By Mark Howard, partner And Jodie Dennis, associate, Charles Russell LLP
The AIM (formerly the Alternative Investment Market) IPO market has seen a number of significant listings recently in the life sciences sphere. Notably, the market appears to be strong for companies providing clinical services or medical devices, with a wide range of such companies coming to market in the last 12 months, including Clinigen Group (clinical trials supply and specialty pharmaceuticals) and Venn Life Sciences Holdings (consulting and clinical trial provision).
For companies involved in drug discovery, the market remains challenging. But there are signs of interest from certain institutional investors in this part of the sector too, and the successful floatation of Retroscreen Virology Group’s shares on the AIM market demonstrates a willingness to invest in businesses carrying out quality R&D, albeit in this case counter-balanced by a novel clinical services business. Retroscreen is a virology healthcare business that provides preclinical analytical services and clinical services to large pharmaceutical and biotech companies. Last year it successfully raised £15 million ($23.5 million) from an AIM IPO to fund its R&D and working capital requirements.
In April 2013, the London Stock Exchange welcomed Electrical Geodesic, Inc. (EGI), a U.S.-based medical device company, to AIM. EGI made a strong debut, raising the £8 million ($12.5 million) before expenses on admission.
EGI’s successful floatation is not surprising, given the company’s measured evolution, both in operational and financing terms, prior to coming to market. EGI has steadily advanced and developed its core technology over the last 20 years and has obtained regulatory clearance in the U.S., EU, and from a number of other major international regulatory bodies. EGI has an established revenue stream with around 500 customers internationally.
EGI and almost all recent IPOs in the United Kingdom demonstrate that companies with a strong pathway to profit are seeing a lot of interest from institutional investors. Investors are also interested in strong management teams that have a proven track record of bringing life sciences companies to market and providing them with a profitable exit. For example, David Evans, chairman of Healthcare Investment Opportunities (which was admitted to AIM in April), has been part of a number of successful management teams in this area, including Venn.
Alternative Sources Of R&D Funding
Companies that are very early in their development are unlikely to be suitable investments for institutional investors. However, as Venn and Retroscreen (previously backed by private equity houses Calculus Capital and Aquarius Equity, respectively) have shown, there are other sources of finance available to fund the earlier part of the life cycle. In addition to private equity/venture capital, alternative providers of finance, such as national development funds and mentoring initiatives (for example, Government’s Biomedical Catalyst and the Growth Accelerator) and regional development funds, such as the Thames Valley EIS Fund, can be invaluable alternatives for early-stage, next-generation businesses. This is especially true in the context of an economy where traditional providers of debt finance remain relatively cautious.
Companies early in their life cycle also may benefit from partnering relationships with universities, charities, or large corporations. Such partnerships can help smaller companies plug the funding gap and provide access to R&D expertise and services critical to their long-term success.
For those companies with established revenue streams, access to a public market, whether this is AIM or the main market, can offer many advantages. Recent admissions on AIM have raised from a relatively modest £8 million ($12.5 million) (EGI) to a very healthy £50 million ($78.3 million)(Clinigen), providing these companies with crucial funds for further development. The secondary fundraising market also has been buoyant, with more than £2.5 billion ($3.9 billion) and £4.1 billion ($6.4 billion) being raised in 2012 through secondary issues on AIM and the main market, respectively. In addition to access to capital, companies benefit from enhanced status and public profile, the ability to incentivize employees through share-option schemes, a transactional currency in the form of their listed shares, and a profitable exit option for investors (e.g. at Clinigen, the existing shareholders achieved a significant sell-down, receiving aggregate consideration of over £40 million [$62.6 million]).
In March 2013, the LSE (London Stock Exchange) launched a new high-growth segment of the main market. The new platform is aimed predominantly at addressing the needs of fast-growing European technology companies with a view to providing such companies with a transitional route to the UKLA’s (U.K. Listing Authority) official list. This opens up an exciting new platform for companies in the life sciences arena that are looking for access to capital as a stepping stone to the main market.
The public markets are looking more positive for life sciences companies with strong underlying fundamentals, strong management teams and profits, or a clear pathway to them. Meanwhile, policy initiatives such as the Biomedical Catalyst mean better support is being made available at the other end of the life cycle. Both factors bode well for the future of the sector and R&D.