Life sciences offers a broad range of subsectors that are potentially rewarding to both business builders and investors, particularly as technologies converge to include bio and advanced materials, connectivity and digital innovations across the UK. In the wake of global challenges, including Zika, antimicrobial resistance, an ageing population and demographics growth, technological advances in surgery and diagnostics, and the growing use of digital technology in the delivery of healthcare, businesses capable of offering solutions that are both ethical and cost effective are the most likely to become market leaders.
However, before investors start seeing life sciences as a honey pot of opportunity, they must bear in mind that this sector, perhaps more so than any other, requires a vast amount of knowledge, experience and, most importantly, patience.
Nevertheless, knowing what to look for, and understanding how to approach businesses within this sector, will help significantly in offsetting risk and building capital in what can be a morally - and potentially financially - rewarding proposition for investors.
Investing in life sciences requires knowledge, experience and patience.
For Mercia, life sciences is a sector in which we hold a great deal of expertise (our investment team for this sector includes PhDs, entrepreneurs and a clinician). Broadly speaking, we ask ourselves the following questions whenever we examine a new business investment opportunity.
1. Does it solve a clinical or scientific problem?
A life sciences business must be able to prove that it can solve a current clinical or scientific problem more efficiently and cost effectively than any other existing solutions in that field. This needs to be demonstrated in both the initial Research & Development phases, and then again further down the line, when the business needs to pass industry regulations.
2. Is it defensible?
From start-up to exit, the intellectual property of any technology developed by a life sciences business must be protected by patents, both domestically and abroad. A company that does not ensure this leaves its work vulnerable to theft, reproduction and, potentially, the opportunity for a competitor to build on and improve its technology.
3. Is it in motion or lost in the lab?
Ideally, by the time any investment comes into the picture, a life sciences business should be in its development and commercialisation phase. As an investor, we will be asking the business to prove that its minimum viable product is capable of being applied outside of a laboratory setting, with all of the necessary regulatory and commercialisation plans mapped out.
4. Does their stated target market really exist?
The research may be a unique, ground-breaking piece of work worthy of a science fiction novel, but if the market is theoretical, then the technology simply cannot be commercialised.
A business must demonstrate that it can solve a clinical problem with technology protected by patents.
5. Is the team ready to build a business?
We have had the privilege of working with some of the most brilliant scientific minds in the country, but this has not always meant that their work is destined to disrupt their given sector. Knowing the ins and outs of the human genome does not automatically equate to knowing the ins and outs of sales, marketing and finance. An investor must, therefore, complete extensive due diligence on the capabilities of the team to ensure a healthy mix of both academic expertise and business builders.
6. Is the commercialisation plan credible?
Is the route to market feasible, or built on a wing and a prayer? We often see a business plan that has the sales forecasts totalling multi-millions in year three, but an overhead structure that does not change from day one, without including costs for marketing, clinical development, sales, operations, finance and all other aspects required to run a successful and profitable business.
An investor will want to review projections very closely, ensuring that a business could withstand regulatory approval, market changes and economic upheavals, as well as support the sales forecasts.
Never be swayed by flashy promises and always bear in mind that a successful life sciences business has many challenges to overcome, with the product actually working being only one of them.
7. Are any possible reimbursement challenges identified and addressed?
Unique to this sector is the requirement for a business looking at medical devices or diagnostics to meet all of the standards required for reimbursement, whether through a private health company, a national health service or an insurance firm. It is vital that investors understand this process in order to recognise any potential problems, which could mean the difference between success and failure.
8. Are potential regulatory challenges identified and addressed by the business plan?
An investor must have the requisite knowledge to spot any hurdles that could crop up during the regulatory process. Likewise, they should be satisfied that the business has also identified those hurdles, and offered strategies on how to mitigate the risks, as well as a couple of Plan B's if necessary.
An investor should always be aware that new medical technology must go through several stages of approval before it reaches the market, meaning that the company may not reach profitability until several years after the initial investment.
Peter Dines is Mercia's Head of Life Sciences & Bio-Sciences. He has over 20 years' experience in the industry, having founded and sold a number of businesses in this sector.