Welcome to the inaugural City and Finance update. Each month we plan to: introduce an investor, explain a piece of jargon you may have heard, discuss an interesting deal and highlight key City and financial news that will impact the BIA membership.

In this update we cover the Chancellor promising more money into venture funding and IP Group and Touchstone Innovations flirting over a takeover. Plus, we explain what MiFID II means for you, Horizon Discovery’s acquisition of Dharmacon is deal of the month, and our first investor profile is on one of the most important investors in the UK’s life sciences sector – Woodford Asset Management.

IP Group/Touchstone Innovations – the impact on UK life sciences

On 23rd May, IP Group announced a 2.149 IP Group shares for 1 Touchstone Innovations offer. This equated to 307p offer for Touchstone Innovations and a 320p cap.

Both businesses are major UK-listed IP commercialisation players, investing in a large number of university spin-outs and other early-stage high-tech businesses. Touchstone Innovations rebuffed and continues to rebuff IP Group, but with around 90% of shareholders minded to agree to the deal, Touchstone Innovations independence may be on shaky ground. 

What happens next?

The combination of the two businesses would give a £1.49bn IP commercialisation business on the UK market. The vast majority of the investments in the two businesses are based in the UK and include 50+ life sciences businesses, roughly half the portfolio.

Touchstone Innovations is vigorously defending itself with a number of chairman’s letters and comments, with the latest rejection on 18th July of the slightly improved 2.2178 IP share for 1 Touchstone Innovations share offer. This valued each Touchstone share at the time at 304p (with a 330p cap). Touchstone’s management argues that the offer undervalues the business and that as of 30th June their NAV (Net Asset Value) was £502m or 312p per share. In addition, management has voiced concerns around employee/investee company relationships.

What does it mean for UK biotech?

The deal has both pros and cons for the sector. On the negative side, two businesses with two different approaches had offered UK biotech more investor options and helped make the IP commercialisation space in the UK a viable sub-sector, attracting overseas businesses such as Puretech. However, on the plus side, there may be economies of scale in a combined business, and a larger business may be better placed to follow-on initial investments to companies scaling up their activities.

If this deal does take place, there would certainly be room in the UK market for an emerging management team (or even for the existing Touchstone management) to launch their own fund.

British Business Bank to replace EIF money

The Chancellor has promised to replace some of the monies the UK will lose from the European Investment Fund when the UK exits the EU. 

The European Investment Fund invests in venture funds, which in turn invest in early stage and SME European businesses. After the UK exits the EU, UK venture funds are unlikely to have access to EIF monies. This could be a significant blow for UK VCs; the EIF currently has over €20bn invested in 351 venture funds and the UK’s biotech industry relies heavily on venture capital investment; £681m venture capital funding was raised in 2016 alone.

The story behind the story

At the Chancellor’s annual Mansion House speech in late June, Philip Hammond said that the British Business Bank (BBB) “will extend the limits in its current venture capital investment programme … As part of this, the BBB will, if necessary, be able to bring forward some of the £400m additional investment that the Chancellor announced at Autumn Statement 2016. We estimate that the short-term additional demand for the extended programme could be up to £80m, unlocking up to £320m of total investment into funds in the coming months.”

The EIF recently committed one of its largest investments in life sciences to date in the Medicxi Growth 1 (MG1), a new US$300m fund that will focus on growth-stage companies in European life sciences. Other investors in MG1 include Novartis and Verily (part of Google’s Alphabet).

What does this mean for UK biotech?

The UK’s biotech industry relies heavily on venture capital investment to complete early stage clinical programmes. But, with the loss of the EIF monies, a potentially smaller pot of money may focus only on those companies with a quicker return on investment, leaving biotech businesses, with their longer time frames and higher risk profiles, worse off. Public money invested through the BBB could offset some of the likely shrinkage in the pool of capital available to invest in these riskier long-term businesses.

Jargon of the Month: MIFID II

MiFID II (Markets in Financial Instruments Directive) is perhaps the city’s most soporific acronym against tough competition. But it’s important. It’s a set of new regulations to be implemented in early 2018 and it will have a huge impact on the UK’s investment industry. Of interest here is that the regulations require “research” on companies and their shares to be paid for directly by fund managers as opposed to being “bundled” into other services (such as trading). So, will UK Biotech need to pay more for investment research?

What could happen?

These are European regulations but the investment industry expects to abide by them, even with the UK exiting the EU, since this will allow UK banks and fund managers to work in the EU too. So what impact will they have? There are a number of possible scenarios:

  1. Fund managers will pick a limited number of investment banks from which to obtain their research. There is likely to be consolidation in research analysts and so less diversity of opinion in the market.
  2. Investment banks may choose to specialise in either research or trade execution. While some buy-siders believe this would improve the quality of execution service they receive, others warn that it could drive up the price of research, which will put pressure in particular on smaller investment managers.

You can find out more in the Consilium and BIA briefing.

What does this mean for UK biotech?

There are likely to be fewer analysts covering a growing number of stocks. Smaller life sciences businesses, perhaps covered by a single in-house broker (bank), may struggle to attract the attention of independent research analysts and could have to turn to expensive non-independent paid-for research. Since many are sceptical about the objectivity of paid-for coverage smaller companies may struggle to get their investment case heard in the market.

Deal of the Month

On 19th July, Horizon Discovery announced an US$85 million (£65 million) acquisition of GE Healthcare Dharmacon, which comprised both cash and shares, and a placing (fund raising) of £80 million. This gives Horizon Discovery a global brand in RNAi and gene expression technology.  In addition, it provides access for Horizon’s products on Dharmacon’s eCommerce platform and established global distribution channels. Horizon Discovery expects a return on invested capital of 10% by 2020. The remaining money will be used to accelerate the existing Horizon Discovery business. The shares reacted positively to the news.

Introducing the investor

Woodford Investment Management was established in 2014 by Neil Woodford – one of the UK’s most well-known fund managers – after he had spent many years at Invesco.

The investment team comprises three experienced fund managers and two specialist analysts: Stephen Lamacraft focuses on the FTSE 350 companies and other mature international businesses; Saku Saha and Lucinda Crabtree cover earlier-stage investment opportunities, with a particular focus on the healthcare industry; and Paul Lamacraft and Harry Raikes cover earlier-stage investment opportunities but mainly in the technology and industrial sectors. There are three funds:

  • The CF Woodford Equity Income Fund, the first fund offered by Woodford Investment Management. It aims to offer investors capital growth and a growing income stream, paid quarterly. As of 31st May, it was valued at £10.15bn with a historic yield of 3%. Healthcare is c. 29% of the fund, well ahead of the benchmark’s 9%.
  • The Woodford Patient Capital Trust. It invests in a mix of disruptive early-stage companies, along with some of Woodford’s high conviction mid and large capitalisation ideas. As of 31st May, it had £828m in assets. Healthcare accounts for 67% of the fund with financials at 32% and the final 1% made up of tech, industrials, telecoms and consumer goods.
  • The CF Woodford Income Focus Fund: a fund focused on listed shares, offering a higher level of regular and sustainable income (at an expected 5% pa). The fund is invested in quoted stock, mainly in the UK, though it has no geographic constraints. It currently has 13% of the fund invested in healthcare, well ahead of the benchmark of 9%. 

This communication should not be regarded as investment research and does not constitute any recommendations to buy or sell shares.