The founders of small and mid-sized biotechnology companies are an incurably enthusiastic bunch. Many have PhDs from top universities. Most are supported by patient finance directors. All have found or are determined to find solutions to mankind’s biggest health problems.
Meeting these men (just four out of the 55 listed UK drug discovery companies are led by women) leaves a feeling of great optimism: just last week, a biotech boss told me he has developed technology that will change drug development forever.
And yet, actual success stories in UK biotech are few and far between. Only half of the 26 companies that have joined the stock market since 2014 currently have a share price higher than at IPO and just three of the 55 listed groups turned a cash profit in 2016.
But Britain should be good at making money from biotechnology. As a nation, it punches well above its weight when it comes to scientific development and is overflowing with entrepreneurs. London’s stock exchange is home to two of the biggest pharmaceutical companies in the world and the National Health Service is the envy of many other countries.
The problem – it seems – is a lack of funds. London-based investors are often reluctant to put money into drug development on the blind hope that the drug in question will succeed. Can you blame them? Without clear evidence that biotech has the potential to make, let alone return, money, it's hard to convince investors to plough cash into the sector.
But, for the brave, biotech has the potential to be incredibly lucrative – you need only look across the Atlantic for evidence of that. Thus, to help our readers find Britain’s most promising new drug, we've conducted an in-depth analysis of all 55 biotech drug developers listed on the London Stock Exchange. We've read reams of scientific documents to find the companies closest to commercialisation, located those in niche areas of the market where competition shouldn’t be a problem and filtered through financial statements to spot the strugglers.
Ready, set, GO
With each clinical trial success, biotech companies inch closer to launching their medicines. Diurnal (DNL), Motif Bio (MTFB), Summit Therapeutics (SUMM) and PureTech (PRTC) have all recently reported positive data from final-phase trials, which means they can register their drugs with global regulators. All four operate in niche areas, so their drugs should be in high demand when they hit the market.
With most of the legwork done, the risks associated with investing in these companies are significantly reduced, and share prices often flourish as a result. But there's still value to be found: as companies transition from high-risk drug development towards commercial viability, it could be a good time to jump on board.
Money, money, money
True, there's more to be gained from investing in companies at earlier stages of development, but clinical trials are long, arduous and success is never guaranteed. They're expensive too, so companies are often forced to tap investors for more cash – especially if there are setbacks.
Well-funded companies are our top picks. Bank balances at Indivior (INDV), Verona (VER) and Shield Therapeutics (STX) all far exceed individual annual research and development (R&D) costs, so investors shouldn’t have to worry about near-term fundraising and possible dilution. Skinbiotherapeutics (SKIN) and Optibiotix (OPTI) also have very low R&D requirements, so their current cash positions look sustainable.
Recent indulgence
Faron (FARN), Midatech (MTPH), Realm (RLM) and Hemogenyx have all taken advantage of the buoyant London market to ask investors for more cash. All four said they will use the proceeds (£37.3m in aggregate) to fund the next phases of drug development.
For new investors, this could be a good time to join in. All four companies now have enough cash to see them through the next set of clinical trials and are equally optimistic that success lies just around the corner.
Self-help
It's interesting to note that there are more British biotech companies making no revenue (17 out of 55) than there are groups generating cash from operations (five out of 55).
But while Hutchison China Meditech (HCM), Allergy Therapeutics (AGY), Circassia (CIR), Hvivo (HVO) and Abzena (ABZA) aren't yet profitable, all have commercial operations that are used to help fund new drug programmes. Aside from minimising the financial risks, these groups already have sales platforms in place for when their new medicines are ready to enter the market. In our view, it's this business model that makes them some of the most attractive biotech companies in the UK.
Running out of time
An unprofitable company with an onerous level of debt is a major red flag. That’s why we advise investors to steer clear of Oxford BioMedica (OXB) and Proteome Sciences (PRM). We are also a little nervous about Midatech, whose management team said they are exploring funding options after burning through their recently raised cash pile.
There are also companies that last year spent more cash than they currently have available. For that reason, C4X (C4XD), ImmuPharma (IMM) and Scancell (SCLP) may have to return to investors within the next year.
