures being constrained by limited financing. In addition, uncertainty in the financing environment encourages cautious behaviour amongst entrepreneurs and company directors who build smaller, more virtual, capital constrained companies and exit these by trade sale at any earlier stage. A more vibrant financing continuum with fewer gaps would encourage the growth of bigger more sustainable technology companies.

26. In encouraging more private investment from within the UK it is important not to just focus on traditional venture capital funds and to ensure that a diversity of financing sources is available and stimulated. This should include angel financing through enhancements to the EIS scheme and mechanisms to support “soft start” companies.

27. Private investment into the UK from funds outside the UK is also be encouraged and here there is an important role for UKTI to target potential investors and provide them with a compelling story along with clear case examples of how investment in the UK can provide superior returns. Specific investor classes should be targeted and in the first instance corporate venture capital funds (CVCs) who are already dominating the early stage life science investment environment and internationalising US VC funds that have started searching out investments in Europe should be an initial priority.

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

28. The relative lack of enthusiasm from public market investors for home grown UK science and technology based growth companies is a challenge that needs careful evaluation. A situation where high quality companies once more consider an IPO as a viable route alongside a potential trade sale exit would be a healthy development.

April 2012

Prepared 12th March 2013