Scotland is blooming with life sciences

Kirsty Smith

DWF Biggart Baillie

According to a recent report, the number of spin-out companies across England, Wales and Northern Ireland fell by 30 percent between 2005 and 2011. During the same period in Scotland, however, the number increased by 47 percent, of which almost two thirds were in the life sciences sector. With this in mind, this article looks at why spin-outs in Scotland’s life sciences sector are so successful.

Scotland has a long-standing and world-class reputation for its research – it is home to one of the UK’s oldest medical schools and is the birth place of Dolly the Sheep, the first cloned mammal ever to be created from an adult cell.

Scotland’s universities and research institutions have long been at the front line for key clinical and scientific discoveries and the sheer amount and quality of research makes it inevitable that there are plenty of ideas suitable for commercialisation. Scottish universities actively encourage spin-outs to form and invest heavily in them, using their experience to develop frameworks and support structures which promote entrepreneurship and in turn generate even more spin-outs.

Steps to spinning out

The benefits to spinning research out of universities are numerous, including a boost to the local economy and the creation of new jobs. It also helps to put the UK on the map as a global contributor in terms of science and innovation. However, before long-term funding can be secured and a product formed, two main steps must be taken to spin out a company.

Firstly, the ownership of the underlying intellectual property (IP) between the university and the academic team must be agreed. The IP may be transferred to the company by an outright assignation, or shared with the university under a licence. Which option is chosen will very much depend on the nature of the technology. In exchange for the IP, the university may take equity in the company and, in some cases, further royalty incomes. This way, it can participate in the upside of the value of the company should it be successful, while ensuring a basic return without draining the cash-flow of the business in its early stages. This is an important stage in forming the company’s relationship with the university and one which should be documented to prevent any disagreements or potential legal battles further down the line.

Next, if the technology is at a very early stage, early seed funding may be required to develop a robust proof of concept which can then attract external investment.

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“The benefits to spinning research out of universities are numerous, including a boost to the local economy and the creation of new jobs.”

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External investment

Once the company has identified its product and agreed on ownership terms for the IP, funding must then be secured. The amount of funding required will differ for each spin-out, depending on the level of development that is still needed to get the project off the ground. Because of the nature of life sciences, a product is often subjected to further research and testing before it can be commercialised, meaning there is a requirement for a relatively high investment with no immediate route to market. This must be taken into consideration and, as such, longer-term investment is more ideal, rather than a funder who requires short-term results.

External investment often comes from venture capital funds or, more commonly, business angels. Scotland has a very active and well-organised network of angel investors, many of whom have backgrounds in the life sciences sector themselves and are willing to take a longer-term view on high-risk ventures, where a product may still require a considerable amount of investment before it can start generating returns.

Scotland also benefits from Scottish Enterprise, a sponsored, non-departmental public body of the Scottish Government that works with universities, local authorities and other public sector bodies to stimulate economic growth and improve the business environment. Scottish Enterprise has shown a commitment to the life sciences industry, providing much-needed funding through both grants and co-partnering with private investors.

Other considerations

Starting a spin-out company requires much more than a good idea and a way of funding it. As with any business, there are legal and tax implications and it is important to address each of these to ensure no problems arise in the future.

A spin-out is a complex, multi-party venture. The academic team, university, and external investors will all be stakeholders in the project and will all have different objections and expectations, which should be managed from the outset. Each party’s role should be clearly documented, along with how much involvement they will have in the day-to-day running of the business, what information they will receive about the company, and when.

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“Scotland has a very active and well-organised network of angel investors, many of whom have backgrounds in the life sciences sector themselves…”

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The legal documentation will also deal with fundamental issues surrounding each party’s equity share in the company and how that value might be realised in the future.

Scotland’s success

Scottish companies have been some of the most successful at securing investment, which is largely down to its active network of those willing investors. However, as well as the more traditional ways of funding spin-outs, a range of new funding sources are becoming available as universities collaborate or develop their own funds to bridge the gap between seed funding and high value VC investment. For example, Edinburgh University has recently teamed up with Manchester University and University College London to launch the £150m Orion Fund with MTI Ventures, which acts as a ‘late seed fund’ and invests in university spin outs. A similar fund has also been created with early stage investors Rock Spring Ventures, which will involved Edinburgh, Aberdeen and Glasgow Universities. This fund will focus on young stage life science companies in particular and will be another launch pad for Scottish innovation.

However, it is not just financial investment that early stage enterprises need. Scotland has a dynamic and collaborative life sciences community, which is fostered by its compact geography, and has a well-developed set-up that supports growing life science ventures in a number of ways. The investment in business incubators and accelerators such as Biocity Scotland, based in Lanarkshire, and the Edinburgh Bioquarter, which combines biomedical research from the University of Edinburgh with the clinical expertise of NHS Lothian, means young life sciences start-ups have access to the key utilities they need, including accessible lab facilities, the opportunity to share knowledge, and other business support.

Reference

1. The 2012 UK Life Science Start-up report, ‘Realignment’, released by Mobious Life Sciences of Biocity Nottingham.

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About the author:

Kirsty Smith is an associate within DWF Biggart Baillie’s corporate and commercial team, specialising in corporate finance with experience in a wide range of transactions. These include company formation and, in particular, first and subsequent round investment in young spin-out companies. Kirsty regularly acts for both the investor and investee company in venture capital and private equity investments along with advising on corporate acquisitions and disposals.

DWF LLP is one of the fastest growing law firms in the UK. It offers a full range of services to both businesses and private clients with teams specialising on all aspects of law, as well as providing specialist advice across a range of sectors including education, energy and infrastructure, financial services, food, health, insurance, public sector, real estate, retail, outsourcing and technology, and transport.

It has over 2,000 people based in Birmingham, Bristol, Coventry, Dublin, Edinburgh, Glasgow, Leeds, Liverpool, London, Manchester, Newcastle, Preston and Teesside and has an international reach through its relationships with law firms around the globe.

DWF was ranked second in the 2011 Legal Week Client Satisfaction Survey and was also voted ‘National Law Firm of the Year’ in the 2011 Legal Business Awards.

Why are spin-outs in Scotland’s life sciences sector so successful?