There is a desire for the UK to create a science and technology superpower that will drive long-term economic growth. One way to achieve this is to commercialise the intellectual property that universities develop through their research. Companies established to do this are termed ‘spin-outs’.
As the Government’s 2023 Independent Review of University Spin-out Companies states, generating income from research is not only important for economic growth and productivity, it is also crucial for improving health outcomes and solving some of the biggest challenges the world faces, such as climate change, infectious disease and food availability.
We have subdivided this important area of biotechnology spin-outs into two sections: Part 1 will consider the issues from a wide perspective including the impact of the recent Budget; Part 2 will address the practical issues involved in creating a university spin-out and can be considered as a guide going forward.
While start-up companies are high-risk ventures, they offer substantial economic and strategic gains if they are successful, eclipsing most other industrial activities in terms of return on investment.
Medical/biotechnology spin-outs in particular face a unique set of challenges in terms of research intensity, regulatory and marketing issues, and costs that extend the period before profitability can be established. This article will examine ways to mitigate these challenges and propose a way forward.
Background
Beauhurst’s 2024 ‘Spotlight of Spin-outs’ painted a positive picture of the ecosystem, with an overall trend for an increase in the number of spin-outs formed each year; albeit that the total of equity investments reduced from £2.36bn in 2022 to £1.66bn in 2023. Since 2011, the most prolific universities, in terms of the number of spin-outs, have been Oxford, Cambridge and Imperial College, London.
More than half (52.3%) of spin-outs have come from the top ten institutions and 60% of these have been in the pharmaceutical, clinical diagnostics, medical devices, medical instrumentation and related sectors. Of the 1,800 spin-outs tracked by Beauhurst since 2011, 19% have ceased operations, with the average age to spin-out death being eight years. Can a new approach to funding extend the life of spin-outs?
These medical/biotechnology spin-outs are challenged by the length of time taken to produce viable products. This can be because of the need to arrange clinical trials, to meet regulatory requirements and to gain traction with public and private customers in a famously conservative industry. Also, the costs of product development and conducting phase 2 and 3 pharmaceutical trials for new drugs can be prohibitively expensive. This means that the spin-outs must be well-funded and the investors must be patient – with control of cash flow always being a major issue.
Spin-outs and start-ups in this sector are therefore relatively risky enterprises, with discount rates of up to 50% typically being applied to future cash flows when being valued, depending on how close they are to commercialising their technology. On the other hand, exit valuations for successful companies can be high, ranging from ten to 18 x EBITDA for pharmaceutical companies.
Read the article in full here.