Too many UK life sciences companies tolerate commercial failure – that has to change

A trip to the annual Medica trade fair in Dusseldorf is a must for people like me, looking to keep on top of what’s happening globally in the field of biotech, medical technology, and pharmaceuticals.

With more than 5,300 exhibitors, 80,000 visitors from 166 countries, and 10,000 innovations on display, no other business-to-business (B2B) event comes close to providing a cliff-face perspective on these industries worldwide.

As a UK-based recruitment consultant, the event also gives me an opportunity to compare what’s happening in life sciences at home and abroad; a perspective you don’t get from sitting in the office or from meeting individual clients.

In addition to the usual mix of trade gossip – who’s been fired, who’s raised funds, etc. – a recurring theme among UK delegates last year was Rishi Sunak’s commitment, voiced earlier in 2023, to make the UK a global science superpower, with much of the focus on life sciences.

Reaction from industry to his announcement, back in March, was generally positive, but, as time has passed and companies have gained a clearer picture of what strategy, if any, the government has in place to fulfil the ambition, a degree of scepticism has crept in about whether the Prime Minister’s actions will match his rhetoric.

The long road ahead

Talking to delegates at Medica, there was a broad acceptance that Britain still has a long way to go before it is capable of competing, far less trading as equals, with competitors from North America, India, and South-east Asia.

The stark reality is that, behind the headline figures and growth statistics, UK MedTech is still making precious little money.

According to official statistics, the sector generates an annual turnover of around $33 billion.  It has a strong foundation of mostly small to medium-sized enterprises (SMEs) around the country, with clusters of activity in areas such as the South-East of England and the Midlands.  

Many multi-national companies, including several leading US medical technology manufacturers, have offices or manufacturing facilities in the UK and, crucially, the statistics don’t include a breakdown of how much is generated by those, compared with home-grown companies, nor any reference to how much of the headline figure is profit.

The truth is that it is extremely rare for a company founder in this country to successfully lead a MedTech company from launch to profitability. 

As someone who has worked closely in the sector for more than 20 years, I recently estimated that only around 20% of UK MedTech companies turn a consistent profit. The majority, perhaps around 60%, make money, but their profits either rely on accounting sleight of hand (our old friend EBITDA) or, more likely, they have some turnover, but make a loss and never trouble HMRC with Corporation Tax payments. The remaining 20% or so effectively make no money at all.  

This tells us that too many companies have too few products and sales to make them financially sustainable. Another hard truth it reveals is that the sector is currently too often served by people in senior positions who have not achieved objective business success. 

The zombie company effect 

These companies generally employ highly skilled and talented people and they are able to pay them handsomely because they have attracted short-to-medium-term investment.

But they often don’t make full use of their potential and, crucially, they deprive other, more successful businesses of their skills, which has a knock-on effect on the performance of the sector. Nor do they bring anything to the wider economy beyond income tax and National Insurance contributions.

It’s known as the ‘zombie company effect’.

I am not suggesting launching a successful MedTech company from scratch is easy or straightforward. Before they can sell a single product, there is a long period of education, research design and development, followed by the necessary navigation of regulatory hurdles, raising of funding, and development of manufacturing and logistics capabilities.

Businesses which do manage to successfully negotiate these stages can often feel, with some justification, that they have done the hard bit, only then to find there is not a big enough market for their products(s), or that they’re incapable of locating and accessing those markets. 

In short, they don’t possess the requisite skills to steer their intellectual property and the companies formed around it to financial success.

It should be pointed out, in mitigation, that the nature of the UK market for MedTech leaves them at something of a disadvantage. The largest purchaser of medical technology equipment – the publicly-funded National Health Service (NHS), which accounts for approximately 86% of healthcare provision – is essentially a monopoly buyer whose tendering procedures naturally discriminate against start-up suppliers with comparatively short track records. 

As a result, a significant proportion of domestically manufactured medical products is exported and the producer-gap is filled with overseas manufacturers, many from the US, which is a leading provider of diagnostic, dental, and orthopaedic equipment, along with high-quality wound care products.

Measuring the success or failure of UK MedTech companies is complex and multi-faceted, but it is undoubtedly influenced by two significant factors. One is a lack of business acumen and experience among science and medical graduates, who seek to turn their ideas – often derived from doctoral theses – into successful businesses.

The other is a little-acknowledged acceptance in this country of commercial underachievement and even failure. 

Commercial failure in life sciences

Too many CEOs have a career trajectory that takes them from one small, early-stage company – that secures limited funding, but fails to generate any substantial revenue – to another. 

Funding often comes from relatively small venture capitalists (VCs) and syndicates with limited liquid funding, who see investments in MedTech start-ups as an intriguing side bet and a means of diversifying their portfolios.

They accept that their investments may or may not pay off, but they have clever accountants who ensure that, whatever happens, they will recover most of their money through tax breaks. As investors go, they are not the most demanding group of people.

In the US, there is a higher incidence of start-ups achieving success on a large scale. That is partly because MedTech investment tends to come from private equity firms, who demand more tangible results and are less forgiving than venture capitalists, and partly because expectations are higher among both investors and those receiving the investment.

There is already some evidence that America’s culture of intolerance to failure is rubbing off on the UK, particularly in the post-COVID era, where a shift in the investment landscape has caught some companies off-guard, particularly those accustomed to the leniency of earlier funding rounds.

Future demand and the supply chain

Meanwhile, the ongoing push for the UK economy to meet its net zero targets is likely to influence future product demand, and broader supply chain considerations, in the NHS – shorter delivery routes mean smaller carbon footprints – providing greater opportunities for more, home-based suppliers.
 
Equipping the sector with the necessary business skills, in addition to the world-class scientific and technical capabilities that already exist here, will necessitate new partnerships between government, higher education institutions, and industry.

In this country, there is a presumption that medical undergraduates will naturally go on to work in the NHS, whose resources are used to assist them in becoming qualified. Doctors in the UK have rarely left the medical profession to join the ranks of entrepreneurs and managers because they have tended to earn more as practicing physicians. 

While studying medicine and business together in the UK is a novelty, in the US more than 60% of medical schools now offer dual MD-MBA programmes, double the number from two decades ago and, during the same time, the number of dual degree graduates has tripled.

But that needs to change and joint business and medicine degrees can serve as the doorway to those new opportunities — with the potentially lucrative ownership stakes that can come from leading successful medical technology companies.

Hopefully, when attending future Medica trade fairs Sunak’s goal of the UK being a science superpower will have become a tangible reality, rather than remaining a discussion over currywurst.