The arrival of several new company-builders on the London stock exchange, encouraged by a handful of enthusiastic institutional investors, has created a sector valued at close to £4bn ($5.2bn). Given the disappointing returns that these firms have generated, this ongoing support is somewhat surprising.
Shareholders appear to have been convinced that these new kids on the block will do things differently, and for now they are giving them the benefit of the doubt. Arix Bioscience, for example, looks much more like a venture firm than its long-established tech transfer-focused cousins. “We thought, what’s wrong with taking that [VC] model public?” chief executive Joe Anderson tells EP Vantage.
“We offer investors access to true innovation and early-stage science, without being locked up in a 10-year fund. And, unlike a VC, we don’t have to sell our companies to generate cash. We can continue to run with a company if we feel there’s more value there, because we are a source of permanent capital,” with access to the public markets, he says.
Of course generalist public investors have been able to access these sorts of high-risk opportunities via university commercialisation outfits like IP Group and Touchstone Innovations – formerly Imperial Innovations – for some time. However, Mr Anderson is reluctant to be pigeonholed with these, pointing out that Arix is not tied to particular institutions, and can look globally for opportunities and invest at any stage of development.
“We’re very focused on value creation – we’re not here to help IP commercialisation for the sake of it,” he says.
Arix is the most recent arrival in London to this sector, raising £112m in an IPO in February. Stifel analysts reckon the listed, pan-European IP commercialisation space is sitting on more than £1bn of net cash, with an aggregate unlisted portfolio of investment companies valued at almost double that.
The new additions to this field mean that the sector now contains companies that look very different – from Arix’s VC model to IP Group’s university alliances and Puretech’s expert-led R&D efforts. The last of those and Allied Minds are US companies listed in the UK while Syncona, the Wellcome Trust’s life science evergreen fund, went public late last year after merging with the cancer research-focused investment trust BACIT.
Other examples include Malin in Ireland – run by Elan’s former chief executive Kelly Martin – and Sweden’s Karolinska Developments. Further flotations cannot be ruled out: Cambridge Innovation Capital is thought to be eyeing the public markets.
With all of these models managing to attract investors, demand for what they are offering is real; a previous analysis by EP Vantage illustrates how several key investors, who hold large stakes in most of these companies, have provided crucial support (IP-Touchstone merger highlights trouble in tech transfer town, May 23, 2017).
The question is whether returns can be improved in a space that has underdelivered in terms of exits and, ultimately, share price appreciation – trade sales or IPOs of portfolio companies have been rare events and the highest profile of these, Circassia from Touchstone, was ultimately a huge disappointment. Ongoing attempts by dominant IP Group and Touchstone holders – Woodford, Invesco and Landsdowne – to push through a nil-premium takeover of the latter, at the expense of minority shareholders, surely demonstrates that investors feel that the model needs adjusting.
In fact only Arix and Syncona are trading at a premium to their assets and cash – notably, these are also the most recent arrivals on the public markets – and thus have much to prove with their VC-based models.
|Struggling to produce a premium?|
|Portfolio valuation (£m)||Cash (£m)||Assets + cash (£m)||Market cap (as of 29 Jun 2017; £m)||Report date|
|Syncona||822 ̚||79||901||1,073||Mar 2017|
|Arix Bioscience||17||130̎||147||197||YE 2016|
|IP Group||614||300*||914||910||YE 2016|
|Netscientific||29 ̐||17^||46||34||YE 2016|
|Touchstone Innovations||389||113||502||461||Mar 2017|
|Puretech Health||293 ͒||148||441||282||YE 2016|
|Source: Company filings.|
|*Includes £200m fundraising in June|
|͒̄ Described as: Aggregate Value of Growth-Stage Holdings|
|̎ Includes proceeds of February IPO|
|^Includes £8.1m June fundraising|
|̐ Cash invested into portfolio to date - Netscientific has not provided a recent portfolio valuation|
|̚ Figures includes historical BACIT fund of £584m, lifescience holdings of £238m|
Differences in the way that these companies calculate their asset value is an important caveat to this analysis, though overall the picture is hardly one of buoyant investor confidence.
With a life science focus and a team “who has done it all before”, Mr Anderson believes that Arix can deliver attractive returns. And with two large pharma companies on the shareholder register with which Arix also has strategic partnerships – Takeda and UCB – he says he has the ear and advice of his biggest customers.
Early signs are good – the company’s biggest portfolio company, Verona Pharma, just pulled off a Nasdaq listing, raising $80m, while its own new funds have allowed Arix to lead or co-lead three major series B rounds in the last two months.
Mr Anderson says Arix seeks a diversified range of investments, from seed to late stage, across another 10 to 15 opportunities: “This is the beginning of Arix. We’re ambitious and we’re built to scale.”
Perhaps with a venture firm mentality Arix has found a better way to make money for public investors interested in this space. But of course, unlike a venture firm, its performance over time will be much more easily assessed.