form, grow into companies, and stay local without shifting key operations overseas or being acquired.
Not surprisingly, in one of the world’s most expensive urban centers, real estate was top of mind among our dinner guests. Just as the world’s oceans need reefs and coastal wetlands to nurture young organisms, London itself needs more space to incubate its emerging startups. It has four incubators currently, with a fifth due to open in 2016 that will bring total capacity to 700,000 square feet—room for more than 80 companies.
One conspicuous absence from the incubator scene is Johnson & Johnson (NYSE: [[ticker:JNJ]]), which has put its JLABS incubators in five North American cities. Despite having an innovation center in London to make connections to local academic and industry, there are no U.K. JLABS plans for now, a spokeswoman said.
There is space in the sprawling suburbs ringing London, but several dinner guests noted that, unlike the U.S., few entrepreneurs are keen on living near distant industrial parks or making long commutes. Centrality and proximity are high priorities. (The U.S. is learning this lesson, too, in watching the rise of Kendall Square.)
One of Europe’s top biotech venture investors, Index Ventures of Geneva and London, rents space in Cambridge for its handful of startup companies to tap into personal networks and “top research,” according to Index partner Francesco De Rubertis.
But Index is not necessarily looking to create companies for the long term, and the firm’s strategy illustrates some of the obstacles in building out a homegrown U.K. sector. About a decade ago Index decided in large part to scout single drugs, build minimal corporate infrastructure around them, and develop them with an eye toward a sale to a company looking for pipeline material. (Here’s one recent example.)
Some VCs in the U.S. have pursued a similar model, sometimes called asset-based financing. Avalon Ventures of San Diego is one; Versant Ventures (which is also in Europe and Canada) is another.
The difference is, the venture pool in Europe is smaller and the risk greater of making long-term biotech investments in full-scale companies. “It’s hard to do follow-ons and stay [invested] in a company longer,” said De Rubertis, who spoke to me one evening at the Index office in London’s swanky Mayfair neighborhood.
The U.S. has a fairly exclusive group of early stage biotech investors, too, but the unprecedented IPO run that has finally slowed this fall was fueled by something those I interviewed said barely exists in Europe: crossover investors, which are public funds that take a private stake in a biotech as a way to get a better slice of the company come IPO time. (I wrote about the U.S. crossover phenomenon, and the consequences if it were to falter, at the end of the summer.)
Crossovers provided the late-stage tinder to keep the IPO fires burning in the U.S. But not in Europe. “In Europe, they don’t invest in biotech,” said De Rubertis. In the U.S., they might cut back for a time, but they have “a Pavlovian instinct” to go back into biotech as markets heat up. London’s markets—either the London Stock Exchange or its AIM offshoot for emerging companies—have hosted a few life sciences IPOs in the recent boom years, none more notable than the £200 million ($332 million) raised by allergy drug maker Circassia Pharmaceuticals of Oxford in 2014.
But while U.S. IPOs returned in 2012, with the boom starting in 2013, U.K. biopharma issues were barely to be seen in those years: only two, according to LSE records. (Note: Link downloads an Excel spreadsheet.) In 2014 and 2015, there have been 14, raising a total of £509 million ($770 million)—and 40 percent of that from Circassia alone.
Just as notable, then, are the British firms that have jumped to the American markets for financing, such as cancer immunotherapy developer Adaptimmune Therapeutics (NASDAQ: [[ticker:ADAP]]), which raised $191 million on the Nasdaq this year after a big crossover round led by American firm New Enterprise Associates. “We only did crossover funding in the U.S.,” Adaptimmune CEO James Noble said at a biotech investment conference in San Francisco this fall. “You’re wasting your time in Europe, I wouldn’t bother.”
Financial migration isn’t the only concern. Those I spoke with on my trip often cited the trend of U.K. firms building out manufacturing in the U.S. instead of at home, leaning on U.S.-based expertise (not to mention government incentives) in large-scale vaccine and antibody manufacturing.
It’s too late to lure back that part of the business, said Roger Bone, vice president of transactions at J&J’s London Innovation Center. But the U.K. should be thinking of ways to keep home the next technological wave and the wealth that comes with it. “This is not about trying to regain manufacturing that is well established elsewhere,” Bone said. “It is about making the U.K. a center for manufacturing [that requires] new processes.”
So certain businesses might not be lured back, but what about people? Derek Jones, the CEO of Babraham Bioscience Technologies, mused about how to get British “sea turtles” to repatriate, borrowing the phrase for the Chinese diaspora of professionals who return home.
Sitting to Jones’s left at dinner was a semi-sea turtle: Kevin Lee, a Brit based in Boston who was just named CEO
