Government movement on Biotech fundraising

The UK government is to investigate the fundraising difficulties experienced by the UK's bioscience sector in comparison to regimes elsewhere.

Paul Myners, chairman of Marks & Spencer, will chair the study, supported by an advisory group drawn from representatives from high tech sectors, private equity companies and City investment institutions.

Science and Innovation Minister Lord Sainsbury said: 'This is an extremely important issue and I am delighted that Paul Myners has agreed to chair this study to see if there is a way forward which meets the needs and concerns of all the parties involved.'

The study follows representations from the biotechnology industry that current application of pre-emption rights (see below) in the UK makes it difficult, and more expensive, for companies to finance research and product development. The industry argues that this is not in the interests of the shareholders of these companies. Current application largely follows the pre-emption guidelines issued by institutional investors, but the rights themselves are enshrined in law.

The conclusions will help to inform the Government's thinking in advance of a planned review by the EC of the EU second company law Directive. Current companies act provisions on pre-emption implement the requirements of the Directive. The aim is to produce and publish a final report early in the New Year.

In 2002 European bioscience companies raised €1.98bn - about half the 2001 total. By comparison their US peers raised almost 3.4 times as much. At the same time valuations of bioscience companies listed on public markets also declined across the globe.

BIA chief executive Aisling Burnand said: 'One of the recommendations included in Bioscience 2015, the most significant report into the UK's bioscience sector was a relaxation of the pre-emption guidelines. The involvement of a fresh pair of eyes in the form of Paul Myners is therefore excellent news. He is someone who understands the perspective of both companies and investors.

'UK biotechnology companies are unfairly hampered when one looks to, for example, the USA. Companies in the USA enjoy greater flexibility in raising new equity capital and listed companies may issue new shares for cash in amounts of up to at least 20% of their share capital at a discount to the market price without needing to obtain shareholder consent. Bioscience is a global business and therefore we believe that it is important that there is a level playing field financially for bioscience companies.

'There are particular circumstances applying to the fundraising difficulties being faced by the UK's bioscience sector. Financial demands on bioscience are enormous with very heavy capital requirements before companies can become very profitable. The top ten US bioscience companies with market capitalisations of up to $70bn needed to raise $700m from investors before ever reaching profitability.

'We do appreciate the sensitivities involved in reviewing pre-emption rights and wish to work in partnership with Government and other interested parties to see if progress can be made.

'Government has greatly invested in UK science. That public policy investment needs a level playing field in financial terms otherwise the support will not bear fruit. Bioscience is a sector that requires long development periods that, in turn, require regular injections of cash. If these injections are not made, the economic and healthcare benefits offered by the bioscience sector will not be delivered. When it comes to pre-emption rights, one size does not fit all.'

Pre-emption problems

Markets in bioscience stocks tend to be extremely volatile and funding windows can open and close very quickly. Consequently, the length of time for which pre-emptive issues have to remain open can prejudice the success of an issue because funding windows can open and close within that period. This is exacerbated by the fact that, in a sector where company stories are relatively complex and require detailed and time-consuming analysis which is often not primarily financially based, sub-underwriting in the usual manner practised in the London market is much less feasible. This is because potential sub-underwriters are not able to make the underwriting decision in the narrow window of time that is typically available to them. The combination of pre-emption without underwriting makes for a materially increased risk of failure. Secondly, bioscience companies are characterised by demands for capital that can increase by an order of magnitude as companies proceed through the various stages of drug development. By way of example, the costs of a later stage (Phase III) clinical trial can be ten times the cost of an earlier stage (Phase I or II) trial. As a consequence, bioscience companies are more likely to need funding support from outside their existing shareholder base to meet their capital demands as they progress. The complications of pre-emption effectively act as an impediment to introducing outside investors, particularly in this sector, where the company story is relatively complex as referred to above and requires detailed and time-consuming analysis by a prospective investor. The BIA is advocating a relaxation in the application of pre-emption guidelines as currently followed by UK institutional investors. These guidelines, which are supported by the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF) provide for a maximum size of non pre-emptive equity issue for cash of 5% (of issued share capital) annually, with an additional limit of 7.5% over a rolling three year period. The BIA proposes that this 5% limit be relaxed to 20%.