WHERE ARE THE BIG GORILLAS?
HIGH TECHNOLOGY ENTREPRENEURSHIP IN THE UK
AND THE ROLE OF PUBLIC POLICY
5 ENTREPRENEURSHIP IN BIOTECHNOLOGY
In 1953 Francis Crick and James Watson, working at Cambridge University, discovered the double helix structure of DNA, and set in train a series of advances in molecular biology out of which the modern biotechnology industry was born. Two key innovations were made in the 1970s. The first was the recombinant DNA technique, developed by Herbert Boyer at the University of California at San Francisco and Stanley Cohen at Stanford in 1973. This was a method of producing hybrid gene material by joining pieces of DNA from different organisms and then inserting this hybrid material into a host cell.[94] The second came in Britain two years later. Cesar Milstein and Georges Koehler, working at the Medical Research Council’s Laboratory of Molecular Technology in Cambridge, found a way of fusing two cells to form a clone, or hybridoma, which combined the characteristics of both the original cells.
These innovations paved the way for a new approach to the development of drugs, but the established pharmaceutical companies were slow to recognise it. Their expertise lay in organic chemistry, not in molecular biology, and they saw no immediate need to switch from a technology which was delivering a steady stream of new drugs. As in other examples of disruptive technical change, such as the replacement of the thermionic valve by the transistor, the leaders were not the incumbents, but new enterprises devoted to the new techniques.[95]
Some commercial ventures in molecular biology had been started even before the invention of recombinant DNA. Cetus was founded in 1971 in Berkeley, California, with support from Kleiner Perkins, a venture capital firm based in San Francisco. But despite Cetus’s impressive academic credentials it was outshone by a younger company in which Boyer himself participated. This was Genentech, which brought together Boyer’s scientific skills with the financial expertise of Robert Swanson, a partner in Kleiner Perkins. Founded in 1976, it focused initially on the development of proteins such as insulin and human growth hormone whose therapeutic properties were already well known.[96] Kleiner Perkins was one of several Silicon Valley venture capitalists who applied to biotechnology the skills they had learned in micro-electronics.[97]
Genentech was followed by several other firms, including Biogen (co-founded by Walter Gilbert, a Nobel laureate from Harvard), Amgen and Hybritech; the last of these, founded in 1978, was the first company to focus on monoclonal antibodies. The financing arrangements were similar to those that had been used in semiconductors – seed money from family, friends and business angels, then equity finance from venture capitalists, followed within a few years by an Initial Public Offering (IPO), usually on the NASDAQ exchange. Between 1980 and the end of 1983 more than a dozen biotechnology companies were floated.
A notable feature of the new industry was the close link between academic science and commercial exploitation - much closer than in computers and semiconductors. Partly for this reason, most of the new firms were set up around universities. Two of the largest biotechnology centres were in California – in the San Francisco area and in San Diego – but there were also important clusters at Worcester in Massachusetts, around Research Triangle Park in North Carolina, and in Maryland, where the state university set up a Centre for Advanced Research in Biotechnology, located close to laboratories run by the National Institutes of Health.[98] Three of the key ingredients in a successful biotechnology cluster were a strong scientific infrastructure (in the form of universities or government laboratories), easy access to business angels and venture capitalists, and the presence in the region of firms in complementary industries, especially information technology.[99]
In the early days of the industry some of the new biotechnology firms were expected to become fully-fledged competitors to the established pharmaceutical companies. But to do this they would need, not just research expertise, but competence in development, production, clinical testing and marketing. While some firms such as Amgen did follow the integrated route, the trend was towards interdependence between biotechnology and ‘Big Pharma’ – a variety of collaborative arrangements including licensing deals, joint research projects, minority investments and some outright acquisitions. Some biotechnology firms specialised in developing tools or technology platforms which would help pharmaceutical firms speed up the drug discovery process.
The new industry was born in the US. The most obvious follower was the UK, since British academic science in molecular biology was on a par with the US, and one of the two key discoveries had been made in Britain. But there was no immediate response from British scientists, and British industry missed out on the first wave of the biotechnology revolution. It was not until the end of the decade that steps were taken to catch up. The Labour government’s National Enterprise Board had the task of supporting high-technology industries which the private sector was unable or unwilling to finance, and biotechnology was an obvious candidate for attention. The leading British pharmaceutical companies were showing little interest, and the best way of getting biotechnology off the ground in the UK seemed to be through the creation of a new firm on the Genentech model.
Early in 1979, shortly before the election which brought the Conservatives to power, the government set up a committee to investigate the industrial applications of biotechnology. The committee’s report recommended that a new biotechnology firm should be established. Government support would be necessary, in the committee’s view, since there was little prospect of any such venture being set up by the private sector. The report suggested that the NEB should examine the possibility of setting up such a firm, working in collaboration with the National Research Development Corporation.
This proposal seemed unlikely to find favour with the Thatcher government, which was committed to reducing the role of the state in industry. In the case of biotechnology, however, the Prime Minister was persuaded that the NEB could play a catalytic role in getting the industry started; she agreed that a new company could be set up, as long as the private sector was fully involved. The outcome was the creation of a new company, Celltech, with 44 per cent of the equity held by the NEB and the rest by four private-sector institutions. These were: Prudential Assurance, one of the UK’s biggest institutional investors; Midland Bank; Technical Development Capital, the technology arm of 3i; and British and Commonwealth Shipping.[100]
The company got off to a slow start, and there was criticism from the shareholders that the scientists were spreading their efforts too thinly. In 1983, when new shares were issued to raise an additional £6m, one of the original investors, Technical Development Capital, sold its holding and its place was taken by Biotechnology Investments Ltd (BIL). This was an investment trust specialising in biotechnology which had been set up by N.M.Rothschild, the merchant bank. But despite some successful collaborations with established pharmaceutical companies, Celltech’s commercial direction remained uncertain, and the chances of its catching up with the leading US biotechnology firms seemed remote. BIL sold its shares in Celltech in 1987, apparently because of dissatisfaction with the company’s management.
By this time several other biotechnology firms had got started. British Biotechnology was set up by two scientists, Brian Richards and Keith McCullagh, who had been working at the UK laboratory of Searle, the American pharmaceutical firm. In 1985 Searle was taken over by Monsanto, and the new owners closed down the UK laboratory. Richards and McCullagh struck out on their own to exploit technology which they had been working on at Searle – the use of enzymes to break down links between body cells.
British Biotechnology was an American-style spin-off. Another entrepreneur who was strongly influenced by the American approach – and who later became an influential advocate for the British biotechnology industry – was Chris Evans. After studying biochemistry at Imperial College and Hull, he took a PhD in genetic engineering at the University of Michigan before working for several US pharmaceutical firms. He returned to the UK in the mid-1980s to set up his own company, Enzymatix, in Cambridge. This was an enzyme-based biotechnology business which Evans expanded to form eight divisions; two of them were later spun out to form separate companies – Chiroscience, specialising in chiral technology, and Celsis, a diagnostics company.
None of these ventures involved support from public funds, as Celltech had done, but the government’s decision in 1985 to change intellectual property regime (see page 14) provided a useful boost for the biotechnology industry. The universities now had a stronger incentive to license their intellectual property to existing firms in exchange for royalties, or to create new firms in which they would take an equity stake.
In Oxford Isis Innovation participated in the spin-out of several biotechnology companies, including Oxford Asymmetry and Oxford GlycoSciences. At Cambridge, one of the first spin-outs was Immunology (later renamed Cantab Pharmaceuticals), founded by Dr Alan Munro, Head of Immunology at the university’s Department of Pathology. Another Cambridge firm, set up in 1990, was Cambridge Antibody Technology (CAT). This was the fruit of collaboration between a group of scientists at the MRC’s Laboratory of Molecular Biology, led by Dr Greg Winter, and David Chiswell, then working at Amersham International. (Amersham had originally been the radiochemical centre of the Atomic Energy Authority; privatised as a separate company in 1991, it specialised in diagnostics, and became an important source of management talent for British biotechnology companies.)
Oxford and Cambridge were beginning to develop biotechnology clusters comparable to those that had grown up in the US, and the venture capital industry was taking a greater interest in the sector. While Rothschild’s BIL was still the leader – it was one of the early backers of British Biotechnology – it was facing competition from other merchant banks, notably Schroders, and from specialist firms such as Abingworth (which helped to found Cantab Pharmaceuticals), Apax Partners and Advent. Thanks to pressure from the venture capitalists, the London Stock Exchange agreed in 1993 to allow loss-making biotechnology firms to be listed as long as they met certain conditions: they had to have a market value of £20m and intend to raise at least £10m at the time of listing, and they had to have at least a three-year record of operations in laboratory research and development.
British Biotechnology was the first to take advantage of the new rules, raising £30m in new equity, and it was followed by several other flotations including Celsis and Chiroscience, two of the companies created by Chris Evans. Celltech also went public at this time, and by the end of 1995 about 25 biotechnology firms were listed on the London Stock Exchange. British Biotechnology was widely regarded as the flagship of the industry, and there were hopes that its cancer treatment, Marimastat, could become the industry’s first blockbuster drug. By early 1996 the company, though still making losses, was valued in the stock market at over £2bn.
Barriers to entry were lower in biotechnology than they had been in semiconductors, and UK biotechnology firms had an advantage which was not shared by comparable start-ups in electronics – the presence in the UK of a large and successful pharmaceutical industry, including British-owned firms such as Glaxo, Beecham and Wellcome as well as foreign-owned firms such as Pfizer which had built research and manufacturing facilities in the US. While these ‘Big Pharma’ companies did not necessarily favour UK-based biotechnology firms when considering licensing deals and other forms of cooperation, they provided a valuable source of technical and managerial talent. As US experience had shown, fast-growing biotechnology firms needed professional managers, and some executives from the big pharmaceutical firms were attracted by the prospect of working in smaller firms that promised high risks but also – thanks to stock options – high rewards.
Yet most of these small firms were dependent on one or two drugs which might fail unexpectedly. In the UK, 1997 was a disastrous year. Two of British Biotechnology’s most important drugs, Marimastat, the anti-cancer drug, and Zacutex, targeted at acute pancreatitis, showed disappointing results in clinical trials, and the company came under fire from the US Securities and Exchange Commission for making inflated claims. Investors lost confidence, and the shares fell from a peak of 326p in 1996 to 94p early in 1998. Celltech was also going through a difficult time. An asthma treatment that was being developed in cooperation with Merck of the US was abandoned early in 1996, and the same fate befell a treatment for septic shock being developed with Bayer. When the two companies announced their decision to stop all further work on the project, Celltech’s share price fell by almost a half.
These setbacks came at a time when American biotechnology firms were still growing strongly and new competitors were appearing on the scene in Continental Europe, principally Germany. Yet the British industry was less fragile than it seemed, and over the next few years confidence was gradually rebuilt. Part of the revival was due to the to the rise of younger companies, such as Cambridge Antibody and Oxford GlycoSciences. Celltech, too, was showing better results from its research programme. Its rising share price enabled it make some sizeable acquisitions, including that of Chiroscience, which broadened the company’s portfolio of drugs under development.
Behind the quoted sector came a steady flow of start-ups, some of which were targeting the emerging field of genomics. For example, Oxagen was founded in 1997 to apply techniques of genetic analysis developed by scientists at the Wellcome Trust Centre for Human Genetics at Oxford University. Seed finance came from the university, the Wellcome Trust and two private investors, and Oxagen later raised venture capital finance from Advent and 3i. Another newcomer was Cambridge-based Astex Technology, co-founded by Tom Blundell, head of the university’s biochemistry department. This company, which raised start-up finance from Abingworth and a US venture capital firm, specialised in structural proteomics – analysing the structure of proteins through high-throughput X-ray crystallography technology.
Cambridge had become a magnet for biotechnology entrepreneurs, not only scientists spinning out from the university, but also founder-entrepreneurs from other parts of the country. Roughly half the scientists working in Cambridge biotechnology firms came direct from an academic laboratory, but the rest came from other firms in the life sciences industry. The fact that a number of scientists had survived failure and gone on to find jobs in subsequent start-ups indicated that a flexible labour market resembling that in Silicon Valley was beginning to appear in Cambridge.[101]
There were smaller clusters in other areas. In Dundee an outstanding research team at the local university had generated a viable group of biotechnology enterprises. One of the first spin-outs was Shield (now Axis-Shield), a diagnostics group which went public in 1993. By 2001 there were some 30 biotechnology firms in and around Dundee, of which the most prominent was Cyclacel, founded by Sir David Lane, Professor of Molecular Oncology, to exploit the anti-cancer gene p53.
What had happened in biotechnology since the 1980s could reasonably be claimed as a success for government policy. In addition to improving the overall climate for entrepreneurs, the Thatcher government recognised the need for increased funding of scientific research, and for better coordination between the various research councils concerned with biotechnology. In 1981 a biotechnology directorate was set up within the Science and Engineering Research Council. Its task, in liaison with the Medical Research Council, was to promote biotechnology as a strategic area of research and to encourage greater cooperation between industry and academics.[102] The government also set up a biotechnology unit within the Department of Trade and Industry. This unit had a small budget for supporting biotechnology ventures, mainly in the form of grants to cover consultancy costs and modest contributions to research and development.
One critic complained at the end of the 1980s that the Thatcher government’s hands-off policies “seem to have been little if at all more successful than earlier interventionist approaches at stimulating British industry out of its lethargy towards new technologies”. According to this view, there was no strategy or vision in the government’s approach. The problem was made worse by rivalry between the research councils, and by the failure to make use of the buying power of the Departments of Health, Agriculture and Energy, all of which had an interest in genetic engineering applications. The government’s policies had left British biotechnology “like a rudderless ship, launched but carried with the tide and lacking any positive sense of direction”.[103]
With the benefit of hindsight, this judgement seems wide of the mark. The Conservative governments’ market-driven approach between the early 1980s and their departure from office in 1997 generated a sizeable British biotechnology industry. The new Labour government saw no reason to abandon the Thatcherite approach, but chose to build on it. The government increased its support for biomedical research and maintained the DTI’s sponsorship role in biotechnology, without any significant increase in funding. Today a Biotechnology Mentoring and Incubator scheme provides grants of up to £50,000 for consultants to provide specialist advice for biotechnology start-ups, and a Biotechnology Exploitation Platforms scheme gives advice to scientific institutions on how best to exploit their intellectual property.
The government also sought to promote the development of biotechnology clusters around universities. The value of clusters had been emphasised by Michael Porter, the Harvard economist, and his work influenced the Labour government’s thinking. In 1999 a government-industry team led by Lord Sainsbury, the Science Minister, examined biotechnology clusters in Britain and, as a result of its recommendations, the Department of the Environment issued new guidance to local planning bodies, to ensure that planning system would be more responsive to the land-use implications of clusters.[104]
Some commentators questioned the value of the clustering policy, suggesting that it could lead to wasteful duplication as each region sought to foster its own cluster.[105] In general, however, the biotechnology industry had few complaints about government policy. A group of high-technology entrepreneurs, including Chris Evans, wrote a letter to the Financial Times in 2001 claiming that Labour had produced a “remarkable change” in science-based enterprise in Britain.[106] “The University Challenge Fund”, the letter said, “has given science entrepreneurs the early funding they often lack. The Science Enterprise Centres are teaching science students the business skills they need. Incentives for technology transfer and the promotion of venture capital have helped the start-up of new companies”.
It is true that this letter was written in the middle of an election campaign and that several of the signatories were known Labour supporters; many of the improvements they were praising had been set in train by Conservative governments. Nevertheless, the letter reflected a degree of confidence among biotechnology firms in the attractions of the UK as base for developing their businesses.
At the end of 2002 the UK had nearly 500 biotechnology companies (of which 47 were publicly quoted), employing some 26,000 people. The industry had 225 drugs in clinical development or awaiting approval, more than twice as many as the German industry, its nearest European competitor.[107] Comparisons with the US, however, were much less favourable, and there was concern that, as in electronics and information technology, too many of the British biotechnology firms were too small to be viable in the long term. The Cambridge biotechnology cluster looked impressive in European terms, but its Boston counterpart employed a third more people and had much higher rates of successful commercialisation.[108] There was no sign that any of the British firms were about to leap out of the pack in the way that Amgen and others had done in the US.
Some commentators argued that, despite the improvements that had been made since the 1980s, there were still deficiencies in the financial markets. According to this view, the financial backers of US companies start fewer companies than their European counterparts but fund them more generously, not only at the outset but all the way through their development life cycle.[109]
These fears were echoed in a report produced by leading biotechnology executives, together with venture capitalists and academics. They urged the government to ease the industry’s financial problems through changes in taxation to improve biotechnology firms’ cash flow, through a new scheme of ‘bioscience innovation awards’ for later-stage firms, and through changes in the treatment of stock options. The report also called for changes in the Stock Exchange’s rules on pre-emption rights. These rules oblige companies, when they issue new shares exceeding 5 per cent of the equity, to offer them to existing investors. This was said to restrict the ability of biotechnology firms to raise capital from new sources and put British firms at a disadvantage vis-à-vis their US counterparts.[110]
The government pointed out in its response that some of these proposals were contrary to established tax policy or would run foul of the EU rules on state aids.[111] On the issue of financial support for later-stage companies, it reminded the industry the industry that the government “does not support the picking of industrial or sectoral winners for specific, unconditional financial support; rather it seeks to identify market failures in order to address the causative factors across the board”. The government did accept the need for a fresh look at pre-emption rights, and a subsequent report commissioned from Paul Myners recommended several changes to make the rules more flexible.[112]
A broader point stressed in the industry’s report was the absence in Europe of a single public equity exchange with the critical mass in bioscience of NASDAQ. Most of the 22 European exchanges had only a handful of bioscience companies – “they lack liquidity and the necessary foundation of specialised analysts and fund managers that would encourage new capital to enter the sector, and help insulate the sector from the failures of individual companies and products”. This was a European rather than a British problem, and not one that the British government could do much about, except to the extent that it would continue to push for further integration of financial markets in Europe.
How valid was the industry’s concern about finance? Peter Fellner, one of the most experienced UK biotechnology managers – he had been chief executive of Celltech and later chairman of Vernalis, which had absorbed British Biotechnology - accepted that one of the difficulties faced by British firms was that they were under-capitalised compared to their American counterparts. But they were under-capitalised, in his view, because their business models were not attractive to investors. They needed to get away from the traditional model of always having to go back to shareholders for more money, and progress more rapidly to the point where they could become financially self-sufficient.[113]
One way of strengthening the industry’s finances – and attracting greater interest from investors - was through consolidation. When Oxford Asymmetry, a platform technology company, was taken over by Evotec of Germany in 2000, it had a market capitalisation of £230m against Evotec’s £600m “Size was part of our concern” said Oxford Asymmetry”s chairman, “We all know that you have to have a market capitalisation of at least £400m to get institutional investors on board”.[114]
If there was to be consolidation in the industry, the obvious leader was Celltech, which had the highest market capitalisation of British-owned biotechnology firms. In 2003 it paid £140m for Oxford GlycoSciences, defeating a rival bid from Cambridge Antibody Technology. In the following year, however, Celltech itself was bought by a Belgian chemical group, UCB, for £1.53bn; it was an agreed deal, and the price paid was at a 28 per cent premium to Celltech’s market price before the bid.
The chief executive of Celltech insisted that the merger was good for the UK and Europe. “The key is to have viable European businesses that have a sustainable long-term presence”. Yet the deal raised once again the familiar issue of the UK’s dependence on foreign companies: did it matter if what had seemed to a promising knowledge-based industry passed largely into foreign control? One observer feared that “we could end up with the UK performing the role of the research division of US multinationals”.[115] Another suggested that, while the UCB deal was not the death knell for the sector, “it is hard to see us ever progressing to become a US-style industry”.
The Celltech sale coincided with the take-over of Amersham, a diagnostics company with close links to the biotechnology sector, by General Electric of the US. This was a much bigger deal – GE paid £5.7bn for the business – and was designed to strengthen the American company’s position in healthcare. Sir William Castell, who had been mainly responsible for Amersham’s growth over the preceding decade, was appointed head of GE’s health care division, which would transfer its headquarters to the UK.
After the Celltech acquisition, the remaining British publicly quoted biotechnology firms were relatively small; only two, Acambis and Cambridge Antibody Technology, were ranked among the top 30 most highly valued biotechnology companies (Table 2). At the end of 2004 AstraZeneca, one of the big British-owned pharmaceutical firms, acquired a 10 per cent stake in Cambridge Antibody as part of a wide-ranging technical collaboration in antibody-based drugs.
Table 2 Some leading biotechnology companies by market capitalisation
(figures in $bn November 2004)
| 1. Amgen (US) | 71.91 |
| 2. Genentech (US) | 47.79 |
| 3. Biogen Idec (US) | 19.68 |
| 4. Gilead Sciences (US) | 14.91 |
| 5. Genzyme (US) | 11.96 |
| 6. Serono (Switzerland) | 7.23 |
| 16. Actelion (Switzerland) | 2.66 |
| 27. Acambis (UK) | 0.51 |
| 28. Cambridge Antibody (UK) | 0.50 |
Source: Financial Times, November 10, 2004
As the table shows, the gap between these two companies and the US leaders is extremely wide in terms of market capitalisation. Size of company is not the only measure of an industry’s performance, and, in the case of biotechnology, perhaps not the most useful. Amgen in the US is exceptional in following the integrated route, turning itself into a fully fledged pharmaceutical company. Most other biotechnology firms will continue to rely on partnerships with established pharmaceutical companies Their value will lie in early-stage research where economies of scale are relatively small. While the financial fragility of the British biotechnology industry is a matter of concern, the main focus of public policy should be to create a favourable environment for biomedical research – support for the science base, promoting collaboration between academia, industry and the National Health Service in clinical research, and ensuring that the regulatory system provides appropriate incentives for the development of innovative drugs.
NOTES
[94] L.Orsenigo The emergence of biotechnology Pinter, 1989, p.38.
[95] F.Malerba and L.Orsenigo The dynamics and evolution of industries Industrial and Corporate Change, Vol 5 No 1, 1996.
[96] Maureen McKelvey Evolutionary innovations, the business of biotechnology Oxford 1996, Ch 6.
[97] Martin Kenney Schumpeterian innovation and entrepreneurs in capitalism: a case study of the US biotechnology industry Research Policy, Vol 15, 1996, pp.21-31.
[98] Martha Prevezer Clustering in biotechnology in the USA in G.M.Peter Swann, Martha Prevezer and David Stout (eds) The dynamics of industrial clustering Oxford 1998.
[99] Andrew A. Toole Understanding entrepreneurship in the US biotechnology industry in Hart (ed) The emergence of entrepreneurship policy.
[100] For a description of these events and Celltech’s subsequent history see Mark Dodgson Celltech, the first ten years of a biotechnology company Science Policy Research Unit, Sussex University, Discussion Paper, February 1990.
[101] Steven Casper and Fiona Murray Examining the marketplace for ideas: how local are Europe’s biotechnology clusters in Maureen McKelvey, Annika Rickne and Jens Laage-Hellman (eds) The economic dynamics of modern biotechnology Elgar 2004. For a recent assessment of the Cambridge cluster, see The Cambridge Cluster Report 2004 published by Library House, Cambridge, in association with Grant Thornton.
[102] Margaret Sharp Biotechnology in Britain and France in Margaret Sharp and Peter Holmes (eds) Strategies for new technology Peter Allan, 1989.
[103] Sharp Biotechnology in Britain and France p.156.
[104] Biotechnology clusters, report of a team led by Lord Sainsbury, Minister of Science Department of Trade and Industry, HMSO, August 1999.
[105] Ron Martin and Peter Sunley Deconstructing clusters: chaotic concept or policy panacea? Journal of Economic Geography, Vol 3 No 2, 2003.
[106] Financial Times May 24 2001
[107] Critical I Limited Report on the biotechnology industry to the Department of Trade and Industry 2004.
[108] Casper and Murray Examining the marketplace for ideas.
[109] Critical I Report on the biotechnology industry
[110] Bioscience 2015, a report to government by the Bioscience Innovation and Growth Team Department of Trade and Industry, 2003.
[111] The government’s response to ‘Bioscience 2015’ Department of Trade and Industry, May 2004.
[112] Financial Times, November 4, 2004.
[113] Sunday Telegraph, September 12, 2004.
[114] Financial Times August 1, 2000.
[115] Financial Times, May 22/23, 2004.
Back to the Top of the Page.