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Panel members Colin Miller
Rhona Allison
Dr Charlie Bavington
Damien Bechelli
Claire Brady
David Bunton
Biggart Baillie LLP (Chair)
Scottish Enterprise
GlycoMar Ltd
Biggart Baillie LLP
Edinburgh Research Innovation
Biopta Ltd
PHOTOGRAPHY BY MIKE WILKINSON
Finding
funding
The life sciences sector is seen by many as one of the most promising in the Scottish economy. CA Magazine and leading law firm Biggart Baillie LLP brought together a panel of business experts, funders and advisers involved with the sector to discuss its potential growth and international impact and, as Robert Outram reports, their mood was upbeat
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olin Miller, head of technology and intellectual property, Biggart Baillie LLP, opened up the discussion. He said: “In the past decade there has been huge growth in the life sciences sector in Scotland, and now there are more than 600 organisations employing more than 40,000 people. With changed economic circumstances, everyone has been affected in some way. What steps can be taken to ensure that investment in life sciences is maintained and enhanced in difficult economic conditions? For example,
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what new sources of finance could be found? And, could public sector bodies work better together to improve efficiency of service and effectiveness of public spending?” Rhona Allison is senior director, life sciences with Scottish Enterprise. She said: “In Scotland, we’ve got a very supportive public sector. The approach has been to work with outside partners when it comes to funding, which I think has worked well. It’s not ‘soft’ government money, it’s helping to leverage in private money. “The real challenge is how to get
VCs [venture capitalists] with much deeper pockets investing in life sciences. We don’t have, in Scotland, an active local VC that is routinely funding the sector. We have been working on that for some years, and we are now selling the idea to VCs that there are a lot of good opportunities in Scotland, good companies ready for investment.” Derek Smith, business development partner, Clydesdale Bank, has funded a number of life sciences businesses. He asked the panel: “Which stage of funding is the most difficult to obtain? Early stage or
follow-on funding?” “It’s the £5m-plus level, the VClevel funding, that is the most difficult.” That was the answer from Scott Johnstone, director of the Scottish Life Sciences Association. Johnstone is also CEO of Antoxis, an antioxidant specialist drug development company. He added: “We’re lucky when it comes to early stage funding because, in Scotland, we have the best angel network, or the best in Europe at least. But it’s hard for the angels to give up their stakes when it comes to the next stage of funding, www.icas.org.uk
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Hugh Ilyine
Scott Johnstone
Neil McInnes
Derek Smith
Brendan Waters
Robert Outram
DestiNA Genomics Ltd
Scottish Life Sciences Association
Grant Thornton
Clydesdale Bank
Johnston Carmichael
CA Magazine
and that’s a barrier.” Hugh Ilyine is an independent consultant with the Scottish Stem Cell Network (Advisory Board) and a board member of DestiNA Genomics, which specialises in chemical sequencing and DNA analysis. The problem for the angels, Ilyine added, is that the VCs can impose their own conditions, unless the angels keep going back in for round after round of funding.” He added: “Scottish Enterprise has a unique model to encourage funding, but in my view it does not ask for enough back. The www.icas.org.uk
Government should look for a return on its investment, albeit in a delayed way... for future investment and to create a virtuous circle.” Dr Claire Brady, IP licensing manager with Edinburgh Research Innovation (Edinburgh University’s technology transfer and commercialisation arm), pointed out that universities, which are not-forprofit organisations, also apply for government grants such as the Proof of Concept Fund. They would not be able to pay back at a commercial rate because R&D carries with it some risk of failure, which
should not be penalised. She added: “Everyone involved, including investors, already wants a piece of the pie, so if the Government takes more, that will leave even less for VCs who are already difficult enough to attract.” Rhona Allison said: “The way we can all benefit is to ensure that everybody gets a reasonable, appropriate reward. So if money is needed to make an idea into commercial reality, we should be looking for ways to reward everyone who is putting resources into that.” “Is it part of the problem that
opportunities are individually too small for the VCs?” asked David Bunton, CEO of human tissue specialist business Biopta. Neil McInnes, head of technology, Scotland with Grant Thornton, agreed that scale could be an advantage. He said: “If you can put complementary technologies together, you improve the chances of getting funding; and in some cases it is easier raising £5m-£6m than £2m. More collaboration between companies would help, even if it does not involve merging companies
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together legally, but working together through partnerships, joint ventures and so on.” Brendan Waters, corporate finance partner with Johnston Carmichael, commented: “Investors tend to seek earlier exits in Scotland, so companies don’t get the chance to grow to be true, global companies of scale before they are sold.” Damien Bechelli, a partner with Biggart Baillie LLP, who regularly advises life science companies and start-ups, added: “If we don’t have a local lead VC investor – which is often the case – it can lock out some of the overseas funds who might otherwise invest but want someone on the ground, locally, who’s keeping an eye on the company.” Claire Brady said: “A lot of spinouts have fantastic business plans and they get the first round of funding, but can’t get the next. So they survive on generating cash from early products and consultancy; this distracts from their R&D programme and the potential big rewards.” “There were three exits from SE’s funds last year, all to overseas buyers,” Brendan Waters noted, adding: “I think this can be a good thing, but some were concerned that it looks like ‘selling out Scotland’.” Claire Brady asked: “Do we want to build businesses in Scotland, or to have these five-year buyouts?” Rhona Allison said: “They’re not mutually exclusive. A sale of a Scottish business to a company like Pfizer, for example, can be a positive outcome. If the acquirer is investing, creating jobs here and collaborating with local businesses, that is a good return. I don’t think we should be overly concerned about whether it is an indigenous company or not. “The ‘stickability’ of jobs is what counts. It’s about keeping the faith; this is a long-term plan. This is not an industry that brings quick returns, though it is very lucrative in the medium to longer term, so we need to show that we are achieving milestones along the way.” Neil McInnes added: “The sucessful sale of a Scottish business should not necessarily be considered as a negative, and {18} CA MAGAZINE
“Do we want to build businesses in Scotland, or to have these five-year buyouts?” Claire Brady, Edinburgh Research Innovation indeed it can help address those areas where the Scottish sector is deficient, when experienced managers and the cash from the sale are available to be recycled into new opportunities.” Hugh Ilyine argued that, as part of the UK, Scotland cannot introduce the kind of tax breaks introduced by Ireland to attract inward investment. He was positive, however, about the “phenomenal” range of IP talent among universities in Scotland. Ilyine added: “There needs to be a discretionary pot of money for pinpointed investment, to test the potential commercial value of ideas.” “There is more of that kind of money around than there ever was, although funding for translation research is still limited and competition is high,” was the response from Claire Brady. “The challenge, often, is getting the academics to
apply for it, because their main interest, and purpose of employment, is the funding they get for research papers, not in a short project that might only involve three months’ work, the purpose of which isn’t core to their research expertise.” “Stanford University [in Palo Alto, California] has the same problem; they have a pot of money for short projects and typically it is not all spent. This is not unique to Scotland. It’s hard to employ staff for a three-month project, and you could spend as much time applying for a £3m grant as for £30,000, often with less bureaucracy to deal with.” Damien Bechelli speculated: “Perhaps if there was more of a switch away from that, there would be an incentive to undertake research that could be commercialised?” Claire Brady said: “I would have loved to see that message get
through eight or nine years ago. It’s coming through now, but there is a danger of missing out on the unexpected brilliance and rewards of pure research, if you go too far down that road.” Hugh Ilyine said that not everyone is keen on applied science: “At one company, when I suggested we could use stem cell technology in beauty products, I was nearly frogmarched out of the building!” Scott Johnstone argued that the panel should not be too negative, pointing out that there are successful Scottish life sciences quoted companies, for example Omega Diagnostics, and Axis-Shield. These companies and others, he said, had not only built their own business but had been active in acquiring others. Biopta’s David Bunton said: “Our vision is also to go on the acquisition trail over the next two or three years.” Biopta started as a spin out from Glasgow Caledonian University and now has a thriving research services business. The company employs more than 20 people. Dr Charlie Bavington is chief executive officer at GlycoMar, which specialises in the application of marine biology to human health and www.icas.org.uk
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personal care, and so far has experienced both the start-up process and the acquisition of another business. He said that diversification and acquisition, even if not part of the original plan, could be a good thing for the business. As he put it: “It’s not a failure for your business plan to be a bit messy. It’s a model which works for us. Some VCs may not like that, but there are VCs out there who do understand. The power to survive alone is worth something.” Rhona Allison stressed: “There is more activity going on and Scottish Enterprise, and a number of companies, are talking to VCs about how they can invest in Scotland. Raising awareness is working. “A r e c e n t r e p o r t s h o w e d Scotland has the UK’s highest start-up rate per capita in the life sciences sector, and over 50 per cent get funded as opposed to 36 per cent elsewhere in the UK.” Derek Smith commented: “As businesses reach the level at which they are looking for VC funding, debt funding also plays a part. Maybe the life sciences community has found it harder, in the past, to access debt – it all depends on what part of the sector we’re talking about – but there are venture debt products, working capital products out there that work well, alongside equity investment. “I think it helps to have management teams that know how to access that sort of funding, and how to use it. That’s no different in any industry.” Claire Brady said that the university sector is showing greater enthusiasm for commercialising technology. She said: “We have more and more academics wanting to come forward and form companies. Last year we had a record number, many from students. The appetite is there.” Attitudes are different now, Scott Johnstone agreed: “The ‘culture of failure’ we used to talk about in Scotland five or 10 years ago has completely changed.” Colin Miller asked: “How closely is the National Health Service working with the life sciences sector and with the universities, and could www.icas.org.uk
this be improved?” Claire Brady said: “We work with the NHS daily. Fundamentally, our priorities are different – research and teaching versus patient care – but there is good collaboration happening.” Brendan Waters pointed to the success of SHIL (Scottish Healthcare Innovations Ltd), a company jointly owned by NHS Scotland and Scottish Enterprise, which has been involved with successes like Touch Bionics and Ambicare with the aim of helping to commercialise medical technology and expertise. He said: “This is a fantastic story.” Rhona Allison said: “Previously, we had competition rather than collaboration, at least between the universities. One of the biggest developments was Wyeth [a global
player in pharmaceuticals, now part of Pfizer] collaborating with Scotland. From the point of view of international corporates, they only need one contract to work with the whole of Scotland. Wyeth tried to do this in other global locations, but they could not it make it work there. Here, they can work hand in hand with the healthcare provider and researcher.” She added: “The Government realises that there is a ‘health and wealth’ agenda for Scotland, in other words not just creating economic wealth but helping to tackle some of the country’s health problems.” Allison highlighted the work of LiSAB – the Life Science Advisory Board – co-chaired by Nicola Sturgeon and Dr John Brown, chairman of Axis-Shield, CXR Biosciences
“In Scotland,we have a very supportive public sector and the angel community is strong” Colin Miller,Biggart Baillie
and the Roslin Foundation, with representation from small and large companies, international and indigenous companies. She said: “It’s not just a talking shop. The CEOs who give their time for this want to see an outcome and some tremendous work has been done.” Hugh Ilyine added that the Scottish Stem Cell Network also combines academia, industry and government in one body. He said: “Around the world, in most places you don’t see that kind of connectivity. Scotland is a socially more open country than many others, and the standard of ethics here is second to none.” Summarising, Colin Miller said: “In Scotland we have a very supportive public sector and the angel community is stronger than in many other countries, but we need to look for deep-pocketed investors, particularly over the £5m mark. That’s a major challenge. Another is attracting foreign investment and “stickability”, good investors who will be in it for the long term. “Scottish Enterprise has achieved a lot, but we recognise that this is a long-term game.” ■
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Anthony Harrington finds that while the challenges facing Scotland’s life sciences sector are great, so is the industry’s potential
The appliance of
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Edinburgh BioQuarter
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s a small country on the periphery of Europe, Scotland has to work hard to keep its economy moving forward. Key to this has been the task of identifying and championing sectors where the country already has world-class strengths. The life sciences sector has been one such focus for a number of years, and while everyone in the sector would always argue that more Government support would be an exceedingly good thing, what has been achieved so far has been remarkable.
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As Scott Johnstone, CEO of the life sciences company Antoxis and director of the Scottish Life Sciences Association, observes, the sector currently employs more than 33,000 people and contributes some £3bn to Scottish GDP. However, some in the sector argue that while individual companies continue to do well, there is a sense that the sector has hit something of a plateau in the last few years – and not just because of the recession. There are however, some substantial initiatives going forward, which should give the whole sector some additional impetus in the medium term. Not least of these is the Edinburgh BioQuarter, a $1.2bn public/private investment project located alongside the new Royal Infirmary. The 100-acre site contains a state-of-the-art teaching hospital and the University of Edinburgh medical school. The completed site will provide more than 500,000 square feet of academic research space and an additional 900,000 square feet of accommodation for life sciences companies. It doesn’t lack for prestigious neighbours either, having the Roslin and Moredun Re s e a r c h I n s t i t u t e s , t h e Edinburgh Technopole and Heriot Watt Research Park nearby. Pa r t n e r s i n v o l v e d i n t h e Edinburgh BioQuarter include the City of Edinburgh Council, the University of Edinburgh, Scottish Development International (which will be looking to attract inward investment from existing pharmaceuticals giants, for example) and NHS Lothian. In June 2010, work began on the £24m, three-storey “Bioincubator” building based in the Edinburgh BioQuarter. The building, which is expected to be ready in 2012, will provide a mix of office and laboratory accommodation for a range of life sciences companies. Johnstone says that he is very optimistic about the sector’s prospects. The steps that have been taken are all extremely positive and the Life Sciences Association itself is thriving, he says. “We were part of the UK Biotechnology Association, but we felt that since key issues for the sector, such as health, are devolved issues, it was essential that Scotland
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Colin Miller reviews legal developments in the world of life sciences and biotechnology
Life sciences and the law In the past decade we have seen significant growth in the life sciences sector in Scotland. There are now more than 630 organisations directly involved in life sciences, employing more than 40,000 people. However, they are facing unprecedented challenges due to the financial downturn. Life science companies are struggling to attract new finance and the investment community has become increasingly risk averse. Many pharma companies are tightening their belts and cutting back on more of their R&D activities. Anomalies in NHS procurement have also created their own problems for the sector. However, recent legal developments suggest help is on the way from both the UK government and the European Union. In November last year, the UK Government launched a wideranging review of the way UK tax impacts on both intellectual property and research & development. The Government has outlined further details of the
proposed UK “patent box” which wa s f i r s t a n n o u n c e d i n December 2009. This will provide favourable tax treatment for income generated in the UK from certain patents, hopefully making the UK a more attractive environment to invest in life sciences. The consultation period runs until 22 February. There have also been encouraging developments from Europe. As from 1 January 2011 new arrangements have been put into place for filing patents in Europe which will, in certain circumstances, cut costs for UK businesses. For example, applicants no longer have to supply the European Patent Office with the results of searches already carried out by the UK Intellectual Property Office (UKIPO). Although the EU provides for a Community Trade Mark and a Community Design, there is still no unitary EU Patent. This may finally become law in 2012. If adopted, there will be a new patent covering all the member states of the EU (currently, 27) but without any translation requirements, except that claims will need to be translated into two other official languages. The adoption of a single EU Patent will result in significant benefits, including substantially lower translation costs. Currently, it is often more expensive to obtain patent protection in Europe than in the US or Japan. ■ COLIN MILLER is a partner with Biggart Baillie, heading up the firm’s IP and Technology Group.
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had its own association. When Government deals with the sector, it is much happier dealing with a single voice and a single Scottish body than it would be addressing a part of a UK body,” he says. Rhona Allison, senior director for life sciences and chemical sciences with Scottish Enterprise, argues that far from being flat lined on some plateau, the sector is actually growing strongly. “Between 2000 and 2007, the sector saw a 50 per cent growth in terms of revenue, and we anticipate that revenues in the sector will double by 2020,” she says. A very recent initiative, still not completely grasped by everyone in the sector, is the work that has come out of the Life Sciences Advisory Board (LiSAB), co chaired by Dr John Brown and Nicola Sturgeon. LiSAB provided extensive feedback to the Scottish government as to what barriers there are to growth in the sector. As Allison notes, LiSAB has done much to highlight what needs to be done to truly make Scotland a location of choice for life sciences companies. Key to this has been the work done with the Scottish NHS, which was only finalised in September 2010, and which provides a much smoother route for companies who want to sell their product into the health service. “What is important here is that life sciences companies, whether they specialise in medical devices or drug development, can get input direct from clinicians which reflects the NHS Scotland view. This will tell them what data the NHS needs to make judgements about the viability of particular products,” Allison says. In her view, the next piece of the puzzle that Scotland really needs to put in place is to find a venture capital company with deep pockets that is prepared to base in Scotland and focus on the sector. “Scotland has been investing in the life sciences sector for many years and the Co-investment Fund and the Venture Fund have been extremely helpful for the sector, but we need venture capital and that is a real {22} CA MAGAZINE
Spin-out success story Touch Bionics has created iLimbs, which is marketed globally
“Touch Bionics is a prime example of a Scottish life sciences company that has successfully circumnavigated the passage from a pure R&D company to one that is shipping products globally” Stuart Mead, CEO, Touch Bionics challenge at present,” she says. Neil McInnes, associate director, corporate finance, with Grant Thornton, is a specialist in life sciences transactions. He argues that it can be misleading to make generalisations across the sector. “Life sciences” is a portmanteau term, drawing together vastly different kinds of enterprises. A company specialising in providing outsourced clinical trials capabilities is a very different operation from a bio sciences company pioneering a new drug or a medical devices company developing diagnostics kits or brain scanning equipment. “There are a number of business models in the sector and these models are viewed very differently by potential funders,” he notes. “What we have seen quite a lot of in the last 10 years is that big pharmaceutical companies – and some mid range ones as well – have cut back on some of their own homegrown R&D and are looking to leverage the efforts of smaller, early stage companies,” McInnes says. If the pharmaceuticals company
takes a stake in the new company, or signs a joint venture agreement a t , s a y, j u s t p r i o r t o t h e commencement of clinical trials, that takes much of the risk of the R&D, from the investor company’s perspective. It also, of course, derisks much of the rest of the journey for the investee company, since it delivers a partner with the resources to take the product to market if it turns out to be successful. However, McInnes argues that the danger for the Scottish life sciences sector is that it can be very tempting for companies to sell up too soon, and achieve only a small fraction of their potential value. “They end up selling for a few tens of millions instead of a few hundreds of millions,” he says. At the same time, this process of early selling can end up attenuating the life sciences community in Scotland by constantly “cropping” potential winners, flattening the growth curve of the whole sector. One Scottish biotech that got things exactly right, McInnes says,
was Bio Envision, which raised a good deal of its funding in the US and floated on NASDAQ. The company successfully developed a childhood leukaemia drug and began working with Genzyme, the second largest biotech company in the world. Once the drug won approval, Genzyme bought the whole company for something like $450m. “The question for other Scottish biotechs is, can they replicate this kind of model?” he asks. For McInnes, the recession has dealt rather lightly with the Scottish life sciences sector, largely because for companies who are still at the pre-revenue stage, and are wholly driven by funding, the fall away in demand that characterises a recession is not an issue. Funding has always been difficult to come by, of course, and a recession certainly does not make funding any easier. However, he argues that Scottish life sciences companies have, of necessity, got very good at switching off some of their costs and running on a much www.icas.org.uk
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lower cost base. O ne o f th e great early successes for the Edinburgh BioQuarter was the announcement by the drug development company TPP Global Development that it was going to locate its new headquarters in the BioQuarter. The company cited Scotland’s highly ranked life science universities, strong skills base and a first-rate medical technologies infrastructure as the background for its decision to locate here. Dr Sandy Allan is chief executive officer at Scottish Health Innovations (SHI), which was originally set up by the Scottish Government and Scottish Enterprise to administer intellectual property licensed from the NHS in Scotland. The operation has been grant funded until now, but in the wake of the coming public sector cuts, Allan is keen to find new sources of funding. “We have quite a lot of product coming to the market shortly and we have some licenses that are already out there and are bringing in royalties,” he says. According to Allan, there is no shortage of good ideas coming through from the NHS, many of which have very good commercialisation potential. “Since we first started, we have had more than 1,000 ideas that merited consideration,” he adds. In Allan’s view, SHI currently needs about £3.5m in funding to get it from where it currently stands, to the position where it would be self-funding in future and he is exploring a number of options to secure the required cash injection. So what is the difference
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between SHI and, say, the commercialisation departments of Scotland’s mainstream universities. According to Allan, the major difference is that SHI looks to add substantial value to the IP that it is pushing out to the market. This increases the revenue share that SHI can expect from that IP once it is successfully “out there”. It has some fantastically successful spin outs to its credit, including Touch Bionics, which has achieved worldwide acclaim for its work on artificial hands. Touch Bionics began as a programme of work in the Princess Margaret Rose Hospital in Edinburgh back in 1963, looking at prosthetic solutions for children affected by thalidomide. It was spun out in 2003 under SHI’s guidance and with a SMART award from Scottish Enterprise. Further funding since then has come from Archangel Informal Investments and the Scottish Co-investment Fund. The company now has three products that look like being world-class successes, the i-LIMB-Hand, ProDigits and LIVINGSKIN. As the company’s CEO, Stuart Mead, pointed out recently, Touch Bionics is a prime
ex a m p l e o f a S c o t t i s h l i f e sciences company that has successfully circumnavigated the passage from a pure R&D company to one that is shipping products globally. Colin Miller, the partner responsible for IP and life sciences at law firm Biggart Baillie admits to some concern over the current state of the sector. “Things have slowed down quite dramatically over the last few years and the recession certainly did not help,” he says. Apart from a dearth of funding generally, a number of Scottish life sciences companies are focused on contract R&D and they are reliant on the big pharmaceutical companies such as Pfizer and Johnson & Johnson putting work their way. There has been much less of that through the last few years as these firms too have responded to the global recession by trimming costs. Tightened NHS funding has also created a real problem.
Douglas Anderson, founder of the retinal imaging company, Optos, which has long been hailed as one of Scotland’s most outstanding biotech companies, is involved with several start-up companies in the sector, one of which has just succeeded in raising £2m in business angel funding. However, to set against this success, another of the companies he is involved with, also in the medical devices sector, has been ignored or turned away again and again in its search for funding. “We are not even getting to the point where a funder is prepared to do some due diligence. So I am well aware that funding can be very difficult,” he says. Anderson is another who feels that the sector in Scotland is somewhat bogged down at present and that it is difficult to see where the next big growth spurt is likely to come from. On the research front, h o w e v e r, h e f e e l s Scotland remains world-
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Optos, which manufactures retinal imaging devices, has been hailed as one of Scotland’s most outstanding healthcare technology companies
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class. The weakness in the sector continues to be in its ability to exploit good R&D and to take product to market. “We need a lot more energy to go into this,” he says. Anderson blames, in part, the UK custom of academic tenure, which cuts across the grain of entrepreneurial start ups. “There is just not inherently the aspiration to go out there. People become academics as a career choice, not as a stepping stone to being the CEO of a biotechnology company. Th e U S h a s a mu ch m ore entrepreneurial spirit,” he says. Anderson’s advice to any biotech early stage company would be to ignore the NHS as a potential market. “People who focus on the NHS, and I am speaking about the NHS in England, rather than Scotland, find their enthusiasm and resources dissipated while they try to secure that breakthrough. It is much better to take your product to market in the US and when you have a proven success, it becomes much easier to get the NHS to take
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it seriously,” he says. PwC partner Martin Cowie points out that Scotland has more than 15 per cent of the UK life sciences market, which means that Scotland is punching way above its weight, but he adds that life sciences right around the world is a challenging sector. Cowie says: “Things were very different five years ago, when the sector was seen as a highly attractive investment target. “Today, post the recession, VC firms are very reluctant to get into bed with life sciences companies until they have a proven product, at which point the company will probably be on the radar of a big pharmaceutical company anyway,” he says. Cowie argues that one of the real growth areas for Scottish life sciences companies is to step in and provide R&D outsourced services to big pharmas. “The big companies have set up development funds and are looking at investing in small companies to do R&D for them since it is a much
cheaper route to go down than sponsoring their own internal R&D,” he says. One of the strengths of the Scottish sector is the cross fertilisation between different areas of expertise, such as engineering expertise, medical expertise and computing expertise. “Collaboration provides an excellent way forward for the sector and we anticipate seeing some great innovation from such cross specialist co-operation,” Cowie says. For the sector in Scotland to really mushroom, it will need probably five or six companies of the scale of pharmaceutical business ProStrakan or diagnostics specialist Axis-Shield, he says. There is more than a little cause to be optimistic that this is achievable. Companies such as Touch Bionics are already well on their way. ■
“Between 2000 and 2007, the sector saw a 50 per cent growth in terms of revenue, and we anticipate that revenues in the sector will double by 2020” Rhona Allison, senior director for life sciences and chemical sciences with Scottish Enterprise
ANTHONY HARRINGTON is a freelance business journalist.
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