The first half of 2020 will go down in the history books; it has brought about rapid changes to our way of life and raised profound questions about the way our economies operate. However, even amid the chaos of COVID-19, the UK’s pharmaceutical industry has delivered, bringing about intense innovation and industry collaboration at a time when it is most needed. The crisis has seen the sector come together on a huge scale – the usual trade secrets and intellectual property have been more widely shared in recent months than ever before, with the development of a successful vaccine for COVID-19 becoming the industry’s new holy grail. Under immense pressure, many companies have also accelerated digitisation processes, allowing for clinical trial data to be processed and shared faster than ever.
However, the UK’s pharmaceutical sector has a long-running track record of delivering powerful innovation that overwhelmingly predates the pandemic. This innovation is testament to the way the UK’s pharmaceutical sector has been developed and nurtured – providing a blueprint for how to create a truly cutting-edge industry. In my view, there are three major factors driving this long-running phenomenon in UK pharma.
A dynamic supply chain
The first factor driving the innovation of the sector is its dynamic supply chain, connecting institutions from all parts of society. Home to many of the world’s best universities, the UK is a natural hub for talented graduates. For the pharma sector, having access to highly talented PhD and Masters students is a significant boost, especially compared to countries that are more reliant on immigration to supply the workforce for pharmaceutical firms. Recent boosts to apprenticeship training in vaccine manufacturing also represent a welcome move as vaccine development becomes a key focus across the sector.
However, universities also play another key role – many of the most successful firms began as start-ups spun out of university research faculties. One prominent example is Abcam, which has become one of the leading players in the sector thanks to its work on antibodies. The company was initially spun out of a genetics research institute in Cambridge. These firms can also benefit from the local wealth of knowledge around M&A and intellectual property, driving further growth.
The NHS plays an important role in the broader pharmaceutical supply chain, providing the ideal infrastructure for the commercialisation of drugs. Working with pharmaceutical companies, the NHS contributes significantly to UK pharma’s strong international competitiveness. It also plays a critical role in supporting clinical trials. For example, hospitals in Birmingham are home to many of the UK’s leading clinical research institutions and have supported work on groundbreaking medicines.
Value chains
Secondly, the sector is set up in a way that creates and protects value. Indeed, the financial outlook for the sector is strong, even against the backdrop of COVID-19. Even at the peak of the pandemic, global investment in biotech continued to soar, reaching new heights in the second quarter. This was driven by a string of deep-pocketed US IPOs in biopharma and cell and gene therapy. In the UK, financing has also remained positive in recent months, driven by later-stage private fundraising deals and follow-on public market financing rounds.
Broadly speaking, the UK’s pharma and life sciences sector has held up well in the face of the crisis, with robust capitalisation providing a structure for continued momentum despite the downturn. Driving this relatively strong performance is a backdrop of innovation, supported by a complex and wide-ranging network of government support, collaboration with research institutions and the NHS, and financial incentives.
The strength of the sector’s value chain is well illustrated by the robust capitalisation among life sciences companies ahead of the pandemic, which provided a basis for continued momentum despite the downturn. For example, one well-publicised exit included Mercia portfolio company The Native Antigen Company, now a world-leading supplier of antigen reagents required for antibody testing kits. The company has been a key player in previous efforts against emerging viruses like Zika. Now acquired by LGC, a leader in genomics analysis, the deal highlights how competitive marketplaces and firm technology-investor foundations support steady long-term valuations and drive continued dealflow despite wider headwinds.
Government support
The third key factor behind the UK pharma sector’s innovation is a system of government support that incentivises risk-taking. Government incentives have continued to drive business activity and productivity, with the Future Fund, Sustainable Innovation Fund and many others forming part of a broader R&D strategy aimed at cementing the UK as a global science superpower.
One area in particular that supports the pharma sector is the system of R&D tax credits. For the pharmaceutical sector, R&D tax relief can be claimed on activities throughout the drug development process, from drug discovery all the way through to post-launch trials. It can be claimed on expenditure on a wide range of areas, including employee costs, with the salary costs of the chief scientific officer and other R&D personnel being eligible for claims.
It also applies to materials used directly in carrying out R&D, the utilities needed to support R&D activities and software costs that support R&D activity. Given the importance of R&D for the pharmaceutical industry, this form of tax relief represents a major boost.
The relief pays out generously, with the qualifying costs multiplied by 230% to provide a reduction in businesses’ corporation tax bill. In other words, for every £100 spent on qualifying R&D costs, the company is able to lower its corporation tax bill by a further £130 in addition to the £100 spent. For pharma companies facing the reality that most drug prospects will not ultimately make it to market, the tax relief makes a significant difference and encourages inventiveness and risk-taking.
Furthermore, in line with the UK’s ambition to raise R&D investment and earmark the UK as a continued global life sciences hub, associations such as the BioIndustry Association continue to support their members through efforts that encourage Foreign Direct Investment, and streamlining of regulatory, legal and financial incentives for domestic and international companies.
These efforts span public and private industry ecosystems and impact both large and small players in the market. For example, smaller biotech firms in a significant loss position, which would previously have been disqualified from receiving state funding due to state aid rules, are now able to benefit. The government has also stepped up its support, ensuring that R&D tax relief payments are processed and paid within rapid time-frames in order to support firms seeking to accelerate growth during the crisis.
Conclusion
2020 has seen unprecedented levels of uncertainty across global economies. However, the UK’s innovative pharmaceutical industry has held up well, driven by dynamic support networks and a flexible investment landscape. The wide-ranging web of support from the government builds on an industry landscape that links research institutions, private companies, universities and the NHS, fostering a cycle of innovation that boosts the whole sector.
This approach is proving its worth in times of need, with the crisis acting as a catalyst for new ways of working and new levels of collaboration that may bring about the vaccine that the world needs.
While all countries have their own unique circumstances, aspects of the UK’s model may offer valuable insight into how the pharmaceutical sector – and innovative industries in general – can be supported to generate cutting-edge outcomes and power economic growth for years to come.
Jameel Zayed is a consultant at Leyton specialising in innovation incentives
