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Desperately seeking alpha: the quest for value

"VC investor seeking long-term relationship. WLTM small cap, early-stage, oncology-focused biotech. Interested in preclinical/Phase I assets and strong management. Good communication skills essential. US or UK/Ireland base preferred.”

Biotech and Money’s 2018 Investor Perception Survey reveals both predictable and more surprising insights into investors’ perennial quest for value in life sciences, and highlights an encouragingly positive outlook on investment opportunities within the sector. Most respondents were UK/European-based VC investors and family offices, skewing results towards their preferences and priorities; however, many themes are relevant to the wider investment community and the diverse companies and stakeholders within the sector.

 

  • Few surprises about ‘hot’ areas: Biotech remains favoured, although interest in digital health is growing as its potential becomes better appreciated. Within biotech, oncology is a keen focus given the size of the commercial opportunity and the positive impact of recent therapeutic and technological advances (e.g. in immuno-oncology). In future, therapeutic area distinctions could blur with momentum in innovative technology platforms that have broader applicability (e.g. cell and gene therapies). Most obvious areas attract investor attention, with one notable exception: anti-infectives. Antibiotic resistance is a high profile public health issue, but is at risk of sustained under-investment.

 

  • Commercial risks under-appreciated: Investment over a sustained time horizon reflects product development timelines and an inclination to invest at pre-clinical or Phase I stages. Predictably, given this profile, two-thirds of respondents identified clinical failure as the greatest risk. However, commercial risks are relevant to all areas of life sciences and will gain increasing prominence given pricing pressures and the implications for reimbursement of new devices, procedures or expensive complex novel therapies. Quality of the science and a compelling commercial opportunity are increasingly connected.

 

  • Small companies as the engine for innovation and M&A: Small innovative companies offer attractive entry points for investors and remain potential M&A targets. Innovative assets/technologies are typically at an earlier development stage and, as unencumbered mature assets become scarcer, are more accessible to potential acquirers. Large pharma/biotech/medtech continue to face pressures to address pipeline gaps, enhance revenues, and position themselves with respect to new technologies. Survey respondents cite US tax breaks and offshore cash repatriation as important drivers of increased M&A.

 

  • UK and Ireland a close second to the US: The view that the most attractive opportunities are found ex-Europe prevails, although the UK and Ireland are narrowing the gap. This promising development may reflect the bias of UK-based respondents but bodes well for the domestic sector. So far, the effect of Brexit on investors has been limited, but this may change once there is more certainty surrounding the potential impact of regulatory changes, access to translational funding, and the continued ability of UK companies to attract and retain talent.

 

  • Companies hampered by poor management: Management quality and poor communication are lingering investor concerns. Effective leadership and communication are vital in attracting both generalist and specialist investment, and helping transition the shareholder register from VC to public market investors as companies grow. Clear, tailored articulation of the equity story, addressing past achievements, current strategy and future goals, can catalyse this evolution.

 

  • Perfecting the pitch: Communication skills are an area of perceived deficiency; fortunately, these skills can be learned, and external advisers and third parties can help. Central to effective communication is the ability to tell a story: a clearly expressed idea is more memorable than detailed facts. A compelling equity story, pitched at the appropriate level, will engage the audience, but it must be tailored. Generalist, specialist, retail and institutional investors as well as other external or internal stakeholders all have different goals and motivations, and it is up to management to demonstrate how these are aligned with the company in order to build a successful relationship.

 

People are vital to the success of the UK life sciences sector; they create, build and manage companies and are a critical determinant of investment decisions. Therefore, the high proportion of respondents underwhelmed by management is at odds with their positive disposition towards the sector; it is unclear why. It may be a subjective judgement, a lack of corporate experience at early-stage companies, or evidence of the 80:20 rule. The UK does have a growing depth of competent management teams and there are several breakout success stories, so this wider issue is gradually being addressed.

Huge progress has been made in the UK life sciences sector over the past five years, with numerous exciting private companies supported by solid management now maturing. There is an ongoing need to nurture these and develop the next wave. As part of this, management need to be relatable, reliable, and communicate with all types of investors. All stakeholders are important; management must be proactive about addressing a wider audience.

Written by Lala Gregorek, Analyst at Trinity Delta.

This viewpoint features in the Investor Perception Survey 2018. Download the full report to read through this year's survey results and learn more about the investment community's expectations for Europe's life sciences sector:

DOWNLOAD THE REPORT 

Lala Gregorek
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