Sir Christopher Evans’ timing was perfect. In April, the founder and chairman of medical sciences investor Excalibur sold UK oncology specialist Piramed to Swiss firm Roche for $175 million (£100 million), just before the world’s economic crisis took hold.
“Just as everybody was reaching for the razor blades, we returned about 40 per cent of our Merlin Fund III,” Evans says, who has been backing biotech companies for more than 20 years. “It was good to hand back $60 million-$70 million to our investors.”
That sale and the £100 million it raised this year has put Excalibur in “pretty good shape” with all ten of its third fund companies generating revenues and, in some cases, a profit.
In the past nine months, the firm has backed six businesses, putting in between £2 million-£3 million. Its deals have recently included leading the $50 million funding of York Pharma, which comprised mainly US cash.
“We are currently working on another transaction so there’s still life in the old dog yet. ‘Dog’ is the operative word as it’s a horrible mess out there.”
No mans land
Evans laments that this year there have been “almost no transactions or money invested from London in biotech and medical science companies.
He believes this lack of activity is in part due to companies having such low values that they cannot generate the cash needed to consolidate. “It is a self-fulfilling prolongation of hell. They can’t raise money, they can’t merge, they can’t have a better future and they can’t quite die yet. This is going on everywhere and it’s got very depressing.”
Evans has visited the US and the Middle East recently and believes that in comparison the UK has the least M&A activity. “We don’t back anything other than very profitable cash-generative companies, which means we have become totally risk averse.”
He is not surprised by the industry’s problems, claiming that the biotech market has been in a downward spiral for some time. “People have lost patience. They wanted delivery of more products faster, in some cases rightly so, but others had unrealistic expectations. It doesn’t matter how valid your excuses are if the sentiment falls away then there isn’t any money.”
In parallel, the world is having an apocalyptic 2008 where funding is harder to find, particularly for risky projects like biotech. “Even I didn’t think it would rage as much as this, but we are in it. I’m painting a grim picture today because it’s true.”
He believes that these factors have created a “perfect storm” where British managers have been unable to deliver on projects as they have had “under-nourished” and under-financed businesses.
To calm this storm, Evans wants the government to step in and established a couple of super funds in partnership with the private sector. “We need to create big pots of money of at least £500 million each. You are playing with Mickey Mouse money if they are less than that.”
He believes two funds are needed. The first would be for consolidation to help smaller companies bring the best aspects of their businesses together into one company.
“Collectively they will raise £25 million and with that they would be three to five years ahead of themselves and wouldn’t run out of cash. The more of those that we can create through consolidation the better the sector gets, the more sentiment improves and the more other investors would invest in them. What you don’t want is to have lots of little companies running out of money and struggling.”
The second super fund would help create £1 billion companies by giving a privileged few £100 million-plus to buy other businesses. “It would get investors excited. That would create a renewed, refreshed and vibrant medical sector. If we don’t do that then it will disappear and that is what I’m worried about.”
Evans’ concerns are that the UK will become a second or third-rate industry slipping behind Canada and Germany. “We could fall behind China and India and other Asian countries, and possibly Scandinavia and even France. We are just not investing enough money to sustain our position as the number two to the US, where we have been for 20 years.”