Times may be tough, but optimism abounds says Dr Glenn Crocker, CEO of BioCity Nottingham and BioCity Scotland, as he reflects on the changing pressures in the bioscience market place

Those of us who work to support life science start-ups in the UK need to know our market well, and for this reason I initiated the annual UK Life Science Start-up reports. First published in 2010, these reports are designed to tell us what companies are being formed; where they are located and what the funding climate is like.

The latest report, published in December 2012, is the third comprehensive study of early -stage life science firms across the UK covering the period 2007-2011. This allows a comparison with the findings of the 2010 and 2011 reports.

An optimistic picture of the UK life sciences sector emerges from the latest research with 291 new firms launched in the study period. These represent the next generation of growth-focussed firms.  At the same time, shockwaves from the seismic shifts in the way global pharmaceutical companies and investors operate have led to a realignment in the industry’s business model. The overall picture is of an industry shaping up well to capitalise on the strengthening UK bioscience clusters, the shift to more specialist pharma service companies, new models for R&D collaboration and the introduction of a raft of new funding initiatives.

However, there has been a notable reduction in the formation of university spin-out companies which manifests as a 19% decline in the university spin out population in 2007-11 compared to 2005-9. Interestingly, this trend is bucked in Scotland where the increase in start-ups is entirely accounted for by increased university spin-outs, up 47% in the study period. Indeed Scotland emerges as the leading location for life science start-up companies, assisted in part by strong public sector support and investment as well as an extensive Angel investor network, very important in financing early stage opportunities.

This raises the question as to where the new generation of cutting edge life science companies outside of Scotland will come from. Universities are no longer driven by the numbers game that resulted from some government imposed metrics and are more circumspect when it comes to determining whether to spin-out or license a technology. Too many universities jumped onto the spin-out bandwagon in the early years of this century without the wherewithal to necessarily produce good quality businesses. Consequently many were burnt when their spin-outs failed to take off or deliver any returns. However there is a balance to be struck and we fear the pendulum may have swung too far and that the pool of truly innovative companies needs to be refreshed.

Reinforcing this decline has been the exhaustion over recent years of the University Challenge Funds, which invested small rounds of £250,000-500,000 in university spin-outs. University Challenge Funds were a good idea but limited in what they could achieve. Rather than create a substantial fund to really target investment in the best university spin-outs across the UK, lots of small, regional funds were created which had to get rid of small amounts of investment in a large number of spin-outs and could follow-on in only a limited way. Consequently many sub-optimally capitalised businesses were created.

Despite the drop in university activity, the demand for physical space and business support provided by the UK network of business incubators is on the increase. Well over a quarter of the most recent batch of life science start-ups are located in a bioincubator with another 15% in bio or science parks. BioCity Nottingham, the UK’s busiest bioscience start-up incubator, is at 85% capacity and by June 2013 BioCity Scotland is expected to have over 30,000 sq ft of space occupied, becoming the largest business incubator in Scotland.

A glance at the membership of UKSPA (the UK Science Parks Association) reveals a wealth of incubator locations, configurations, management styles and service offerings. At BioCity we strenuously emphasise the quality of services beyond a mere landlord-tenancy agreement. Occupancy is one thing; engagement in a community of like-minded, ambitious companies surrounded by a support infrastructure capable of seeing them over the early-growth hurdles is crucial. BioCity Nottingham was originally gifted to Nottingham Trent University in 2001 for the establishment of a facility dedicated to the creation and nurture of new bioscience companies. The University of Nottingham and the then Regional Development Agency emda joined NTU as Members of BioCity and a unique support ‘ecosystem’ was built.

Bioscience incubators need to get the tenancy offering right by understanding the often complex needs for labs, access to expensive equipment on a lease agreement, offices and business support. By being creative it is possible to develop an environment to nurture new companies which allows access to central services such as book-keeping and PR, catering facilities, meeting rooms and even social events and clubs. In other words, building a business community others want to join or be involved with.

The bioscience business incubator of the future begins to look and feel like the different divisions found in a global pharmaceutical giant, only made up of smaller, independent companies more adaptable and less vulnerable to the shifting tides of the sector.

The area of most concern to those of us supporting new companies is the continued lack of appropriate investment funding. Despite the introduction of the £180 million Biomedical Catalyst initiative, there remains a need for early-stage risk funding. According to the 2012 report findings, just 24% of start-ups obtained investment in the period 2007-11, compared to 37% in the period 2005-09. This decline could reflect a greater use of “under-the-radar” funding from grants, friends and family but the largest fall in investment activity was seen in smaller-scale sub-£500k amounts, down by 23% in number and 17% in value. This is possibly caused by the end of the regional venture capital funds (RVCF) and the University Challenge Funds. Despite the obvious opportunities to invest in companies across the UK, 86% of total investment into life science start-ups went to companies in London, the South East and East of England.

Clearly success relies on companies attracting the right level of funding; building strong management teams, and exploiting the latest technology.

I believe we can expect more focussed activity between big pharmaceutical companies and investors working together on specific projects. This will require the direct involvement of universities, partnerships with venture capital funds, the provision of sophisticated incubation facilities, sharing of R&D expertise and Open Innovation.

It is our role as experts in the sector to help small start-ups to spot the opportunities and to brief investors about new market and business opportunities and the potential returns. Despite much hand-wringing in the UK, we have an excellent research base and a strong entrepreneurial ecosystem populated by people who genuinely want to make a difference. We can be encouraged by renewed government interest in the life sciences as well as the emergence of new funding streams. We truly have strong grounds for optimism.

Author: Dr Glenn Crocker is CEO of BioCity Nottingham and BioCity Scotland, and author of the UK Life Science Start-up Reports

Reference: _ ‘Realignment’ UK Life Science Start-up report 2012. Published by Mobius Life Sciences Fund 2012. Copies available for download from www.biocity.co.uk