The critical role of crossover investors
The landmark sale of Kymab to Sanofi for £1.45 billion set thoughts racing among life science entrepreneurs around the world and, particularly, in the Cambridge Cluster.
On one hand it showed what is possible commercially for the founders and originators of the core science if they create and grow a sought after company. On the other it brought us back to the much debated discussion – what is the tipping point for founding entrepreneurs in terms of long-term development of their business? How far can they take the science under their ownership?
I don’t think anyone could accuse Kymab of selling out too cheaply: Since its founding in 2010, Kymab has raised $220 million in equity financing from leading investors to enable the company to develop its unique antibody platforms and create a portfolio of therapeutic antibody assets.
Cambridge-based but globally influential life science entrepreneur Dr Andy Richards certainly doesn’t believe the local cluster lacks ambition but acknowledges: “Our companies do need to get bigger – and faster; pace matters.”
Dr Richards adds: “I am not so worried about early stage funding, but the link to larger funding and the public markets is where the current discontinuity is.
“In biotech (therapeutic biotech) gaining maximum value from a technology and the products arising usually requires large amounts of capital, such that the most exciting businesses need to access the sort of capital that you can only get from the public markets (ie through an IPO).
“They often go public well before they have sustainable revenues and if they cannot access such capital then they take the option of selling off or licensing their most valuable products earlier than they would if the capital was available. The real value is captured where it is possible to invest in a product all the way to market as GW Pharmaceuticals has shown.
“In the UK, investors on the public market (LSE and AIM) have over the last 5-10 years been less interested in biotech companies in comparison to other sectors and that is in contrast to Nasdaq.
“The exceptions are companies like Abcam that have been a huge success but do not have the same characteristics as a therapeutic biotech. It is often stated that investors on the London market are generalists whereas the US Nasdaq market does have a large number of specialist investors. That may or may not be a significant factor.
“Traditionally, it was a challenge for UK companies to successfully tap into Nasdaq without moving HQ plus many core activities to the US, but that looks as if it has changed. Note also that Cambridge based Acacia Pharma tapped Euronext to get its capital to go all the way.
“As a consequence of the hurdle to get to Nasdaq and the lack of an effective route to LSE/AIM for therapeutic biotechs a successful venture investment model has been built up here where the investment thesis is ‘investing to sell’ – and this is possible because of the quality of our science and discoveries and the experience and capabilities of our executives, many of whom have been through the whole cycle many times.
“When you ‘invest to sell’ you invest less in building up sustainable infrastructure and long term capabilities and focus more on the lead sellable therapeutic assets.
“As a cluster we should always celebrate an acquisition such as that of Kymab by Sanofi. It validates the quality of our innovation and usually the talent, technology and capital recycles into the next exciting opportunity. KaNDy Therapeutics, acquired by Bayer earlier this year, is another great example and a real success for all concerned.
“However, to grow and build sustainable biotech businesses in the cluster some companies have to scale by going to the public markets to fund their pipelines all the way to commercialisation.
“With a disinterested London market, that means getting to Nasdaq. Success on Nasdaq has always involved some key factors – one of which has been the role of crossover investors.
“Crossover investors (such as Perceptive, RA Capital, Orbimed, etc) have always played a central role, backing companies just before an IPO and then on a flotation. The chance of success on a Nasdaq IPO without a group of crossovers on your share register is diminished.
“There are few UK-based funds that act as crossovers although there was a while when Invesco (when headed by Neil Woodford) and then Woodford (the fund itself after he departed Invesco) did play that role. The disappointment of the whole Woodford episode is that the strategy was never seen through to success and that other UK based funds did not adopt an aligned approach. One of the key discontinuities in our financing continuum is crossover investors.
“However, I am as ever an optimist and there are a number of very promising signs that suggest that times may be changing.
“Key US crossovers such as Redmile, RA capital and Perceptive are more active in the UK than they have been for years. US investors and other international funds with links to these crossovers are also more active here.
“Certain sophisticated UK active venture funds are building strong connections to those crossovers and bringing them into their higher quality biotech scale-ups ie those that have sustained growth potential. In addition, UK companies have shown that an AIM to Nasdaq transition is a viable route to grow and gain the next level of capital. GW Pharma was a pioneer in this regard.
“Most significantly, UK life-science companies on AIM have done well over the last 12 months and UK public market investors have started to show a real interest in life-sciences and even therapeutic biotech. Perhaps COVID has made everyone realise how impactful and global innovation in the sector can be.
“It will be interesting to see which Cambridge based companies are able to use this renewed interest in the markets to IPO on AIM and whether they can gain the momentum and characteristics to transition onto Nasdaq or even, going forward, tap main LSE investors.
“It will also be worth watching those companies that gain larger investor syndicates, including crossovers, that may allow them to catapult straight to Nasdaq.”