First published in our Biotech Review of the year – issue 8.
Well represented within the 200-strong list of companies are the life sciences; the university proudly declared how three of its offspring were developing ventilator and testing technologies to help tackle COVID-19. But though the pandemic may have spurred investor interest in life sciences to an extent, in truth, the university life science spin-out was burgeoning even beforehand. After all, whilst it took Oxford 55 years to spin out its first 100 companies, the second hundred were spun out in just six. At the time of writing, the Vice Chancellor is already publicly anticipating the 300th.
The ‘Golden Triangle’
If Oxford’s spin-outs reflect the essential health of the sector – UK universities raising almost £1.25bn in 2019 alone – it also betrays another important trend: the predominance of a ‘Golden Triangle’ of institutions. Oxford, Cambridge and the London Universities, such as UCL, KCL and Imperial, lead the pack in life sciences. Such a situation is inevitable. The research facilities and capital reserves of these universities, which boast a combined endowment of over £14bn, means their preeminence will likely be maintained in the coming years.
In October 2020, Oxford University spun out its 200th company. Having gone from 100 to 200 such companies in six years, the Vice Chancellor is already predicting the 300th.
Let’s also not forget that these institutions simply have more academics. Cambridge, for example, is made up of over 100 departments, faculties, schools and institutes. More research staff means more ideas capital, supported by incredibly deep pockets.
That’s not to say there haven’t been efforts to encourage spin-outs from across the UK’s wider academic institutions. The Vice Chancellor of Keele, for instance, published a report in 2017 urging the Government to offer greater guidance to help all universities spin out companies. But though this would benefit the UK market, there is no one-size fits-all solution to easily implement and it is unlikely the Golden Triangle will be seriously challenged in the near future. And it is here that investors’ eyes will remain trained.
The stealth company
One of the trends changing the sector as we enter 2021 will not actually be immediately visible. Indeed, the last few years have seen the rise of the stealth spin-out: companies that keep their growth and funding tightly under wraps until emerging almost from nowhere. The only indications of the existence of such companies are typically several job adverts attached to a minimalist website homepage. Regularly checking job listings, then, might prove fruitful for the savvy investor.
For the most part, the desire to attract minimal attention early on is driven by practical business considerations. Making too much noise too soon risks alerting competitors to nascent technology and its financial viability, which would be a highly dangerous strategy if the right IP protections are not already in place. Crucially, with the media spotlight firmly on the life sciences sector, we can only expect stealth companies to continue to grow, albeit covertly, in 2021.
Where’s the money?
This last point is critical, albeit easily misinterpreted: though COVID-19 has shone a spotlight on the sector, the spike in investment activity has not been commensurate with the increased publicity. This is not to disparage the sector; it’s simply the case that the sector was blossoming before the pandemic. Indeed, 333 UK companies in the life sciences sector raised equity in 2019 whilst deal activity increased by 5%. The success stories of the last few years are typified by Autolus, Freeline and Orchard Therapeutics, amongst others, all of which quickly reached NASDAQ.
Inevitably, COVID-19 will throw up opportunities for investors, but (at the time of writing) with vaccines seemingly looming into reality, other areas will also offer rich pickings. Diagnostic and gene therapy spin-outs will likely attract significant investor attention in 2021. More broadly, we may also see increased activity at the intersection of tech and life sciences, not least when it comes to diagnostic technologies.
There is also likely to be an increased activity around university and partner funds, which see the institutions entering into strategic arrangements with chosen investors or fund managers, often providing for some type of priority access to technologies being spunout from that institution. Oxford Sciences Innovation (OSI), which has a long-standing and successful track record of partnering with Oxford University, is emblematic in this regard; and with 2020 witnessing the launch of UCL’s second tech fund, we can only expect such activity to increase in 2021. What’s more, we may even see a growth, if not a continuation, in institutions themselves investing into life science funds.
The growth in university and partner funds, stealth companies and the spin-out ‘engine’ of the UK’s golden triangle all suggest that 2021 will be a strong year for UK spin-outs, but given the pandemic disruption only time will tell how the market will ultimately evolve.