Deals in all sectors are being hit by market turmoil, but biotech companies are veterans when it comes to fighting to attract funding. Mark Dunne reports
Terry Sadler had an eventful summer. The chief executive of dermatology company York Pharma Plc closed a deal that could make the business self-funding as well as propel it into profit.
He bought the global commercial rights of two wound care products, Flammazine and Flammacerium, from Solvay Pharmaceuticals in July. The products make
£8.5 million a year from sales in 21 countries and cost York £22.6 million.
This was a strategic move for Sadler: “This acquisition moves our business firmly towards its primary objective of becoming an established and profitable international dermatology business.”
The deal was funded by a £3.9 million placing and a £24.2 million funding package, which will also be used for working capital. The funding was partly arranged by Sir Christopher Evans, the founder of medical sciences investor Excalibur.
He first met York’s management last year when it bought Derms Developments, one of his portfolio companies. Sir Christopher was impressed with the strength of the team and agreed to fund the deal.
“Excalibur was delighted to assist York Pharma through an investment by Merlin Biosciences Fund III while the company secured additional funding from the United States,” Sir Christopher says.
“While it is reassuring that investment funding is still available from the US, it is important that the UK biotech sector shows that such transforming deals can be achieved despite the grim economic picture.”
Show me the money
York attracting UK funding to develop its business would have impressed Neal Ransome, a corporate partner at accountancy firm PwC. He has seen the struggle biotech companies face when it comes to securing funding in the UK.
“The key challenge for biotech companies in the UK is getting access to funds in order to continue to develop drugs independently,” he says. “Therefore they are laying themselves open to being acquired by larger companies, who might have the funding to drive forward their R&D programmes.”
He claims that by and large big pharma companies’ R&D pipelines are not successful enough, so several are eyeing biotech companies to acquire. “At the moment, they are looking to gain the drug opportunities that they need to replace the products that they have got in their own portfolios coming off patent.”
Small UK players picked up by foreign companies this year include BBI, which was bought by US company Inverness Medical, Japanese giant Olympus acquiring Gyrus and Tissue Science Laboratories swallowed up by New York-Based Coviden. One UK company bucking the trend is Antisoma. The cancer treatment-focused London business bought US oncology specialist Xanthus Pharmaceuticals in June for £26.8 million.
The deals that Ransome is seeing are being funded by corporates off their own balance sheet. There are some niche private equity firms that invest in biotech, but only at the lower end. “Mainstream private equity funds don’t have an appetite for the biotech market because they don’t like the risk associated with the R&D processes. They want businesses that have profit and cashflows and reasonably certain prospects for growth, whereas biotech companies are much more speculative investments.”
Looking to the west
Ransome explains that the UK is one of the largest centres for biotech companies in Europe, although the industry here is dwarfed by the US.
“Certainly for biotech companies, gaining access to capital has been easier in the US than the UK,” he adds. “You could argue that there is a slightly more entrepreneurial culture amongst the institutions giving money to biotechs in the States than there is in the UK.”
He claims this is leading to several UK biotech companies choosing to list across the Atlantic on the Nasdaq rather than at home, as it is easier for them to access funds there.
Cambridge-based vaccine maker Acambis is an example of one company that chose to take that route. “It is a trade-off because it requires the management to spend a fair amount of time in the US dealing with institutional shareholders and the cost associated with this,” Ransome adds.
He believes that it is getting increasingly difficult for biotechs to raise funds in the UK, just as it is hard for anyone at the moment to raise funds in the current market.
“Generally it has been increasingly difficult to raise funds in the UK for two or three years now. This is partly because the UK biotech sector hasn’t had enough successes to validate people investing in it.”
This lack of investment is clear from figures compiled by M&A analyst Zephyr. In the first three quarters of the year, there were 101 deals involving UK biotech companies, compared with 150 during the same period in 2007. While volume fell by a third, announced values dropped by almost two thirds from £13.1 billion to £4.4 billion.
UK biotechs may be ideal targets for their wealthier competitors in the US, but Ransome believes the market is still to reach its full potential: “The issue is the banking crisis. The biotech market is the same as everything else and depends on the market recovering.
“The appetite for the biotechnology sector has tended to be cyclical and therefore at some stage we expect it to come back; whether it is as soon as next year it’s hard to tell at the moment.”
ReNeuron Group Plc
Guildford-based adult stem cell therapy specialist ReNeuron Group Plc secured £2.5 million in June. The interim funding was provided by existing shareholders, Bahrain-based Awal Bank and Merlin Biosciences Fund. AIM-listed ReNeuron is currently developing stem cell therapies for Parkinson’s disease, type one diabetes and diseases of the retina.
Premier Research Group
Pharmaceutical services group Premier Research ceased trading on AIM in June after its management bought the business for £88.8 million. Chief executive Dr Simon Yaxley led the deal after securing the backing of private equity firm ECI Partners in a bid to continue its buy-and-build strategy.
Lab21, a provider of health environmental diagnostics, bought NPTech, an independent provider of diagnostic testing services for the NHS and private companies in the UK and Europe. The deal, which closed in March for an undisclosed sum, added food intolerance and chemical testing services to Lab21’s business.
Ark Therapeutics Group Plc
Vascular disease, wound care and cancer specialist Ark Therapeutics Group Plc bought Helsinki-based Lymphatix Oy in January. The London-based group bought the business in an all share deal that valued the business at
€2.25 million (£1.7 million).
The acquisition gave Ark royalty-free exploitation rights to certain vascular endothelial growth factor genes for developing gene-based medicines for use in blood and lymphatic systems.