The innovative life sciences sector is offering advisers a wealth of investment opportunities, says Andrew Aldridge, Head of Marketing at Deepbridge Capital.
As we continue to countdown to Brexit, questions are continually raised about the strength of the UK economy, how various industries and sectors will fare after we leave the EU, and what it all might mean for GDP, jobs, growth, wages, innovation, development, technology, and not forgetting the UK’s place in the world both politically and financially.
There are plenty of opinions and a large amount of modelling but the reality is, that until we reach the red line and have a better understanding of what Brexit will look like, much is pure speculation.
Advisers no doubt find themselves in something of a tricky position – how can you second-guess what might happen after such a potentially major event? Leaving the EU could be monumental and could impact on all of us, plus UK industry, business, employees and the wider economy for decades to come – or life may be exactly the same post-29 March 2019 as it was before; we simply don’t know yet.
In this respect, advisers considering investment opportunities for their clients have something of an ‘impossible job’. The big question is how do you find the returns required to keep clients happy at a time of great uncertainty?
For appropriate clients it may therefore represent a chance to look at unquoted opportunities which are growth-focused Such stocks may also be relatively uncorrelated to the markets, which may also be appealing during uncertain times. Such investments may also offer the investor the potentially significant tax incentives offered by government via EIS and SEIS – possibly offering a degree of downside protection.
For those of us working with, and supporting, growth-focused early-stage investee companies, it is therefore important we continue to support those sectors and industries which we expect to continue to deliver quality and growth, even in the face of such significant and ground-breaking changes.
Life science opportunity
As well as innovative technologies, one of the major areas we therefore focus on is the life sciences sector because there is a strong pool of UK entrepreneurs – both new and established – that are making big plays here and pushing the boundaries of what was once thought achievable.
For advisers who may not be familiar with this sector, life sciences (somewhat obviously) focuses on the scientific study of life, whether that be plants, animals or humans, as opposed to physical science, which focuses on non-living matter. Various life science sub-sectors include medical technology, drug discovery, anatomy, genetics, immunology, neuroscience, biochemistry, molecular biology, to name but a few; however, what tends to focus the mind of life sciences businesses – and present an investment opportunity – is they are seeking to improve ‘lives’ through health advances, and often seeking to thereby improve health-economics.
Unsurprisingly, given the breadth and depth of the disciplines that make up life sciences, there are a huge number of businesses in this area and what Deepbridge does, as investment manager, is to look for those that need our support/resource/input, who are ‘knowledge intensive’, who have a vision, and have a product and/or service that has the potential to deliver returns on a significant scale.
The scale of science
So, why life sciences? What is it about this sector that is most appealing and what is it already delivering to the overall UK economy? A report by PwC titled The economic contribution of the UK life sciences industry, provides plenty of evidence and arguments to show why it’s a sector worth supporting and exploring.
- In 2015, the UK life sciences sector contributed £30.4 billion to the economy – a contribution that comes primarily from the activities of the pharmaceutical, medical technology and biotechnology research companies.
- Again, in 2015, it’s estimated that 482,000 UK jobs were supported by the life sciences industry.
- It’s estimated that the industry made a contribution of £8.6 bn to the Exchequer during that year via income tax, NI contributions and Corporation Tax.
- Life sciences companies can be found in every UK region and labour productivity in the sector is higher than other major European countries.
Now this data does come from three years ago, so it’s fair to suggest that since that time, there has been an improvement in all of those plus points for life sciences. Indeed, Deloitte has looked at the future for the life sciences and developed a range of forecasts about the growth we can expect to see. It suggests that:
- Global health care spending is likely to reach $8.7 trillion by 2020 because of aging and increasing populations, emerging market expansion, advances in medical treatment and rising labour costs.
- Purely in the pharmaceutical sector, the forecast is at $1.06 trillion worldwide, with spending on research and development predicted to increase by 2.4% until 2022. Deloitte says much of this growth is being driven by the innovation of small, niche companies – a core investment focus for life sciences specialists like Deepbridge. In terms of therapeutic trends oncology leads the way followed by diabetes, rheumatology and antivirals.
- Deloitte says the sector is seeing exponential changes in technology. It highlights artificial intelligence (AI), cognitive technologies, automation and computing power as ‘creating a transformation opportunity’ and effectively leading to the ‘industrialisation of life sciences’.
Deloitte’s analysis is interesting because it highlights how life sciences companies can capitalise on the existing environment but also prep themselves for future changes – and, as we know, there are some considerable ones coming in the UK space. The review says firms should do the following in order to drive the business forward:
- Embrace those technology changes mentioned above.
- Embrace geo-political changes suggesting that tax reforms worldwide are expected to ‘create both incentives and disincentives for the life sciences sectors and impact future investments’. It cites Brexit as one of these changes that will impact on UK firms and points to the uncertainty around whether ‘the UK’s relationship with the European Medicines Agency will change’.
- Build an adaptable organisation for the future of work, citing how automation and tech can be utilised.
- Build a culture of courage to help counter uncertainty.
- Build data integrity, and maximise the value of that data.
- Grow through partnerships and new operating models.
This last point is particularly relevant and important when it comes to the investment decisions made by the life sciences companies themselves, those that we make as a manager, and the choice of manager by advisers when looking to find homes for clients’ investment monies. There has clearly been a shift in terms of access to investment, especially when it comes to start-ups, and accessing funding via ‘traditional means’ is no longer an option for many businesses in this space. This is where managers like Deepbridge come in, and having a specialist focus on life sciences clearly benefits the investee company, the adviser and the investor.
What is positive for us and you, as the adviser, is the continuous development and innovation that firms within life sciences pursue and achieve. By having the connections and network to be able to forge relationships with these businesses – many from a very early stage – and to have the EIS/SEIS structure in order to offer these opportunities to advisers/clients, we believe there is an opportunity available to all. Life sciences will continue to be a great contributor to the UK economy, and it’s our belief that even in an uncertain world, it could be an appealing proposition to appropriate clients.