Private equity takeovers in the UK biotech space have grown as long as an NHS waiting list.
But what started as a pure valuation game has brought a mirror up to the Square Mile, reflecting the malaise at the core of London’s capital markets.
The bulk of the most recent PE deals in the biotech space share a common thread. Take IK Partners’ £269 million Medica Group takeover. Or Permira’s £703 million Ergomed PLC (AIM:ERGO, ETR:2EM) takeover. Or Archimed’s £203 million acquisition of Instem PLC (AIM:INS).
One a teleradiology service to the NHS; another a contract researcher to Big Pharma; the other an IT software and solutions provider to the life sciences sector.
Throw the big-ticket takeover of pet and farm animal medicine supplier Dechra into the mix and it’s not hard to see why PE found these companies such attractive targets.
They’re all commercial-stage services companies and they were all seriously undervalued, making them low-hanging fruit for hungry PE funds with a lot of dry powder at their disposal.
The trend adds yet another source of concern to the Square Mile, which continues to see one business after another run to the arms of overseas PE vultures.
It’s unfortunate, but the blame needs to be spread around.
On the one hand, the City mourns each loss of a UK plc to the maws of PE, all the while standing by as the shallow-pocketed, short-sighted investment class oversees the declining public market valuations of Britain’s biotech innovators.
The Covid-era biotech premium, so it seems, has thoroughly reversed, much to the delight of savvy investors in the PE space who know a bargain when they see one.
The Covid premium
A spotlight was shone on British Big Pharma in the pandemic era when Cambridge-based megacap AstraZeneca led the charge in developing a COVID-19 vaccine.
This led to a massive spike in interest in British healthcare and life sciences companies, many of which sought to capitalise on this interest in clever ways.
“During the boom of 2020/2021 you had pretty much every company put ‘covid vaccine’ in their RNS [statement] and the shares whooshed up,” recalled Nial Pearson, head of corporate broking and sales at Hybridian. (Nowadays, of course, those same companies are stuffing their press releases with ‘generative AI’.)
Pearson noted that this Covid-related hype “created huge valuation gaps with some pre-clinical companies valued at over £100 million whilst other biotechs with a clinical-stage portfolio at just £30 million market cap”.
Basically, the public markets became blinded by hype, taking their eyes off what really matters: Genuine licensing deals and genuinely decent assets with a viable revenue stream ahead of them.
According to Pearson, this was partially a symptom of the lack of standard valuation metrics in the biotechnology sector, where ratios typically applicable to tech and engineering plcs are not fit for purpose.
It has become a real issue for the public markets - specialist biotech investors are virtually non-existent in small-cap public equity, leading to inconsistent valuations unsupported by sensible fundamentals.
When these overhyped Covid-era share prices fell back down to earth, PE was there to snap up the discount.
Hence, we’ve seen a groundswell of takeovers in the services side of biotech. They’re easier to value and sniff out a bargain, even if the public markets aren’t up for the task.
But what next? There are only so many services-side, cash-generating biotech companies to buy.
Britain undervalues biotech
Thanks to the Golden Triangle, Britain is great at biotech innovation, it’s just not that good at nurturing this innovation through to the blue-chip stage. This can be attributed to the shortsighted, conservative nature of the British investment class.
Dr. Joseph Tucker, chief executive of Nasdaq-listed Enveric Biosciences (NASDAQ:ENVB), explained: “Public market valuations that give little or no credit for development-stage products, as is happening with many life science companies that don’t have an anticipated data read-out inflection point coming within the next six months or less, are finding it quite unpalatable, not to mention difficult, to raise what may amount to a significantly dilutive financing that nevertheless may barely see the company to the next inflection point."
He continued: “With private capital being sheltered from the current public capital market oversold situation, there appears to be, currently, greater potential access to capital and reduced dilution for life sciences companies that fall into the category of attractive to VCs but getting uncharacteristically low public market valuations.''
Pretty much every expert in the field has the same sentiment.
Sylvester Oppong, head of healthcare M&A at Ernst & Young, stated: “When you look on the public market, actually, there's lots of really high-quality businesses which appear to be undervalued… There is a disconnect between market value relative to underlying operational performance.”
Oppong explained that some publicly listed life sciences businesses present “really good value” from an M&A perspective. PE firms are doing their analysis on these businesses, and they like what they see.
However, Oppong was reticent to attribute these attractive valuations to the sophistication or lack thereof of the London capital markets.
Rather, he noted that “some businesses just don’t lend themselves to being on the public markets” at their current stage of development, particularly those businesses developing a potential blockbuster drug with a long-term development horizon.
If this is the case, then the next logical phase in the takeover trend will be focused on clinical and pre-clinical-stage biotech companies with a killer app on their hands that is nonetheless being undervalued by the public markets.
“If I was a biotech PE house and there were huge licensing deals going on in a particular field and my scientific knowledge knew that an AIM company had something better, that was ridiculously cheap, I would take it private, pump loads of money into it and hopefully get a decent exit,” Pearson surmised.
At the end of the day, why shouldn’t a quality company with a good asset take on private capital when the market has failed to price them accurately?
The trend is likely to continue as more and more businesses with genuine, clinical-stage assets on their balance sheets look on with envy at their peers netting huge premiums in the private investment realm.
It’s just another existential crisis for a Square Mile still reeling from Arm’s cold shoulder.