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September 11, 2008
US and UK Biotech: Growth and Form
There’s an interesting editorial in Nature Biotechnology on a role-playing exercise that took place recently in London. The UK government (in the form of the Bioscience Futures Forum) asked a University of London simulations group to work out what would happen to two identical companies in England and in the US. These would be university spin-offs with promising oncology compounds that had already shown oral activity in tumor models. (Here's the site for the whole effort - I have to say, it looks like an awful lot of effort for a two-day simulation).
What happened? Well, things diverged. The US version of the simulated company was able to raise more money, had better access to collaborations with larger companies, and better chances of going public by the end of the simulation. That gave them a broader platform to deal with setbacks in the original compound program. Meanwhile, the UK company faced this:
. . . the biotech finance marketplace in the United Kingdom is weak. AIM has little liquidity and virtually no follow-on market. Preemption rights allow existing shareholders to block potentially diluting but opportunistic fundraising rounds, such as private investments in public equity. And there is little access to debt capital for biotech firms.
The game also suggests that UK management and investors have mindsets adapted to constrained financial circumstances. They design businesses to fit the financial environment rather than seeking the environment that their business needs. They discount early valuations because of the inflexible later-stage financial circumstances. Their low expectations become self-fulfilling prophecies. In contrast, US management looks to build a sustainable business from the outset, and investors get higher returns as a consequence.
What I found interesting about the editorial, though, wasn’t these conclusions per se – after all, as the piece goes on to say, they aren’t really a surprise. (That makes you wonder even more about the time and money that went into this, but that's another issue). No, the surprise was the recommendation at the end: while the government agency that ran this study is suggesting tax changes, entrepreneur training, various investment initiatives, and so on, the Nature Biotechnology writers ask whether it might not be simpler just to send promising UK ideas to America. Do the science in Great Britain, they say, and spin off your discovery in the US, where they know how to fund these things. You'll benefit patients faster, for sure.
They’re probably right about that, although it’s not something that the UK government is going to endorse. (After all, that means that the resulting jobs will be created in the US, too). But that illustrates something I’ve said here before, about how far ahead the VC and start-up infrastructure is here in America. There’s no other place in the world that does a better job of funding wild ideas and giving them a chance to succeed in the market. The startup culture here a vital part of the economy and a great benefit for the world, and we should make sure to keep it as healthy as we can.
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