The Healthcare Technology Venture Market in Europe ... - … · The Healthcare Technology Venture Market in Europe, ... The healthcare technology venture market is the second largest

L.I. Group

The Healthcare Technology Venture Market in Europe, UK and Yorkshire & Humber

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About Library Innovation Group (L.I. Group)The L.I. Group was formed as a spin-out company from the Library House Consulting Department. The company uses established evidence-based research methodologies to deliver strategic insights into innovation-led companies and markets. It also advises public and private sector organisations on strategic issues that involve technology, innovation, entrepreneurship and finance.

Project Team:

Martin Holi

Alexander Jan

Stephen Mounsey

Dr Jonathan Lawton

Dr Siobhán Ní Chonaill

Malgosia Rozycka

For more information about the contents of this report, please contact:

L.I. Group

St John’s Innovation Centre

Cowley Road

Cambridge

CB4 OWS

United Kingdom

www.li-group.co.uk

[email protected]

Access To Finance For Healthcare Technologies ProgrammeAccess to Finance for Healthcare Technologies is an investment readiness programme established by Yorkshire Forward to assist companies in the Health Technology sectors. The programme addresses three key factors relevant to the Yorkshire & Humber region:

the opportunity to develop investment markets, especially for companies in complex and challenging markets such as • healthcare;

the opportunity to engage talented business support professionals able to provide advice and guidance on raising • finance in general and especially in this sector; and

a shortage of existing successfully venture backed companies to act as role models, explain the process and showcase • the benefits.

The programme is scheduled to run for an initial period of three years from January 2009 and is delivered by a consortium of three companies, led by Grant Thornton UK LLP and including Quotec and BITECIC.

www.investinginhealth.co.uk

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The Healthcare Technology Venture Market

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Contents1. Executive summary ............................................................................................1

2. Introduction .......................................................................................................2

3. The healthcare technology sector ........................................................................3

3.1. Pharmaceutical industry ................................................................................................ 4

3.1.1. Global and European pharmaceutical industry ...............................................................5

3.1.2. The UK pharmaceutical industry .....................................................................................5

3.1.3. Pharmaceutical industry in Yorkshire & Humber .............................................................7

3.2. Medical technology industry ..........................................................................................7

3.2.1. Medical technology product naming classification......................................................... 8

3.2.2. Cardiovascular ............................................................................................................... 8

3.2.3. Diagnostics ................................................................................................................... 8

3.2.4. Orthopaedics ................................................................................................................ 9

3.2.5. Global expenditure in medical technologies .................................................................10

3.2.6. Medical technologies in Europe ....................................................................................10

3.2.7. Medical technologies in the UK .................................................................................... 11

3.3. Medical technologies Yorkshire & Humber ....................................................................12

4. Thefinancingcycleofhealthcaretechnologycompanies ..................................... 13

4.1. Where do healthcare technology companies come from?............................................. 13

4.2. Is the United Kingdom a good place to attract venture capital investments? ................ 13

4.3. Is this also true for healthcare technology companies? .................................................14

4.4. First round investments ................................................................................................16

4.5. Who are the early-stage investors? ............................................................................... 17

4.6. How much capital was invested? .................................................................................. 17

4.7. Follow on investment rounds .......................................................................................18

4.7.1. European investors in healthcare technology companies ..............................................19

4.7.2. Top deals in Europe ......................................................................................................22

4.7.3. Top deals in the UK .......................................................................................................22

5. The attractiveness of Yorkshire & Humber .......................................................... 23

5.1. The investment landscape in Yorkshire & Humber ........................................................23

5.1.1. The origin of companies in the region ...........................................................................23

5.1.2. Venture capital backed university spin-outs in the healthcare technology sector ..........25

5.1.3. Independent healthcare technology start-ups ............................................................. 26

5.2. Investors in Yorkshire & Humber ...................................................................................27

5.3. Venture capital investment successes .......................................................................... 29

6. Future trends in the healthcare technology venture market ................................. 30

7. Sponsors of Access to Finance for Healthcare Technologies Programme ................38

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Foreword Yorkshire & Humber is at the forefront of the UK’s latest advances in healthcare making it an important region for the healthcare technology industry and one of the fastest-growing nationally. It has one of the UK’s highest concentrations of medical device companies, superb specialist skills (especially in surgical instrumentation, orthopaedics and advanced wound-care), exceptional access to clinical trials, pioneering R&D and Europe’s largest teaching hospital.

The healthcare technology venture market is the second largest sector, behind information and telecommunications, attracting around 24% of all deals in Europe and 29% in the UK. This represents over £2.1bn of investment in European healthcare companies and £434m in the UK in 2007 and 2008.

However, despite the buoyancy of the sector and the strengths of the region, many healthcare technology companies still face difficulty in raising private equity particularly in the early stage where they face the so called ‘equity gap’ . Typically this is the first round of venture capital investment of around £500K to £2m where investors regard propositions as particularly risky.

To help companies in Yorkshire & Humber best position themselves to secure funding we are very pleased to announce a new programme, ‘Access to Finance for Healthcare Technologies’, which will assist these companies to become ‘investment ready’. We are delighted to be part of a consortium with a track record of success in this area, led by Grant Thornton and including Quotec and BITECIC, which will work closely with companies in the region to provide skills, business model reviews, mentoring and investor introductions to get them in the best possible shape to secure investment. The programme will run from January 2009 to April 2012 and is open to all SMEs in the healthcare technology market based in Yorkshire & Humber.

This report has been prepared for the launch of the programme, with the needs of entrepreneurial companies in mind, to provide an overview of the level of investment activity in the healthcare technology sector over the last two years in Europe, the UK and Yorkshire & Humber. It details the types of deals that have been completed and who the most active investors have been and also provides a commentary on the current status of the investment market and likely future trends. I hope that you will find it informative.

Glenn Stone

Partner, Grant Thornton UK LLP

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Key Facts*

£2.1bn of venture capital has been invested into European healthcare companies.

133,000 people are employed by healthcare technology companies in the UK.

Over 300 venture capital investments have been made into UK healthcare companies.

71 first round investments have been made into UK healthcare companies.1

£1.4m is the average deal amount for a UK first round investment into the healthcare technology sector

88 active companies spun-out from Yorkshire Universities (2nd place in the UK).2

17 is the number of active venture capital backed healthcare technology university spin-outs in Yorkshire.

£383m is the total annual research income of the universities in Yorkshire & Humber.

£76.2m is the value of contract research with Yorkshire Universities (3rd place in the UK).3

*as of Jan 2007 – Nov 2008

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1 Executive summaryThis report provides an overview of the healthcare technology venture capital market. It analyses both historical and current investment data on the healthcare technology venture market in the Yorkshire & Humber region and benchmarks it against European and UK figures. It uses a qualitative approach to gauge what the industry perceives to be both the future trends and overall potential of the healthcare technology industry.

The healthcare technology sector is made up of a number of sub areas, including pharmaceutical, drug development, medical technologies and other life sciences. These areas are of particular interest as they have experienced high levels of growth in recent years due to increases in national health expenditure, the global ageing population, developments in technology (including diagnostics and drug delivery) and the rise in the number of chronic illnesses.

The UK’s leading manufacturing industry is the pharmaceutical and drug development sector, with two of the world’s top ten pharmaceutical companies based in the country. Within the Yorkshire & Humber region, pharmaceutical companies make up less than half of all healthcare technology companies within the area. Johnson & Johnson, one of the largest global pharmaceutical companies, has subsidiaries based in the Yorkshire & Humber region as are a number of major publicly-listed UK pharmaceutical companies including; Avacta Group, Syntopix Group and Fusion IP.

Although the UK is heavily reliant on imports it accounts for 11% of the total European medical device market and 20% of all European medical technology companies. Within the UK, the sector employs some 60,000 individuals and nearly a tenth of these are employed within the Yorkshire & Humber region accounting for an output of £450m. In addition to four public- quoted companies (quoted on the London Stock Exchange) there are several large international medical technology companies based in the Yorkshire & Humber region.

Venture capital in the healthcare technology sector accounts for approximately 24% of all investments in Europe. Of the 311 deals completed between 2007 and 2008 there was an almost equal split in investment activity between the pharmaceutical and medical technology area. The average investment size into a healthcare technology company was £2.7m, £1.3m lower than the European average in this sector. There have been six first round investments in the Yorkshire & Humber region over the past two years accounting for nearly 10% of all first round investments in to healthcare technology companies in the UK.

The Yorkshire & Humber region benefits from the presence of a number of strong research universities that have contributed several spin-out companies to the local healthcare technology sector. The universities collaborate closely with intellectual property commercialisation companies which provide capital and advice to spin-out companies. However, the number of products or services that can be transferred into separate spin-out companies is limited at any university. This therefore requires a sustained effort by the region to establish, finance and grow additional start-up companies.

This report has identified a number of technological trends within the healthcare technology sector that are increasingly appealing to venture capital investors. These include miniaturisation and nano-biotechnology, stem cell, ophthalmology, standardisation, imaging and personalised medication. The report also investigates the latest financial trends for early-stage businesses within the sector.

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2 IntroductionOver the years the European healthcare technology sector has provided many attractive investment opportunities for investors. Venture capital investments into this sector now count for one-third of the European and UK venture capital market. The emergence of biotechnology within the pharmaceutical and drug development sectors has created a niche venture capital market with specialised early-stage investors. In the field of medical technologies many innovations are now explored through smaller companies developing diagnostic tools, implants, medical instruments and drug delivery systems to serve patients, with particular focus on the ageing societies across European countries.

Despite the relatively high venture activity in medical technology in the UK all venture capital stakeholders are aware of the challenges that the venture capital market will face in the upcoming months and possibly years. The impact of changes taking place in the economic and financial markets will undoubtedly influence the venture capital market significantly and will require special efforts from entrepreneurs to secure financing for their companies and for investors to close new funds.

This report analyses the European healthcare technology venture market over the past two years (2007-2008) using quantitative and qualitative research methods. Analysis of venture capital investment data within this sector is used to specify the investment activity and trends. The results are backed by interviews with experts and professionals from venture capital organisations, technology transfer offices, venture capital backed companies and other service providers.

Secondly, the results from the analysis provide the basis for recommendations addressed to investment-seeking entrepreneurs of healthcare technology companies located in the UK and, more specifically, in Yorkshire & Humber.

Finally, the report gives a detailed overview of the regional healthcare technology market in the Yorkshire & Humber. Through the analysis of companies, case studies and historical investments, this report provides entrepreneurs, investors, technology transfer professionals, universities and business support organisations with a clearer understanding of the regional investment landscape and ways in which these groups can benefit from investment opportunities.

MethodologyVenture capital investment data is derived from different information sources and news providers. The main data source for investment activities was the Library House database ‘European Venture Intelligence’ (EVI) as of November 2008. Additional information was taken from from correspondence with investors, technology transfer offices and universities. Market capitalisation values are taken from the statistics of the London Stock Exchange (LSE) as of December 2008.

The data presented in this report is taken from publicly available sources. Due to the nature of the venture capital market not all information about investments is disclosed. However, the L.I. Group claims to provide an accurate picture based on the information that is currently available.

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The healthcare industry is generally defined as that which has a focus upon the treatment and tending of patients who are injured, sick, disabled or infirm and is facilitated by professional health workers and technology. The healthcare technology industry can thus be broadly segmented into two areas:

Pharmaceutical and drug development•

Medical technologies•

Investors look for companies that have excellent growth potential driven by the company’s own innovative capacity. However, external factors such as market size and market growth are part of the key reasons for investment as companies are more likely to gain venture backing if they can prove that their products and services can serve large or growing markets that would have a high uptake of innovative goods. Before an analysis of differing sectors within the healthcare technologies industry can be undertaken, the overall industry and the effects technology has upon it, has to be understood.

The demand for innovation in the healthcare market is driven by several factors including the increase in life expectancy across developed western countries; the increase of expenditure to

Figure 1 – Health expenditure as a share of GDP, 2006 (Source: OECD)

provide healthcare services; the identification of numerous medical areas with unmet needs, particularly oncological, cardiovascular, arthropathic and neurological diseases such as Alzheimer’s and Parkinson’s. Rising obesity levels worldwide, which have led to much higher numbers of diabetes- and cardiovascular-related conditions, have also created a demand for innovative healthcare technologies. A company that is able to serve any of these demands can provide huge financial returns to their investors, and is therefore a prime target for venture capital funds.

According to the latest OECD Health Data, the average national spend on healthcare worldwide still remains at the 8.9% of the GDP (denoted by the OECD in Figure 1), with the US spending the highest percentage of GDP (see Figure 1). It can be seen that healthcare spending remains a large enough market to attract the interests of investors, particularly when the innovation can garner a large enough portion of the expenditure.

In previous years it has been stated that the focus • on healthcare technology would cost the country increasingly large amounts year on year, with some healthcare experts stating that the development and

3 The healthcare technology sector

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diffusion of medical technology was responsible for the persistent difference between health spending and overall economic growth. Some argued that new medical technology may account for about one-half or more of real long-term spending growth. However, the costs were shown to have specific benefits such as:

Development of new treatments for previously • untreatable terminal conditions;

Major advances in clinical ability to treat previously • untreatable acute conditions;

Development of new procedures for discovering and • treating secondary diseases within a disease;

Expansion of the indications for a treatment over • time, increasing the patient population to which the treatment is applied;

On-going, incremental improvements in existing • capabilities, which may improve quality;

Clinical progress, through major advances or by the • cumulative effect of incremental improvements that extends the scope of medicine to conditions once regarded as beyond its boundaries, such as mental illness and substance abuse.6

As stipulated in the ‘Impacts of Advances in Medical Technology in Australia’ report (2005)7, increased expenditure on new medical technologies is reflected in improved treatments and a significant increase in the numbers of people treated. Although advances in medical technology have provided value for money — particularly as people highly value improvements in the quality and length of life — in practice the cost effectiveness of individual technologies varies widely. This high level of variation in healthcare cost effectiveness makes the overall value, or net community benefit, to be an important point of consideration.

With this in mind, two key questions shown in Figure 2 must be asked when looking at new healthcare technology.

These two questions and the subsequent thought process have become the basis for determining the impact and hence attractiveness to investors interested in the healthcare industry.

Figure 2 – Developed from Rettig (1994) and Productivity Commission (2005)

3.1. Pharmaceutical industryThe pharmaceutical industry is one that is focused on the development, production and marketing of medication, which is defined as ‘as any substance intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease.’8 Lately the pharmaceutical industry has undertaken intensive research and development activities within the biotechnology industry and therefore the term biotechnology has become synonymous with drug discovery and production. In order to understand the healthcare technologies industry one must look at these industries and the potential market facing venture capital investors.

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3.1.1. Global and European pharmaceutical industry

Figure 3 – Breakdown of global pharmaceutical sales by region – 2007 (Source: IMS,2008)

The global pharmaceutical industry was estimated to be worth over US$660bn in 2008. Figure 3 shows the breakdown of global pharmaceutical sales by region. It can be seen that one third of global pharmaceutical sales were in Europe. Of the top ten pharmaceutical companies, five are based in

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Corporation Country Sales (£m) Market share (%)

Pfizer US 22,292 6.7

GlaxoSmithKline GB 18,847 5.6

Novartis CH 17,154 5.1

Sanofi Aventis FR 16,788 5.0

Astrazeneca GB 15,010 4.5

Johnson & Johnson US 14,478 4.3

Roche CH 13,814 4.1

Merck & Co US 13,631 4.1

Abbott US 9,570 2.9

Lilly US 8,335 2.5

Top 10 149,920 44.9

Amgen US 8,188 2.5

Wyeth (acquired by Pfizer) US 7,949 2.4

Bayer DE 7,020 2.1

Bristol-Myers Squibb US 6,519 2.0

Boehringer Ingelheim DE 6,277 1.9

Schering-Plough US 6,181 1.9

Takeda JP 5,479 1.6

Teva IL 5,300 1.6

Novo Nordisk DK 3,336 1.0

Daiichi Sankyo JP 2,925 0.9

Top 20 209,093 62.6

Europe, with two based in the UK (see Table 1). Despite this sources claim that Europe still made up at least one-third of the overall sales spend in 2007.9

3.1.2. The UK pharmaceutical industryAs shown in Table 1, the UK is home to two of the world’s largest and most profitable pharmaceutical giants, the British founded GlaxoSmithKline and the Anglo-Swedish AstraZeneca. The UK pharmaceutical industry is estimated to be worth over US$19bn. It is directly responsible for 72,000 jobs, of which an estimated 28,000 are in R&D. This results in a gross output to the country of approximately £235,000 per employee (Table 2). An analysis of DTI and ONS data reveals that the pharmaceutical industry has used over a third of its sales revenue for R&D purposes in 2007. In line with this, ONS data shows that the pharmaceutical industry contributes over a quarter of the entire UK’s R&D spend.

Table 1 – Top world pharmaceutical corporations, 2007 (Source: IMS World Review 2007)

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Year Employees (1,000s)

R&D employment (1,000s)

R&D as a % of total employment

Salaries and wages (£m)

Gross output per employee (£)

1980 73.3 12 17 412 33,315

1985 66.9 15 22 662 60,239

1990 71.1 18 26 1,120 90,549

1995 61.9 17 27 2,039 160,242

2000 66.0 25 38 2,214 190,492

2001 71.0 27 38 2,624 198,862

2002 84.0 29 35 3,086 183,940

2003 73.0 27 37 2,698 212,712

2004 73.0 27 37 3,040 208,753

2005 68.0 26 38 3,084 231,588

2006 72.0 28 39 3,414 235,278

Table 2 – Employment in the UK pharmaceutical industry (Source: ONS,2008)

Table 3 – Nationality of top 20 pharmaceutical companies in the UK (Source: IMS Dataview, 2007)

Rank Corporation Nationality Total market sales (£m) Market share (%)

1 Pfizer US 1,091.5 9.3

2 GlaxoSmithKline GB 1,056.9 9.0

3 Sanofi-Aventis FR 782.0 6.7

4 Astrazeneca GB 667.6 5.7

5 Novartis CH 458.9 3.9

6 Roche CH 438.2 3.7

7 Wyeth (acquired by Pfizer) US 387.0 3.3

8 Merck & Co US 353.0 3.0

9 Lilly US 344.5 2.9

10 Boehringer Ingelheim DE 267.6 2.3

11 Johnson & Johnson US 256.5 2.2

12 Schering Plough US 252.5 2.1

13 Novo Nordisk US 218.0 1.9

14 Bayer Schering DE 195.1 1.7

15 Abbott US 167.8 1.4

16 Teva IL 136.3 1.2

17 Bristol-Myers Squibb US 114.5 1.0

18 Mundi Int. US 113.8 1.0

19 Gilead Sciences US 105.0 0.9

20 Servier FR 102.3 0.9

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3.1.3. Pharmaceutical industry in Yorkshire & Humber

In the Yorkshire & Humber area, pharmaceutical and biopharmaceutical companies account for significantly less than half of healthcare technology companies in the region. Although the number of companies correlates with previous Yorkshire Forward reports10, the reliability of this dataset (Company House) is questionable and the true percentage is up for debate. Key publicly listed pharmaceutical and biotechnology corporations in the Yorkshire & Humber region include Avacta Group, Syntopix Group and Fusion IP.

3.2. Medical technology industryMedical technology is generally defined as the use of technology to manage a range of health conditions through diagnostic11 and therapeutic application. In a more general sense, the term can be used to refer to the procedures, equipment, and processes by which medical care is delivered.

Medical technology companies have a range of focuses and these include:

The UK is home to a number of global pharmaceutical companies, especially within the Greater South East. The Yorkshire & Humber region is home to several of the Johnson & Johnson family of companies. As Table 3 suggests only a small minority of the Top 20 UK-based pharmaceutical corporations originated and are active within the UK. Nonetheless, the pharmaceutical industry is considered to be Britain’s leading manufacturing sector. This claim is backed up by HM Revenue & Custom data from uktradeinfo, which has shown a trade surplus from 2006 to 2008 for the Pharmaceutical industry. According to HM Revenue & Custom, this surplus has been ongoing since mid 1980, making the UK one of the top five countries for global pharmaceutical trade. However, there is speculation at this time that due to the strength of the Euro and the subsequent weakness of Sterling, UK-based pharmaceutical companies may be less profitable in the upcoming year.

Year Exports Imports Trade Balance

2006 13,400 9,114 4,286

2007 14,080 9,871 4,209

2008* 12,085 7,934 4,151

* as up to date as November 2008

Table 4 – UK exports and imports of pharmaceutical goods 2006-2008 (Source: uktradeinfo.com,2008)

Figure 4 – Key health sector focus 12

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with an annual estimated cost of €192bn to the overall EU economy.

According to the WHO’s 2007 statistical data, heart disease and strokes account for 21.7% of deaths worldwide, while cardiovascular disease accounts for 30%. The WHO estimates that in 2015 almost 20 million people will die from a cardiovascular-related condition. This can all be related to both an ageing global population and a sustained rise in obesity. In fact, rising obesity levels are not only responsible for the growing number of cases of heart disease and strokes, but has also contributed to the rise in deaths related to diabetes. The WHO predicts that within the next ten years diabetes-related deaths will increase worldwide by more than 50%.

This in turn has created a viable marketplace with the cardiovascular device market expected to reach US$40.46bn by 2011 in North America alone. Cardiovascular medical technology products include cardiac rhythm management, heart valves, cardiac surgery systems, minimally-invasive image-guided technologies, interventional neurovascular technologies and heart assist devices and stents. An example of this is that the European drug-eluting stent market has been forecast to reach $4.5bn by year end this year, up from $1.6bn in 2001.14

Globally, the major cardiovascular device companies include Cordis (Johnson & Johnson), Medtronic, Boston Scientific, Guidant, St Jude Medical, Abbot, Sorin, Conor Medsystems and Biotronik.

3.2.3. DiagnosticsAs healthcare has improved, there has been an ever-increasing reliance on better and faster diagnostic tests. Such diagnostics include biotechnological-based testing as well as medical hardware.

The pace of technological change in the diagnostic market is enabling earlier and more accurate diagnoses of disease, improving clinical decisions and assisting more effective monitoring of treatment. The global market for in vitro diagnostics was valued in excess of US$38bn in 2007 and has been forecast to grow by 6.7% year on year until 2012. There are two diagnostic methods in particular that are seen as high growth areas: molecular diagnostics and point of care diagnostic tests. These are expected to exhibit a Compound Annual Growth (CAG) of 14% until 2010 from a base value of $2.6bn in 2005, and 7.8% until 2010 from a base of $12bn in 2005, respectively.

3.2.1. Medical technology product naming classification

Though the health sectors with which medical technology companies focus upon seem very well defined and limited, there is a huge range of products that can be developed for each area. Table 5 shows the common nomenclature developed by the Global Medical Device Nomenclature Agency.

Despite the plethora of health-related focii listed above, cardiovascular, diagnostics and orthopaedics are the largest therapy areas within medical technologies.

3.2.2. CardiovascularThis focus is on any medical technology, whether therapeutic, diagnostic or procedural, that deals with disease or the prevention of disease relating to the cardiovascular system.

It is estimated that the two most common occurrences of cardiovascular disease, heart disease and strokes, cost the US $448.5bn in 2008.13 In line with this trend, cardiovascular disease is considered to be the major cause of death in the European Union, killing over 2 million people each year

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Term Examples

Active implantable technology

Cardiac pacemakers, neurostimulator, etc.

Anaesthetic and respiratory technology

Anaesthetic and respiratory technology

Dental technologyDentistry tools, alloys, resins, dental floss, brush, etc.

Electromechanical medical technology

X-ray machine, scanner, laser, etc.

Hospital hardware Hospital bed, etc.

In-vitro diagnostic technologyPregnancy, blood glucose, genetic tests, etc.

Nonactive implantable technology

Hip, knee joint replacement, cardiac stent

Ophthalmic and optical technology

Eye glasses, contact lenses, ophtalmoscope, etc.

Reusable instruments Various surgical instruments

Single use technologySyringes, needles, gloves, balloon catheters, etc.

Technical aids for disabled per sons

Wheelchair, walking aid, hearing aid, electrical bed, etc.

Diagnostic and therapeutic radiation technology

Radiotherapy units

Table 5 - Global medical device nomenclature (Source: Global Medical Device Nomenclature Agency, 2009)

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of years ago in the areas of reconstructive devices and joint replacements, spinal implants and instrumentation, fracture repair and orthobiologics.

In 2007, the European market for orthopaedic devices was valued at around $3bn. On a global scale, worldwide sales reached $25.9bn and it is estimated that by 2010 the sector will top $44bn in global revenues.

Globally, the major orthopaedic medical technology companies include Smith & Nephew, based in York, and DePuy (Johnson & Johnson) which is based in Leeds.

3.2.4. OrthopaedicsOrthopaedic conditions affect hundreds of millions of people throughout the world. According to recent reports orthopaedic conditions account for up to half of all chronic conditions in people over the age of 50 in developed countries, a figure that is set to double by 2020. Combined with the fact that a fifth of all visits to outpatient clinics worldwide are for musculo-skeletal conditions, a focus on orthopaedics by medical technology companies seems an obvious and lucrative choice.

The main products seen within this sector are divided into a number of different fields, with strong growth seen a number

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Figure 5 – Top 25 global expenditure in medical technologies in 2007 (€bn) (Source: Eucomed,2008)

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Within Europe, Germany is both the biggest exporter (€14bn) and the biggest importer (€9.2bn) of medical technology. In terms of exports, Germany is followed by France, the UK and Ireland. The biggest importers after Germany are France, Italy, the UK and Spain. Germany, the UK, Ireland, Sweden, Denmark and Finland have trade surpluses in medical technology, while all other countries have trade deficits, suggesting the prowess of these countries in this area.

3.2.5. Global expenditure in medical technologiesFigure 5 provides a quick overview of the 25 countries with the largest global expenditure in medical technologies. As can be clearly seen, the US has the largest expenditure, almost €80bn. In fact, US expenditure is equivalent to the entire expenditure of Europe.

3.2.6. Medical technologies in EuropeAs stated recently in a report15 by the McKinsey Group, the European medical technology market, which is regulated by the European Medical Devices Directives, is growing at a rate of 5–6% each year – a model of consistency in an otherwise turbulent economic climate. In support of this, Espicom Business Intelligence predicts that the main medical device markets in Western Europe will grow by over 40% in the coming years to reach an estimated US$82.4bn by 2013.16

According to Eucomed medical technology sales in Europe amounted to €63.6bn in 2005, making up one-third of the global market share. Eucomed has also stated that the European medical technology industry invests some €3.8bn in R&D and employs 435,000 people across Europe, making a major impact upon Europe’s economy while costing it less that 0.7% of GNP.

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Figure 6 – Location of European medical technology companies (Source: Episcom, 2008)

Figure 7 – Number of employees employed by European medical technology companies (Source: Episcom, 2008)

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3.2.7. Medical technologies in the UKThe UK makes up an 11% share of the European medical device market and in 2008 this was valued at approximately US$9.9bn. Despite the fact that 20% of all European companies operate from the UK and that the UK has a trade surplus in this industry, the UK medical technology industry is heavily reliant on imports. This is indicative of a domestic industry that is composed of manufacturers that are small and undercapitalised.

At present it is estimated that the UK has 2,000 companies engaged in medical device manufacture, 85% of which are considered small companies (10 -50 people) with a turnover less than £5m. As shown in Table 6, the medical technology industry employs over 60,000 people, the second largest employer in Europe after Germany in this sector.17 Closer examination of the industry landscape shows that the UK is particularly focused on R&D and has excelled in the areas of advanced wound care, diagnostics and orthopaedics.

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Figure 8 – European medical technology market split (Source: Eucomed,2008)

Country Employees % of European Total Population (000s) Workforce per capita

Austria 6,000 1.40% 8,175 0.07

Belgium 5,500 1.30% 10,421 0.05

Czech Republic 12,760 2.90% 10,212 0.12

Denmark 14,000 3.20% 5,401 0.26

Finland 3,000 0.70% 5,228 0.06

France 40,000 9.20% 60,200 0.07

Germany 110,000 25.30% 82,491 0.13

Greece 2,500 0.60% 11,062 0.02

Hungary 4,250 1.00% 10,107 0.04

Ireland 26,000 6.00% 4,044 0.64

Italy 29,815 6.90% 57,553 0.05

Netherlands 9,500 2.20% 16,282 0.06

Norway 500 0.10% 4,592 0.01

Poland 8,700 2.00% 38,180 0.02

Portugal 3,200 0.70% 10,509 0.03

Romania 15,000 3.50% 21,631 0.07

Slovakia 2,198 0.50% 5,382 0.04

Slovenia 1,237 0.30% 2,001 0.06

Spain 25,400 5.80% 42,692 0.06

Sweden 15,000 3.50% 8,994 0.17

Switzerland 40,000 9.20% 7,390 0.54

United Kingdom 60,000 13.80% 59,834 0.10

Total Europe 434,560 100% 498,863 0.09

Table 6 – Workforce in medical technology companies (Eucomed,2008)

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3.3. Medical technologies Yorkshire and Humber

According to UK Trade and Investment (UKTI), and the latest ONS and Companies House data, Yorkshire has the UK’s highest concentration of medical device companies. Over 200 firms involved within the medical technology industry have a base in Yorkshire, employing some 7,000 staff and producing an output of over £450m. These companies include a large number of medical device firms, particularly within the orthopaedic and medical devices arena, including:

Reckitt Benckiser; www.reckittbenckiser.com•

DePuy International (a Johnson & Johnson company); • www.depuy.com

Smith and Nephew; www.global.smith-nephew.com•

Swann-Morton; www.swann-morton.com•

Tunstall Healthcare; www.tunstall.co.uk•

It is believed that the existing presence of these firms plays a substantial role in the attractiveness of the area for new investments.

It should be noted that there are a number of companies that have originated from and are still based in the region. These include Dawmed Systems, 1st Dental Laboratories, Medical House and Surgical Innovations Group.

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4.1. Where do healthcare technology companies originate from?

The products and services of healthcare technology companies are often based on experience gained by former academics or researchers at R&D departments of technology corporations. The scientific discoveries of academics are usually commercialised through university spin-out companies that acquire the intellectual property rights from the incubator organisation in exchange for an equity stake or the payment of a licensing fee. The same mechanism can also be used for corporate spin-outs. By contrast, start-up companies are often founded by entrepreneurs who have a strong professional background and the necessary scientific expertise to start a new company with a unique selling position.

An analysis of UK-based healthcare technology companies that have received investments over the past two years shows that the majority of companies began as independent start-ups, followed by university spin-outs, spin-outs from non-university research organisations, and corporate spin-outs.

Across the different healthcare technology areas there is a distinct pattern of where healthcare technology companies originate from. For example, pharmaceutical and drug development companies do not usually originate from universities (unlike medical technology companies). Despite this, many entrepreneurs who have started companies have done so with an extensive background in healthcare research within public research organisations or large corporations.

4.2. Is the United Kingdom a good place to attract venture capital investments?

There are many factors that influence the provision of venture capital within a country and all European countries have made a commitment – verbally at least - to improve the conditions surrounding the supply and demand of venture capital. The impact of factors such as the entrepreneurial

Of the different sources of finance available to entrepreneurs venture capital plays only a minor role. To put this in context, of the 1.2m companies in the UK only around 2,000, or 0.16%, have received venture capital investments. However, experts estimate that up to 80% of the fastest growing companies, in terms of both revenue and employment, have received venture capital investment during their life cycle. Most of the world’s biggest healthcare companies including Amgen, Genentech, Biogen and others have at some point received venture capital investments or, like General Electric, Medtronic, Johnson & Johnson and Amgen, have their own venture capital activities that invest into the industry.

Innovation companies often display the following growth pattern as they develop from an initial idea into an established market player. The different stages of growth are often linked to certain types of funding:

The report follows the financing cycle of venture capital backed companies from their foundation to the time when the investors can exit their investments. The different stages of the finance cycle will be presented in the following chapters using the insights gained from both data analysis and interviews with relevant market authorities.

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Figure 9 – Financing lifecycle

Origin of healthcare technology companies Percentage

Independent start-up companies ~50%

Spin-outs from universities 30-40%

Spin-outs from research organisations 5-10%

Corporate spin-outs ~5%

Total 100%

Table 7 - Origin of UK-based healthcare technology companies (Source: EVI, Jan 07 - Nov 08)

4. Thefinancingcycleofhealthcaretechnologycompanies

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4.3. Is this also true for healthcare technology companies?

The healthcare technology venture capital market is the second largest sector behind the information and telecommunications sector. Around 24% of all European deals and 29% of all UK deals are invested into healthcare technology, meaning that nearly every third deal in the UK is healthcare-related.

climate, legal and tax frameworks, a country’s innovative capacity and so forth, on the venture capital market has been discussed extensively elsewhere and is not the subject of this report.18

At the outset an entrepreneur is mostly inflexible regarding the decision of where to locate the company. While spin-out companies often choose an initial location close to their incubator organisation, start-up companies are normally based near to where the entrepreneur lives.

Entrepreneurs who start a company in the UK can benefit from the most active venture capital market in Europe with 29% of all European investments (1,076 deals) and 27% of all disclosed investment (£2.16bn) going into UK-based companies. In terms of deal activity per capita, the United Kingdom is comparable to the United States.19 Between 2007 and 2008 at least 3,600 deals were closed between investors from all over the world and entrepreneurs with European-based companies.

The total disclosed amount invested in the 2,070 recorded deals in the UK was £8bn, meaning a European-based company could secure an average of nearly £3.9m per deal. The average deal size for a UK-based company is, at £2.9m, significantly lower than for companies in the rest of Europe. But this is not necessarily all bad news for national entrepreneurs as the drop in the average value is possibly a result of the higher disclosure rates for smaller venture capital deals in the UK.

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Europe (incl. UK) UK Ratio

All venture capital backed deals

Number of venture capital backed deals 3,668 1,076 29%

Number of investments with disclosed deal amount

2,070 748 36%

Total deal amount (£m) 8,034 2,160 27%

Average investment amount (£m) 3.9 2.9 74%

Table 8 – Overview of European venture capital investments (Source: EVI, Jan 07 - Nov 08)

Figure 10 – Distribution venture capital investments across sectors in Europe in 2007 (based on 1,492 deals) (Source: EVI, 2007)

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In terms of deal size, the UK healthcare technology investment landscape differs significantly from the European landscape where the average deal size is £1m above the UK average. The average deal amount for medical technologies is at the same level in both regions. By contrast, European pharmaceutical deals are on average £2.3m bigger.

In summary, the UK has the biggest healthcare technology investment market in Europe. Entrepreneurs have the opportunity to secure substantial venture capital investments to establish and grow their companies. But before entrepreneurs can expect multi-million pound deals, they have to prove that there is a market for their product or service.

UK dominance within the European healthcare technology sector is indicated by the fact that 35% of all European deals are closed by UK companies.

UK pharmaceutical and drug development companies have received in total over £433m in 161 disclosed deals. The lower average deal size in the UK is a result not only of the higher disclosure rates for small deals, but also because there are fewer deals above £10m compared to other European countries.

A breakdown of the different technology areas shows that ‘pharmaceuticals and drug development’ and ‘medical technologies’ offer almost equal investment opportunities in the UK. In Europe, however, the number of pharmaceutical-related deals is significantly larger than those related to medical technology. This would suggest that the UK has a far greater emphasis upon medical technology.

Europe (incl. UK) UK Ratio

Healthcare technology

sector

Number of venture capital backed deals 886 311 35%

Percentage of all venture capital deals per region 24% 29%

Number of investments with disclosed deal amount 532 161 30%

Total deal amount (£m) 2,106 434 21%

Average investment amount (£m) 4.0 2.7 68%

Table 9 – Overview of European and UK healthcare technology investments (Source: EVI, Jan 07 - Nov 08)

Table 11 – Overview of European healthcare technology investments (Source: EVI, Jan 07 - Nov 08)

Table 10 – Overview of UK healthcare technology investments (Source: EVI, Jan 07 - Nov 08)

UK

Healthcare technology sector

Total Pharmaceuticals & drug development

Medical technologies Others

Total number of investments (disclosed and undisclosed deal amounts)

311 130 113 68


161 64 63 34

Disclosure rate 52% 49% 56% 50%

Total deal amount (£m) 433.61 168.62 168.63 96.36

Average investment amount (£m) 2.69 2.63 2.68 2.83

EuropeHealthcare technology sector

Total Pharmaceuticals & drug development Medical technologies Others

Total number of investments (disclosed and undisclosed deal amounts)

886 462 294 130


532 297 164 71

Disclosure rate 60% 64% 56% 55%

Total deal amount (£m) 2,106.10 1,476.83 472.68 156.59

Average investment amount (£m) 3.96 4.97 2.88 2.21

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4.4. First round investmentsAs stated earlier, entrepreneurs with intellectual property (IP) assets and companies that have proven their technology are in the best position to approach investors such as business angels or institutional seed and early-stage investors. Seed and early-stage funds are often managed by institutional investors and backed by public money in the form of co-investment schemes or fund-of-fund investments. These public initiatives address the so called ‘equity-gap’, which refers to the scarcity of initial investments for early-stage companies up to £1m. The main reasons for the lack of investments of this size is that investing in early-stage businesses is considered to have higher investment risks and proportionally higher transaction costs in the form of due diligence and investment appraisals. Besides a few independent investors, public sector backed funds are primarily tasked with investing into companies that fall in this equity gap. This funding is often used to finalise the proof-of-concept stage and establish a management and legal structure.

First round investments are a good indicator of the state of the healthcare technology market, showing the level of activity among entrepreneurs and investors. A European comparison of first round investments offers good news to entrepreneurs in the UK as it shows that the UK has the highest level of activity:

As noted earlier, entrepreneurs are often reluctant to base their companies outside their own region. This means the regional activity level for first round investments provides interesting insights into both the regional capacity for starting companies and the availability of early-stage investors. In the past two years, there have been a number of early-stage investments into healthcare technologies in Yorkshire & Humber.

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Table 12 – European countries with the most first round venture capital investments into the healthcare technology sector

(Source: EVI, Jan 07 - Nov 08)

Rank CountryNumber of first round

investments

1 GB 71

2 DE 48

3 FR 17

4 SE 18

5 CH 17

Table 13 - Overview of UK first round venture capital investments in healthcare (Source: EVI, Jan 07 - Nov 08)

Figure 11 – Distribution of first round investments in the UK (Source: EVI, Jan 07 - Nov 08)

Rank UK regionNumber of first round

investments

1 South East 14

2 London 12

3 Scotland 11

4 North West 7

5 Yorkshire & Humber 6

6 West Midlands 5

7 East of England 5

8 Wales 3

9 South West 3

10 North East 2

11 East Midlands 2

12 Northern Ireland 1

Total: 71

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close relationships with universities and invest primarily in university spin-out companies.

The good news for entrepreneurs is that nearly eighty different venture capital organisations invested into UK healthcare technology companies over the past two years, although it was common for them to invest solely into a single company. Our research indicates that the right business has the chance to attract international investors like the Novartis Venture Funds, Odlander Fredrikson or Truffle Capital.

4.6. How much capital was invested? Around a third of all healthcare technology deals in Europe are initial capital injections. In a similar manner to overall venture capital investment, as discussed in section 4.3, the average amount invested in the UK is lower (£2.8m) than the average for all European healthcare technology deals (£3.9m). The spread is around £1m per deal across the different healthcare technology areas. However, for pharmaceutical and drug development companies the average investment size is still very high at over £4m per deal. This largely reflects the need to fund pre-clinical trials which are expensive and time consuming before any product can be brought to market.

4.5. Who are the early-stage investors? A European analysis of first round investments shows that institutional investors backed by public money and specialised independent investors play an important role in providing the initial capital injections.

What these very active venture capital organisations all have in common is that they invest within a specific region or at least within their national boundaries. Only a few organisations, like Life Science Partner and BB Biotech Ventures, have undertaken first round investment activity outside their national boundaries.

The analysis of investment activity over the past two years supports a commonly held view that entrepreneurs should focus their search for an initial investor within the borders of the country or region where their venture is located.

A follow-on analysis identified the most active early-stage healthcare technology investors in the UK. The results are similar to the European analysis with public sector backed institutional investors dominating the league tables. Interestingly, two of the independent institutional investors (Imperial Innovations and IP Group) in this league have very

Table 14 – Most active European first rounds investors (Source: EVI, Jan 07 - Nov 08)

Table 15 – Most active UK first round investors (Source: EVI, Jan 07 - Nov 08)

Rank Investor Country Investor type Number of investments

1 High-Tech Gründerfonds DE Public Sector Backed 13

2 Clave Mayor SASGECR ES Institutional Investor 6

2 KFW Bankengruppe DE Public Sector Backed 6

4 SEED Capital Denmark DK Public Sector Backed 5

4 Bayern Kapital (Seedfonds Bayern) DE Public Sector Backed 5

4 Scottish Enterprise Fund GB Institutional Investor 5

Rank Investor Investor type Number of investments

1 Scottish Enterprise Fund Public Sector Backed 5

2 Imperial Innovations Institutional Investor 4

3 Rainbow Seed Fund Public Sector Backed 3

3 NESTA Ventures Public Sector Backed 3

3 Merseyside Special Investment Fund Public Sector Backed 3

3 IP Group Institutional Investor 3

3 Catapult Venture Managers Public Sector Backed 3

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by strong research universities and a substantial capacity for spin-out companies which traditionally receive lower first round investments than independent start-up companies.

4.7. Follow-on investment roundsThe high cash-burn rates of research-based companies means that they immediately have to look for follow-on funding. The next funding round, usually referred to as a Series A round, often involves investment sizes from around £1m up to several million pounds. These investment rounds are often led by recognised national institutional investors while other investors join the deal in a syndicate (syndicated deal). At these relatively early stages in a company’s development, a syndicate of investors often rely upon a lead investor to monitor the company closely and to provide hands-on support while the rest of the syndicate can be located all over world. Consequently, it is rare that overseas investors take the lead in a Series A investment round.

An additional aspect to consider at Series A is that venture capital organisations have become more specialised with a later stage focus. Whereas early-stage investors often invest across different sectors, later-stage investors often have more specialised teams for specific technologies and sectors.

In the UK the average size of a first round investment is up to 50% lower than the European average. However, the disclosure rates are 17% higher, indicating that more deals for smaller amounts have been disclosed. The average deal amount for first round investments into pharmaceutical and drug development companies is, at £2.44m, almost identical to the average investment amount of all deals in this sector, at £2.63m. By contrast, deals into medical technologies and other healthcare technology areas tend to be smaller.

Despite the data indicated in Tables 16 and 17, first round investments can still be large, such as the £33m investment into the Belgium-based drug development company Movetis. Founded in 2006, the company received investments in January 2007 from BIP Investment Partners, GIMV, KBC Private Equity, Life Sciences Partners, Quest for Growth, and Sofinnova Partners. In the UK in 2007, Vantia Therapeutics, benefiting from its position as a spin-out of Ferring Research Ltd, received £19m from MVM, Novo and SV Life Sciences.

A more detailed analysis of Europe and the UK shows that the average deal size in Yorkshire & Humber region is far below the European and UK average. This is probably related to the fact that the Yorkshire & Humber region is characterised

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Europe TotalPharmaceuticals &

drug development


Total number of first round investment (Disclosed and undisclosed deal amounts)

280 118 113 49

Number of first round investments with disclosed deal amount

138 66 54 18

Disclosure Rate 49% 56% 48% 37%

Deal amount of first round investments (£000s) 392,364 268,852 95,933 27,579

Average amount of first round investments (£000s) 2,843 4,074 1,777 1,532

Table 16 - Overview of first round investments in Europe (Source: EVI, Jan 07 - Nov 08)

Table 17 – Overview of first round investments in the UK (Source: EVI, Jan 07 - Nov 08)

UK Total Pharmaceuticals & drug development



71 22 30 19


47 17 22 8

Disclosure Rate 66% 77% 73% 42%

Deal amount of first round investments (£000s) 65,891 41,555 18,716 5,620

Average amount of first round investments (£000s) 1,402 2,444 851 703

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sector-backed investors like High-Tech Gründerfonds, Bayern Kapital (Seedfonds Bayern), Scottish Enterprise Fund and the German state-owned bank KfW.

Investors can also specialise in certain areas within the healthcare technology sector. For example, there is a clear difference between the venture funds that back drug development companies and those that back medical technology companies. The regulatory requirements for new drugs result in a long time-to-market period for new products and the cash requirements for drug development companies are among the highest of all sectors. Although the development of medical technology products is also

4.7.1. European investors in healthcare technology companies

Around 300 institutional investors, corporations and other investment organisations have invested in European healthcare technology companies over the past two years. The majority of them have only participated in one investment (around 200) and a small number have participated in two investments (around 50). Less than 50 investors have participated in more than two investments.

The most active investors are mainly from the UK and Germany, including established institutional investors like Sofinnova Partners and Life Science Partners; and public

Table 18 – Overview of first round investments in Yorkshire & Humber (Source: EVI, Jan 07 - Nov 08)

Table 19 – Most active investors in the European healthcare technology sector (Source: EVI, Jan 07 - Nov 08)

Yorkshire & Humber TotalPharmaceuticals

and drug development



6 2 4 6


4 2 2 0

Disclosure rate 67% 100% 50% n.a.

Deal amount of first round investments (£000s) 1,435 650 785 n.a.

Average amount of first round investments (£000s) 359 325 393 n.a.

Rank Most active investors in healthcare technologies Country Type of investor Number of

investments

1 Scottish Enterprise Fund GB Public Sector Backed 27

2 High-Tech Gründerfonds DE Public Private Backed 26

3 KfW Bankengruppe DE Public Sector Backed 21

4 MIG Fonds DE Institutional Investor 15

5 Sofinnova Partners FR Institutional Investor 14

6 Imperial Innovations GB Institutional Investor 12

6 Catapult Venture Managers GB Public Sector Backed 12

6 Bayern Kapital (Seedfonds Bayern) DE Public Sector Backed 12

9 Atlas Venture GB Institutional Investor 11

9 SEED Capital Denmark DK Institutional Investor 11

9 Life Sciences Partners DE Institutional Investor 11

12 IBG Beteiligungsgesellschaft Sachsen-Anhalt DE Public Sector Backed 10

12 Société Générale Asset Management FR Institutional Investor 10

12 Auriga Partners FR Institutional Investor 10

12 HealthCap Venture Capital SE Institutional Investor 10

12 Novo GB Institutional Investor 10

12 Oxford Technology Management GB Institutional Investor 10

12 NESTA Ventures GB Public Sector Backed 10

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public backed investors like Scottish Enterprise, KfW and the High-Tech Gründerfonds populate both tables, Table 20 indicates that the pharmaceuticals venture capital market is lead by sector specialist Sofinnova Partners, followed by MIG Fonds, Novo, Atlas Venture, Life Science Partners, TVM Capital, Augira Partners and MVM Life Science Partners; all of whom have dedicated life science investment teams.

In terms of medical technology, the picture is more diverse and, as Table 21 shows, public sector backed investors again rank well.

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embedded in a complex regulatory framework, this sector has more similarities to the development of products and services in other non-healthcare related sectors and has a significantly shorter time-to-market. Tables 20 and 21 provide an overview of the most active investors in pharmaceuticals and drug development, and medical technology.

Tables 20 and 21 replicate Tables 14 and 15, highlighting the most active early-stage investors. What is obvious from Table 20 and 21 is the level of specialisation among the investors, particularly in pharmaceuticals and drug development. While

Table 20 – Overview of the most active investors in pharmaceuticals and drug development (Source: EVI, Jan 07 - Nov 08)

Table 21 – Overview of the most active medical technology investors (Source: EVI, Jan 07 - Nov 08)

Rank Most active investors in medical technologies Country Number of investments

1 Scottish Enterprise Fund GB 13

2 High-Tech Gründerfonds Management DE 12

3 NESTA Ventures GB 7

4 KfW Bankengruppe DE 6

4 Bayern Kapital (Seedfonds Bayern) DE 6

4 Imperial Innovations GB 6

4 Wellington Partners Venture Capital DE 6

5 Odlander, Fredrikson & Co(HealthCap Venture Capital) SE 5

5 Oxford Technology Management GB 5

5 OTC Asset Management FR 5

5 Catapult Venture Managers GB 5

5 IP Group GB 5

Rank Most active investors in pharmaceuticals and drug development Country Number of investments

1 Sofinnova Partners FR 14

1 KfW Bankengruppe DE 14

3 MIG Fonds DE 13

4 Scottish Enterprise Fund GB 12

4 High-Tech Gründerfonds Management DE 12

5 Novo GB 10

6 Atlas Venture GB 9

6 Life Sciences Partners DE 9

8 TVM Capital DE 8

8 SEED Capital Denmark DK 8

8 Auriga Partners FR 8

8 MVM Life Science Partners GB 8

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Table 22 – Overview biggest European healthcare technology investments (Source: EVI, Jan 07 - Nov 08)

Date Company RegionDeal

amount (£000s)

Sector Investors Investment round

Nov-2008Ganymed Pharmaceuticals

Germany Rheinland-Pfalz

54,820Pharmaceuticals & Drug Development

ATS Beteiligungsverwaltung; Future Capital; MIG Fonds

Venture Funding 5

Jan-2007 NovexelFrance Seine-St-Denis


3i Group; Abingworth Management; Atlas Venture LLP; BIT; Edmond de Rothschild Investment Partners; Goldman Sachs Capital Partners; NIF SMBC Ventures; Neomed Management; Novo; Sofinnova Partners

Venture Funding 2

May-2008 Pharma Swiss Slovenia 27,883Pharmaceuticals & Drug Development

Enterprise Investors Venture Funding 2

Feb-2007immatics biotechnologies

Germany Baden-Wuerttemberg


3i Group; BC Brandenburg Capital; DH Capital Gmbh & Co KG; EMBL Ventures; Grazia Equity Gmbh; KfW Bankengruppe; L-EigenkapitalAgentur (L-EA); Landeskreditbank Baden-Wuerttemberg-Foerderbank; Merifin Capital; National Technology Enterprises Company; OH Beteiligungen GmbH und Co. KG; Vinci Capital; Wellington Partners Venture Capital

Venture Funding 3

May-2007 Noxxon PharmaGermany Berlin


AVIDA Group; DEWB; Dieckell Vermoegensverwaltung und Beratungsgesellschaft mbH; Dow CVC; Edmond de Rothschild Investment Partners; IBB Beteiligungsgesellschaft mbH; IBG Beteiligungsgesellschaft Sachsen-Anhalt mbH; Medical Strategy; Seventure Partners; Sofinnova Partners; TVM Capital Gmbh; Undisclosed Institutional Investors

Venture Funding 4

June-2008 ApatechUnited Kingdom East of England

23,096Medical Technologies

3i Group; HealthCor Partners Venture Funding 5

April-2007Ganymed Pharmaceuticals

Germany Rheinland-Pfalz


Private investor(s); ATS Beteiligungsverwaltung; Future Capital; Ingro Finanz; Landesbank Baden-Wuerttemberg KfW Mittelstandsbank; MIG Fonds; Nextech Venture Lp; ONC Partners; VI Partners AG (Venture Incubator); Varuma

Venture Funding 3

April-2008 ApogenixGermany Baden-Wuerttemberg


Undisclosed; dievini Hopp BioTech holding GmbH & Co KG

Venture Funding 2

Dec-2007Fovea Pharmaceuticals

France Paris


Abingworth Management; Crédit Agricole Private Equity; Forbion; GIMV; Sofinnova Partners; Wellcome Trust

Venture Funding 2

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4.7.3. Top deals in the UKThe UK has not seen as many big investments as some other European countries over the past two years. The majority of big investments went into German companies (ten), followed by French companies (eight). Swiss companies received the same number of investments as UK companies (six).

Within the UK, five of the six biggest deals were closed by companies in the South East and one in the East of England.

During the same period, there were three investments into drug development companies based in Yorkshire & Humber (Table 24).

4.7.2. Top deals in EuropeThe league table of the biggest deals (over £20m), as shown in Table 22, in the European healthcare sector is dominated, as expected, by companies active in the pharmaceuticals and drug development area. The largest investments were closed by the German-based Ganymed Pharmaceuticals, with a £54.8m investment in November 2007 and a £22.8m investment in April 2007. It is also noted that these syndicated later-stage deals involve several investors, with some of them joining as new investors while others participated in earlier financing rounds.

Only one investment went into a medical technologies company which, incidentally, is also the only UK later-stage investment in the league table. Germany, however, had five investments in total (as mentioned before, two belonging to Ganymed) and two from France and one from Slovenia. Out of the 45 biggest investments in Europe, only six investments were made into UK-based companies.

Table 23 – Overview biggest UK venture capital investments (Source: EVI, Jan 07 - Nov 08)

Table 24 – Overview of the biggest investments in Yorkshire & Humber (Source: EVI, Jan 07 - Nov 08)

Rank Date Company RegionDeal

Amount (£000s)

Sector Investors Investment round

9 June-2008 ApatechUnited Kingdom

East of England23,096 Medical Technologies 3i Group; HealthCor Partners Venture Funding 5

14 Oct-2007Oxford Immunotec

United Kingdom

South East19,478 Medical Technologies

Clarus Ventures; DFJ Esprit; Wellington Partners Venture Capital

Venture Funding 3

15 Mar-2008Vantia Therapeutics

United Kingdom

South East19,000

Pharmaceuticals & Drug Development

MVM; Novo; SV Life Sciences Venture Funding 1

19 Mar-2008 PanGeneticsUnited Kingdom

East of England17,618


ABN AMRO Capital; Biogen Idec New Ventures; Credit Agricole Indosuez Private Equity; Edmond de Rothschild Investment Partners; Fortis Private Equity NV (Fagus NV); Index Ventures

Venture Funding 3

24 Oct-2007 SyntaxinUnited Kingdom South East


Abingworth Management; Johnson & Johnson Development Corporation; Life Sciences Partners; Quest for Growth; SR One

Venture Funding 2

45 Jan-2008Circassia Holdings

United Kingdom South East


Goldman Sachs Capital Partners; Imperial Innovations; Invesco Perpetual; Lansdowne Capital

Venture Funding 2

Rank Date Company Region Deal Amount (£000s)

53 Nov-2007 Neoss Yorkshire & Humber 10,000

88 Dec-2007 Photopharmica Holdings Yorkshire & Humber 6,000

157 Jan-2008 Tissue Regenix Yorkshire & Humber 3,000

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Similar to measuring early-stage investment activity, the attractiveness of a region for later-stage investments is analysed by comparing the investment activity across different regions. But unlike early-stage investments, later-stage venture capital organisations invest internationally. International comparisons can be made by scaling the investment activity by, for example, ‘per capita’ or ‘all companies’. This, however, has some methodological disadvantages due to the different sizes and industrial structure of the European countries. Another way is ti compare one region to another. One advantage of this is that the comparison happens within the same industry. To avoid a bias, Yorkshire & Humber was compared to other regions in the two main European economies Germany and France. In Germany the ‘states’ and in France the ‘regions’ have a similar structure and function as the UK ‘regions’.

The table shows that Yorkshire & Humber is well placed and directly follows the major and most well-known European biotech regions in the UK and Germany, and on the same level as Paris and the populous German state of Nord-Rhine Westphalia which contains cities like Cologne, Düsseldorf, Essen, and Dortmund.

5.1. The investment landscape in Yorkshire & Humber

The following section considers the venture capital industry in Yorkshire & Humber. In recent years, an interesting blend of university spin-outs and start-up companies were financed by a variety of regional, national and international investors.

This analysis is based on data released into the public domain mainly through the companies or investors themselves. The report provides a comprehensive picture of the region’s investment landscape by presenting the financing cycle of local companies as well as regional investors and their investment history.

5.1.1. The origin of companies in the regionAs previously noted, universities play an important role in creating promising technology-based companies. University spin-out companies provide excellent investment opportunities for regional, national and international investors. A basic factor for the creation and quality of university spin-out companies is the extent and quality of the underlying research embedded in the university’s

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Table 25 – Overview of the number of deals in different European regions (Source: EVI, Jan 07 - Nov 08)

researchers and students and their means to study and undertake research. Therefore it is important to look into the innovative capacity and the technology transfer activities of the universities in the region.

5. The attractiveness of Yorkshire & Humber

Rank Location Deals Investments

1United Kingdom South East

41 138,418

2United Kingdom Scotland

33 22,037

3United Kingdom London

32 35,985

4Germany Bavaria

30 80,649

5United Kingdom East of England

26 89,712

6United Kingdom North West

22 25,305

7Germany Baden-Wuerttemberg

16 95,506

8United Kingdom Yorkshire & Humber

15 22,570

8Germany North Rhine-Westphalia

15 13,061

8France Paris

15 87,028

11United Kingdom Wales

10 6,926

11United Kingdom East Midlands

10 4,940

11Germany Thueringen

10 6,028

14United Kingdom West Midlands

9 2,620

14United Kingdom South West

9 17,420

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2006, Fusion IP entered a partnership with a £10m side fund from Nikko Principal Investments Ltd that is “exclusively available to invest in our existing and future portfolio companies.” 23

IP Group Plc• core business is the commercialisation of intellectual property originating from research intensive institutions. The company was founded in 2001 and also provides management of venture funds focusing on early-stage technology companies and the in-licensing of drug related intellectual property from research intensive institutions.

All the three major universities in the region have entered agreements with partners to commercialise their intellectual property. These partners can supply experts to provide advice and also have the capital to back these companies.

The University of York and the University of Leeds have entered into an agreement with IP Group Plc, while the University of Sheffield cooperates with Fusion IP:

a) University of York

The agreement between the IP Group Plc with the University of York started in 2003 with the Centre for Novel Agricultural Products. In March 2006 the agreement was extended to cover the entire university.

In the field of healthcare technologies, IP Group and the University of York have spun-out Bioniqs Ltd which has developed unique expertise in ionic liquids that can facilitate and improve bio-chemical and bio-catalytic processes that are difficult to undertake using conventional technologies.

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The local universities strongly contribute to the regional healthcare technology landscape through their knowledge and technology transfer activities. Eleven universities are represented by Yorkshire Universities,20 the regional higher education association for the region.

The two biggest universities by total income and by research income are the University of Leeds and the University of Sheffield. Both universities are members of The Russell Group22 and count for 69% of the region’s research income and 44% of the total income.

Different opinions exist regarding the capacity of universities to engage in knowledge and technology transfer activities. One opinion is that universities should have a research income in excess of £20m to produce sufficient research output to run a technology transfer office. However, smaller universities can also have substantial knowledge and technology transfer activities. In such cases it might be useful to collaborate across universities or with external partners.

The big three universities in the region work with external partners, predominantly IP commercialisation companies who support them in the commercialisation of the intellectual property created in the university to provide the best service for their entrepreneurial academics. The most active organisations in Yorkshire & Humber are two public-quoted companies, IP Group and Fusion IP:

Fusion IP Plc• (formerly known as Biofusion Plc) commercialises intellectual property that is developed at universities and similar establishments. In March

Total income (£m) Total research income (£m)

Total income from research grants and

contracts (£m)

Recurrent research income from funding

council grants (£m)

The University of Leeds 422,334 136,804 90,794 46,010

The University of Sheffield 338,706 127,300 84,556 42,744

The University of York 188,339 66,588 43,748 22,840

The University of Bradford 105,689 16,569 9,762 6,807

The University of Hull 127,372 15,299 9,296 6,003

Sheffield Hallam University 177,249 13,829 10,014 3,815

The University of Huddersfield 102,276 3,134 1,702 1,432

Leeds Metropolitan University 146,006 2,921 2,432 489

The University of Lincoln 71,652 1,416 1,162 254

York St John University 33,273 87 37 50

Total: 1,712,896 383,947 253,503 130,444

Table 26 - Overview of universities located in Yorkshire & Humber (excl. Open University) (Source: Yorkshire Universities and HESA) 21

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a) University of Leeds

Photopharmica (Holdings) Ltd • (2001) develops novel photosensitisers as products for medical use and has opened up new applications of topical photodynamic therapy. As of June 2008 the company was valued at £26m with the IP Group holding a 49.9% stake; www.photopharmica.com

Tissue Regenix Ltd • (2006) is leveraging innovative tissue engineering platform technologies to develop and commercialise cellular tissue; www.tissueregenix.com

b) UniversityofSheffield

Asterion Ltd• (2001) owns novel, patented therapeutic platform technologies to generate and develop long-acting biopharmaceutical products; www.asterion.co.uk

Adjuvantix Ltd• (1999) is an early-stage biopharmaceutical company focused on the development of rational means to effectively and safely enhance the immune response to prophylactic and therapeutic vaccines; www.adjuvantix.com

b) University of Leeds

In 2002 the University of Leeds outsourced its commercialisation activities as one of the first UK universities to the Techtran Group. In 2005 Techtran Group was acquired by IP Group.

c) UniversityofSheffield

In 2005 the University of Sheffield signed an exclusive ten year agreement with Fusion IP, focusing on biosciences and commercialising all of university’s medical IP. In July 2008 the agreement was expanded into an exclusive agreement that allows Fusion IP to commercialise all of the university’s IP.

5.1.2. Venture capital backed university spin-outs in the healthcare technology sector

Many of the university spin-out companies in Yorkshire & Humber have received initial seed and early-stage investment or even further-stage investments. Most of the healthcare technology university spin-out companies originated from one of the three major research universities:

Company OriginDisclosed

investments (£000s)

Investors

Absynth University of Sheffield 325 Fusion IP

Adjuvantix University of Sheffield 857 Fusion IP and WRTSF

Asterion University of Sheffield 1,000 Fusion IP and WRTSF

Cizzle Biotechnology University of York 1,070The Viking Fund, WRTSF, Yorkshire Cancer Research

Diurnal University of Sheffield 221 Fusion IP

Imagel University of York 280 IP Group

Lifestyle Choices University of Sheffield 221 Fusion IP

Medella Therapeutics University of Sheffield 320 Fusion IP

Paraytec University of York 845 Viking Fund & Co-Investors; YFM Group

Phase Focus University of Sheffield 1,050 Fusion IP, Viking Fund and WRTSF

Photopharmica Holdings University of Leeds 15,750 IP Group, WRTSF

Pro-Cure Therapeutics University of York 2,950WRTSF, Aberdeen Asset Management, Yorkshire Cancer Research

Tissue Regenix University of Leeds 4,105IP Group, Aquarius Equity Partners, Ora Capital, WRTSF

Xceleron University of York 5,270 Close Ventures, Foursome

Zilico University of Sheffield Undiscl. Viking Fund & Co-Investors

Table 27 – Selected venture capital backed healthcare technology spin-out companies in Yorkshire & Humber (Source: EVI, Jan 07 - Nov 08)

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Imagel Ltd• (2006) offers a full 3D dosimetry and imaging solution for radiotherapy planning; www.imagel.co.uk

Paraytec Ltd • (2005) is designing, developing and manufacturing ultra-violet area imaging detectors which can be used with simple micro-syringes and/or existing separations hardware including capillary electrophoresis systems, nano- and capillary LC systems to enable high sensitivity across a wide dynamic range without sacrificing spatial resolution. The company was a finalist in the BioEntrepreneurial Company of the Year Award and received a Pittcon R&D 100 Award in 2007 for its product ActiPix™ D100 detector; www.paraytec.com

Pro-Cure Therapeutics Ltd• (2001) is researching for new therapeutic drugs for the treatment of prostate cancer; www.pro-curetherapeutics.com

Xceleron• (1996) is one of the longest active spin-outs in the region. The company has raised over £4m in funding and is focused on human microdosing; www.xceleron.com

5.1.3. Independent healthcare technology start-upsOther companies have been started independently from universities or research organisations, for example:

Activ4Life Healthcare Technologies Ltd• is offering improved, cost-reduced clinical results by providing patient activity monitoring, predictive modelling and management to inform clinical decision-making; www.a4lhealth.com

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Zilico Ltd• (2006), formerly Aperio Diagnostics Ltd, is a medical diagnostics company pioneering new technologies that will allow swifter, more accurate detection of cervical cancer and pre-cancerous conditions; www.zilico.co.uk

Phase Focus Ltd • (2006) is developing an alternative approach to microscopy; www.phasefocus.co.uk

Absynth Ltd• (2007) is developing vaccines and antibodies to treat infections caused by the bacterium Staphylococcus Aureus (S. Aureus) including its more difficult-to-treat drug-resistant form, methicillin-resistant S. Aureus (MRSA); www.absynthbiologics.co.uk

Medella Ltd • (2007) focuses on the use of monoclonal antibodies to inhibit the action of Adrenomedullin a molecule found in 80% of cancer cells; www.medellatherapeutics.co.uk

Diurnal Ltd • (2004) is a pharmaceutical company that creates therapeutics using advanced proprietary formulations and novel physiological treatment regimes of approved drugs for use in the endocrine (hormone) area; www.diurnal.co.uk

Lifestyle Choices• (2005) launched its first product, a new triple hormone ovarian reserve test called Plan Ahead in 2006; www.planaheadtest.com/index.php

c) University of YorkCizzle Biotechnology Ltd• (2005) is focused on the development of novel Ciz1-targeted therapeutic products and related diagnostics for lung cancer; www.cizzlebiotechnology.co.uk

Healthcare technology company Foundation Helthcare technology

sectorDisclosed deal

amount (£000s) Investors

Activ4Life Healthcare Technologies

2007 Medical Technologies 125 SYIF and YHEF

Kirkstall 2000Pharmaceuticals & Drug Development

379 SYIF, Viking Fund, Business Angels

Neoss 2000 Medical Technologies 18,000MMC Ventures, Delta Partners and Medtronic Inc

Pharmacy 2U 1999 Health Care Services 5,000EPIC VCT, Abstract Group and other institutional investors

Platform Diagnostics 2002 Medical Technologies 1,044Enterprise Ventures Ltd, North West Equity Fund, BBI Holdings Plc and Carclo Plc

Rostra UK 2005 Health Care Services 250Coalfileds Enterprise Fund (Enterprise Ventures), Private Investors

Tissuemed 1985 Medical Technologies 11,110YFM, Rensburg VCT, 3i, Granville Baird Capital Partners, Friends Ivory & Sime, SCIPrivate Equity, Capital for Companies

Table 28 – Selected venture capital backed healthcare technology start-ups in Yorkshire & Humber (Source: EVI, Jan 07 - Nov 08)

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majority of seed and early-stage investments into the local university spin-out and start-up companies:

1. South Yorkshire Investment Fund (SYIF); www.syif.com

2. Viking Fund; www.vikingfund.co.uk

3. White Rose Technology Seedcorn Fund (WRTSF); www.whiteroseseedcorn.com

4. Yorkshire & Humber Equity Fund (YHEF); www.yhef.co.uk

5. Fusion IP; www.fusionip.co.uk

6. IP Group; www.ipgroupplc.com/ipo

South Yorkshire Investment Funds (SYIF) is a venture capital and loan fund tasked with investing in small and medium sized (SME) businesses in South Yorkshire who struggle to secure finance for growth through the traditional banking system or from other lenders. SYIF was established in 2001 and has invested almost £50m in 500 investments in South Yorkshire businesses. SYIF can provide seedcorn, loan and equity-linked investments, ranging from £15k to £2.5m. The fund’s investors are the European Regional Development Fund and Yorkshire Forward.

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Kirkstall Ltd• is developing toxicity screening products to be used by the pharmaceutical and cosmetic industries that will reduce the need for animal testing; www.kirkstall.org

Pharmacy 2U Ltd• founded internet pharmacy in the UK in 1999 and is now the country’s largest dedicated internet and mail order pharmacy; www.pharmacy2u.co.uk

Platform Diagnostics Ltd• is creating and developing platform technologies for the In-Vitro diagnostics industry; www.platform-diagnostics.com

Rostra UK Ltd• is providing solutions to National Health Service patients for the treatment of symptomatic varicose veins; www.rostrauk.com

Tissuemed Ltd• is researching, developing and manufacturing proprietary polymers and films for use as surgical sealants; www.tissuemed.com

5.2. Investors in Yorkshire & HumberThe venture capital invested into these companies originates from a variety of investors. The region benefits from six local venture capital organisations which were involved in the

Figure 12 – Location of venture capital backed companies in Yorkshire (Source: L.I. Group, Dec 2008)

Lowest concentration of companies

Highest concentration of companies

Location of VC backed companies

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investments of between £2m and £10m in UK unquoted companies; www.nvm.co.uk

Partnership Investment Finance• is a £37m fund for Yorkshire, The Humber, and North Lincolnshire which has been established to enable small and medium sized businesses (SMEs) and social enterprises access to funding by way of equity or loan finance; www.partnershipif.co.uk

The region also benefits from business angel networks, for example

The Viking Club• is an investment club for high net worth individuals interested in making investments of between £5,000 and £200,000 in early-stage businesses with a technology bias and potential for high growth; www.vikingclub.co.uk

Yorkshire Association of Business Angels• (YABA) is a regional forum for business angels; www.yaba.org.uk

Funding local businesses

The South Yorkshire Investment Fund, Viking Fund, White Rose Technology Seedcorn Fund and the Yorkshire & Humber Equity fund are all public sector backed funds. These funds normally invest over a limited time period until they have invested their available capital. They are often managed by external managers, as in the case of the WRTSF and YHEF. The latter announced in July 2008 that the fund has reached the end of its investment period and no new investments will be made.24

Andrew Burton, the Viking Fund’s managing director stated in an interview in December last year: “We want to continue the Viking experience. We think we have made a big difference and our portfolio has got a lot of value. Our plans are to raise another fund or another small series of funds to replace the £5m Viking Fund that we’re almost at the end of investing in now.”25

The SYIF is better placed having received a £7m funding boost from Yorkshire Forward in January 2009.26

With two active funds, one with fundraising plans, several business angel initiatives and the university partnerships, it is clear that the region offers a variety of equity financing sources to local entrepreneurs.

As of December 2008, Yorkshire Forward announced a new £120m fund to be used to support the growth of small and medium-sized businesses in the Yorkshire & Humberside region starting late 2009. The aim of the investment is to ensure that these growing businesses can gain access to the support needed to ensure that they become successful businesses.

The Viking Fund is a co-investment venture capital fund, specialised in providing finance for early-stage technology companies in Yorkshire. The fund received £5m under the BERR/Small Business Service’s Early Growth Fund scheme and provides early-stage finance to match investments by business angels or other private sector investors. In the past three years, the Viking Fund has invested in more than 48 rounds in 23 companies, totalling £3.4m, plus an additional £4.6m in match funding from other investors. The Viking Fund has invested in the Yorkshire-based healthcare companies Phase Focus Ltd, Zilico Ltd, Paraytec Ltd and the AIM listed Syntopix Plc.

The White Rose Technology Seedcorn Fund (WRTSF) is an early-stage seedcorn fund managed by Aberdeen Assets Managers, which invests in technology emerging from the Universities of York, Leeds and Sheffield. The £9m Fund provides venture capital funding of up to £500,000. The fund was founded in 1999 with £4.5m from the Government’s University Challenge Competition (the Office of Science and Technology, the Wellcome Trust and the Gatsby Foundation) and a further £1.5m from the White Rose Universities (Leeds, Sheffield and York). The Fund received another £3m from Yorkshire Forward in June 2002. The fund has invested in at least 19 spin-out companies from the three universities.

The Yorkshire & Humber Equity Fund (YHEF) is one of nine English Regional Venture Capital Funds. YHEF was founded in 2002 to provide venture capital to SME companies based in Yorkshire & Humber and it is managed by YFM Venture Finance Ltd.

The IP Group and Fusion IP were presented in an earlier chapter.

Other investors with strong regional links include for example:

Aquarius Partners• is a venture capital fund manager based in Manchester; www.aquariusequity.com

Enterprise Ventures• provides venture capital and private equity to high growth unquoted companies throughout the North of England and the Midlands regions and manages several different funds that invest in regional companies; www.enterprise-ventures.co.uk

Key Capital Partners• is focused on the equity gap, making equity investments of between £1 million and £10 million in profitable, growing companies; www.keycapitalpartners.co.uk

Nothern Venture Managers• is an independent private equity businesses focussed on making equity

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In the area of medical equipment two companies are quoted on the London Stock Exchange:

Surgical Innovations Group Plc• specialises in the design and manufacture of innovative devices for use in minimally invasive surgery and industrial markets. The Group’s medical division is focused on strong international growth in two specialist areas namely minimally invasive surgery, where its products are used in ‘keyhole’ (laparoscopic) surgery and products for autologous blood transfusion (whereby a patient’s own blood is recycled).

Dawmed Systems Plc• main activity is designing, developing, manufacturing, selling, distributing, testing and servicing washer-disinfectors and washer-disinfector-dyers for the primary and secondary healthcare sectors.

b) Acquired companies

A recently exited company, Axordia Ltd (founded in 2004), developed a human embryonic stem cell (hESC) technology platform. According to the Fusion IP website the company has received £661k in exchange of a shareholding up to 49%. In December 2008 the company was acquired by Intercytex Plc. At this point Fusion IP had a 64.1% shareholding in Axordia, and in return for the company they received a 4.78% shareholding in the enlarged Intercytex. The closing price of Intercytex ordinary shares on 19 December 2008 was £0.24, valuing Fusion IP’s holding in Intercytex at £1.1m27 and valuing Axordia at 1.68m.28

c) Investment successes by engagement of corporate investors

Large corporations also invest in early-stage companies. Investments of this nature give corporates visibility on emerging technologies that in the future could either be disruptive or value-adding to the corporation.

For example, after several rounds of investments from local investors, Platform Diagnostics Ltd received investment from two corporations, BBI Holdings Plc and Carclo Plc. According to the company’s website, the company undertook these investments with a view to commercialising its innovative technology.29

Furthermore, entrepreneurs have the opportunity to raise capital from any other national or international investors and have done so recently. The start-up company Neoss Ltd has raised over $20m since its first investment in 2003 from investors outside the region. In January 2009 the company announced its latest investment round of $5.5m. The company’s main investors are MMC Ventures (UK), Delta Partners (UK) and Medtronic Inc (US).

5.3. Venture capital investment successes

An entrepreneur who plans to raise money from venture capital organisations needs to have a plan in place that shows how potential investors can make a suitable return (exit). This exit can be released trough selling the company to another investor (secondary), another company (acquisition) or going public (initial public offering).

The following section provides an overview of successful venture capital exits in the Yorkshire & Humber area:

a) Public-quoted healthcare technology companies

The partnership between Techtran Group/IP Group and the University of Leeds has already resulted in university spin-out companies that are now publicly-quoted:

Avacta Group Plc• (formerly known as Readybuy Plc) is researching, developing and producing rapid response detection devices for the biopharmaceutical, homeland security and defence, and clinical diagnostics markets. The company was founded in 2004, went public in August 2006 at the AIM of the London Stock Exchange (LSE), and has a market cap of £17.5m in late 2008 .

Syntopix Group Plc• was founded in 2003 and was quoted on the AIM in March 2006. The company was backed by TechTran Group (now: IP Group), the Viking Fund, White Rose Technology Seedcorn Fund and Business Angels. The main activity is researching, discovering and developing drugs for the topical treatment of common dermatological diseases, currently focusing on acne and superficial Staphylococcus Aureus infections. The current market capitalisation is £6.36m.

These examples show that it is possible to develop university spin-out companies into larger companies within a reasonable time frame. However, it should be noted that Avacta Group Plc and Syntopix Group Plc were floated at the IPO peak in 2006. IPOs in 2009/2010 are unlikely to reach such values. (Note: the median market-cap for all public-quoted biotechnology and pharmaceuticals companies on the LSE (Main Market and AIM) is around £15m as of December 2008).

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Future market trends within venture capital can be divided into two separate areas, technological trends and financial trends.

A recent survey in 2008 showed that 84% of all CEOs in pharmaceuticals and the life sciences are confident that their companies will increase their revenues in the upcoming year.32 The CEOs regarded innovation as the best way to keep their competitive edge. With leaders such as this, the future of the healthcare technology market should be in safe hands.

In line with these expectations are the profit increases announced by the likes of Abbott Laboratories, whose profits rose by 28% last financial year, and by Johnson & Johnson, whose profits climbed by 14% in the fourth-quarter of 2008 alone.

Technology TrendsSome of the key trends within the healthcare technologies industry include areas such as nano-biotechnology, stem cells and ophthalmology.

Miniaturisation and nano-biotechnology

Although this area has been a focus for investors for some time, there is still a lot of interest in new approaches to drug delivery and dosing systems and the miniaturisation of medical products and drugs. As a result, a new sub-area has emerged, referred to as nanotechnology. Nanotechnology firms produce products off the base of nanotechnology platforms. The development of these platforms occurs predominantly in small innovation-based companies, which require early-stage capital investment to finance their research and development. Investments into this area has already resulted in a number successful exits, attracting further interest into this sub-sector by the venture capital investment community.

Stem Cells

Stem cell research, and in particular the use of human-sourced stem cells, is a controversial topic, and debate still remains regarding the ethical implications of using human embryonic stem cells. Despite this there have been a number of commercial successes in this area. For example, Geron, an American drug development company that is developing human embryonic stem cell-based (hESC) therapies has, in a landmark case, received FDA clearance to begin the world’s first human clinical trial of an hESC therapy. www.geron.com

A similar Spanish company called Cellerix, which was founded in 2004 has developed innovative treatments based on cell therapy and is leading the development of a new generation of treatments using expanded adult stem cells. Since 2007, the company has raised over £30m in venture capital, including a €27.2m series B financing round in 2007 plus a £10m venture loan in 2008; www.cellerix.com

In the UK ReInnervate, a Durham University spin-out company, whose work is predominantly in the field of stem cell biology and developmental neuroscience, recently closed a funding round of £750k; www.reinnervate.com

Ophthalmology

Although the area of ophthalmology has received much less media attention than stem cells, this has not hindered it from receiving a noted amount of venture capital interest. For example, the French company, Novagali Pharma, who develop innovative products for all segments of the eye has raised over €44m in venture capital since the company’s foundation in 2000 (www.novagali.com). Other examples include the Swiss-based Sensimed (£3.5m, Series A, www.sensimed.ch) and Cambridge-based Altacor; www.altacor-pharma.com

Standardisation – or smaller, cheaper, better

Attractive propositions to any investor, especially within the field of medical technology, are companies that can manufacture standardised products to a high quality at a more competitive price. These types of companies are interesting to potential investors’ because they address large markets.

An example of this is the French company Implanet, which has received €13m in an initial financing round from a Franco-German investment consortium led by Auriga Capital, Edmond de Rothschild Investment Partners and Wellington Partners (www.implanet.com).

Other similar companies include, ILIAS-medical, which is backed by Sirius Venture Fund and the High-Tech Gründerfonds and is currently developing the world’s smallest artificial lung (www.ilias-medical.de) as well as PharmaSet, a French company, which develops cheap disposable surgical devices for the medical industry (www.pharmaset.com).

Imaging and Software

Imaging technologies have become one of the most interesting medical technology areas of investment lately.

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company is developing an enzyme replacement therapy for Morbus Morquio, a rare lysosomal storage disease; www.vivendy.ch

Zymenex (Denmark) is engaged in developing pharmaceutical products to treat rare, serious, genetic diseases, for which there is no treatment available today; www.zymenex.com

Financial TrendsCost advantage in medical technologies

Companies in the medical technologies sector benefit from several advantages. Firstly, compared to traditional drug development activities, medical technologies require shorter time periods to develop a product and take it to market, resulting in lower costs for research and development. It also appears that Europe has some inter-regional cost advantages compared to the United States. In many European countries it is significantly cheaper to develop medical technology products from an idea to a marketable product.

Ongoing M&A activity

The recent acquisition of Wyeth by Pfizer shows that healthcare technology companies are looking for opportunities to improve their innovative capacity. Many corporations have large cash reserves and are highly liquid, allowing them to make strategic acquisitions.

Acquisitions of innovative companies play an important strategic role in strengthening a corporation’s innovative capacity. Although the majority of acquisition targets tend to be larger and more established companies, early-stage venture capital backed companies are also in the focus of these large acquirers. In the current climate, companies (corporations and SMEs) with strong cash positions will have the opportunity to acquire companies that are in testing financial positions hence have lower valuations and in doing so acquiring companies will strengthen their own product pipeline and market position. Such behaviour has a subsequent downstream impact on universities and SMEs. Corporations that scout universities and research organisations to find new approaches and technologies help academics, inventors and future entrepreneurs to gain first-hand experience with the industry.

While the trend to outsource R&D has already started, the current financial crisis will put additional pressure on companies to keep activities off the balance sheet

In the last two years, forty companies whose activities lie in this region have received investment. Coupled with the advances in hardware, there have also been substantial developments in software applications, primarily related with Computed Tomography (CT) and Magnetic Resonance Imaging (MRI) as well as other areas where graphical data processing is important. Another area where software is playing an ever important role is in the area of computer-assisted planning of therapies and surgeries.

One of the most publicised imaging companies of late is the Paris-based Biospace Med which was founded by Nobel Prize winner Georges Charpak to provide researchers in biology with innovative imaging tools based on his discoveries in high-energy physics and particle detection. www.biospacemed.com

The 2007 funded Visiopharm (Denmark) is a specialist in image analysis software for the life-sciences, including hardware integration, automation, and quality inspection. www.visiopharm.com

Surgix, an Israeli-based company is developing a visual-based system for image guided surgery primarily focused on orthopaedic trauma, was awarded the Ernest and Young Entrepreneur of the Year in Israel in 2006. www.surgix-med.com

Personalised medicine and focussing on smaller patient groups

An industry that is proving to be of interest to investors is the growing idea of personalised medication, allowing customised treatments to be developed rapidly for individual or small groups of people with special or incurable ailments. A lot of this drug development work has been carried out within the Oxbridge region as well as the large medical focused clusters of Switzerland and Denmark.

Horizon Discovery (Cambridge, UK) is aiming to provide drug discovery researchers with tools that accelerate the search for new and more effective ‘targeted’ or ‘personalised’ drugs; www.horizondiscovery.com

Oxford Nanopore Technologies (Oxford, UK) a company backed with more than £32m of venture capital is developing a technology for label-free molecular detection and analysis, with potential applications in DNA sequencing, diagnostics, drug development and defence; www.nanoporetech.com

Vivendy Therapeutics based in Switzerland was founded in March 2006, a spin-out of Inotech Biotechnologies AG, and closed a financing round of nearly £20m in 2008. The

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by broadening its risk profile. While larger acquisitions dominate the press, the management teams of corporations emphasise that they are also interested in smaller companies. For example Abbott Laboratories, which has $4bn in available cash, announced in January 2009 that it is looking to buy companies both in pharmaceutical and non-pharmaceutical sectors to take advantage of the heavily discounted company valuations that are now on offer33, both in the venture capital and healthcare technology market. Recent market activity has indicated that companies in the medical technologies sector have valuations of EBITDA-multiples starting from 8, whilst those in the pharmaceutical sector have multiples of around 10-14.34

Given the economic downturn and despite the fact that corporations are still active in acquisitions, there are a number of disadvantages for early-staged innovation companies to consider.

The acquisition and consolidation activity among the larger corporations means that there will be less investment through acquisition for early-stage healthcare technology companies. Therefore the number of companies available for licensing deals, as corporate investors, or even as buyers will decrease resulting in the continued downward pressure.

Moreover, the large acquisitions may also result in subsequently longer periods of inactivity whilst the two

and maintain flexibility. This will result in interesting opportunities for smaller companies, particularly in the area of research services.

Over the past two years more than fifty venture capital backed healthcare companies have been acquired. The acquirers not only include all of the internationally recognised corporations but also many smaller and medium sized companies as well. Some of which are themselves venture capital backed.

The largest disclosed acquisitions of venture capital backed healthcare technology companies over £20m were completed by pharmaceutical corporations. Table 29 confirms that the UK and Germany are strong in producing successful drug development companies that go on to be acquired by large pharmaceutical companies. Not unsuprisingly, the price paid for medical technology companies is lower than drug development companies.

When it comes to acquisitions, different acquirers have different strategic agendas. For example, some companies try to strengthen their product pipeline by buying companies with similar products or services, while other companies try to build a broader product pipeline with acquisitions into new areas outside their current product portfolio. Johnson & Johnson’s acquisition strategy is to build a broad and varied portfolio of drugs, medical devices and diagnostic tests so as to try and shield itself against any economic downturns

Table 29 – Biggest acquisitions of healthcare technology companies (Source: EVI, Jan 07 - Nov 08)

Date Company Sector Region Deal amount (£000s) Acquirer

2008 Direvo BiotechPharmaceuticals & Drug Development

DE 166,710 Bayer HealthCare

2007Alantos Pharmaceuticals


DE 150,557 Amgen

2008 U3 PharmaPharmaceuticals & Drug Development

DE 119,311 Daiichi Sankyo

2008 PIramedPharmaceuticals & Drug Development

GB 81,087 Roche

2007 Arrow TherapeuticsPharmaceuticals & Drug Development

GB 76,412 AstraZeneca

2007 BiolipoxPharmaceuticals & Drug Development

SE 65,502 Orexo Pharmaceuticals

2007 Precimed Group Medical Technologies CH 60,561 Greatbatch

2007 etkon Medical Technologies DE 51,808 Institut Straumann

2007 Endoart Medical Technologies CH 49,653 Allergan

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In addition to these developments, in these the difficult economic time investors are increasingly focusing on their existing portfolio as opposed to scouting for new investment opportunities. As many of their portfolio companies will have lower revenues than was forecasted at the time of the investment, additional funding will be required to keep the portfolio companies alive.

As venture capital supply is inelastic this will, as described above, increase the demand for seed and early-stage capital supplied by other sources. In particular, entrepreneurs will be increasingly looking to local business angels and public sector backed funds for investments

The first signs for this development are found in, for example, former entrepreneurs and business angels who are already attracted to the manifold investment opportunities. A recent example is the venture capital organisation QureInvest, which invested up to €5m in companies in order to develop them to a stage where they become interesting for licensing deals. The first company benefiting from such an investment is the CT Atlantic AG (Zurich, Switzerland); www.ct-atlantic.com. The investment should help the company to reach a stage where they can look for a licensing deal instead of follow-on investments.

Another spin-out from Zurich University is Neurimmune Therapeutics (www.neurimmune.com) which showed that it is possible to enter into licensing deals when the company is at an early stage. Neurimmune Therapeutics signed a deal with Biogen Idec worth up to £30m. Drug development companies are especially suited to this business model where the presentation of promising data increases the likelihood of attracting venture capital investment and of benefiting from future licensing agreements. Overall, licensing agreements can offer some early-stage companies an excellent funding alternative when venture capital options are scarce.

corporations consolidate their product portfolios before they again go out looking for other interesting investment opportunities.

Focus on later stage deals and orientation towards licensing deals

There appears to be a trend towards later stage deals, which has its origins in several recent developments. Over the past few years several investors in healthcare technology companies have built strong reputations, which has placed them in a strong position to raise bigger funds. For example, Abingworth has closed a £382m life science fund in 2008 and TVM Capital manages €240m in their latest Life Science Ventures VI. These bigger funds have been raised to focus on later stage, larger multi-million investment pound rounds. Smaller rounds are increasingly less interesting due to the relatively high transaction costs.

Why is there a focus on later stage deals more prevalent?

Firstly, the crash of the venture capital market at the beginning of this century made entry for new investors more difficult. Investors that would normally start by investing in early-stage deals before progressing to larger deals are now in short supply.

Secondly, early stage investors with smaller investments often suffer from dilution in follow-on investment rounds and often have only limited capital to participate in the follow-on investments. In particular, drug development companies require several investment rounds before they can be exited.

Thirdly, many investors have become more risk-averse focussing on more proven technologies or services embedded in later stage companies.

The report shows the important role of the healthcare technology venture market in European and the UK. Healthcare technologies and related services attract around one-third of all venture capital investments made in Europe. Besides being the leading venture capital market in Europe, the UK benefits from a strong corporate and research base in this sector which is contributing over 50% of all venture capital backed companies; and strong networks across universities, technology transfer offices, service providers, entrepreneurs, SMEs and corporates.

This can also be seen in the Yorkshire & Humber region where several spin-out companies originated from strong research universities and a network regional investors and service providers helps spin-out and start-up companies to secure their funding. However, this region will feel the squeeze in the venture capital market and needs concentrated efforts to ensure that the regional companies are in the best position to survive the current climate and can grow so much more under improved market conditions. But this also requires ongoing support for research and development in research organisations and corporates to develop marketable ideas, which is necessary to keep the competitive advantage of UK in the healthcare technology sector.

34


Acknowledgements

We would like to thank everyone who has contributed to this report, particularly the Access to Finance for Healthcare Technologies consortium for their sponsorship and the following organisations that supplied data and provided insight in one-on-one interviews for use in this report:

3i, London (UK)•

Abcam, Cambridge (UK)•

Abingworth Life Science Investments, London (UK)•

Bradford Bioscience Business Incubator, Bradford (UK)•

CorporateInformation.com, Milford (US)•

Eucomed, Brussels (Belgium)•

Fusion IP (Sheffield)•

Grant Thornton, London and Yorkshire & Humber regional offices(UK)•

Higher Education Funding Council England, London (UK)•

Higher Education Statistics Agency, Cheltenham (UK)•

Imperial Innovation, London (UK)•

IP Group (UK)•

Leeds Innovation Centre and Bioincubator (UK)•

Leeds Met University (UK)•

Library House, Cambridge (UK)•

London Stock Exchange, London (UK)•

Longbow Capital, London (UK)•

Medilink, Sheffield (UK)•

Science City York, York (UK)•

Techtran Group, Leeds (UK)•

University of Huddersfield (UK)•

University of Hull (UK)•

University of Leeds (UK)•

University of Sheffield (UK)•

University of York (UK)•

Viking Fund, Normanton (UK)•

York Incubator, York (UK)•

Yorkshire Concept Fund, Leeds (UK)•

Yorkshire Connect (UK)•

And all the other undisclosed companies and investors ...•

35

Disclaimer Information about the venture capital market is constantly changing. Reasons for this include new disclosure of past investments, new available insights into the structure of investments, changes in the methodology and definition among others reasons. Therefore any future report might publish alternative figures on venture capital investments in Europe to this report. However, the L.I. Group claims to provide an accurate picture based on the information currently available.All information used in the publication of this report has been compiled from sources that are believed to be reliable. Reasonable steps have been taken to ensure that no errors or inaccurate descriptions arise, but this cannot be guaranteed and the report does not purport to contain all information that recipients may require. Opinions contained in this report represent those of L.I. Group at the time of publication. Neither L.I. Group, nor any of its founders, employees, agents or advisers makes any express or implied report or warranty, and no responsibility or liability is accepted by any of them, with respect to any errors or omissions in this report or any other information supplied at any time to or on behalf of the recipient, or with respect to the fairness, adequacy, accuracy or completeness of the information in this report, including without limitation the reasonableness of the projections, forecasts, estimates or any associated assumptions contained in it, or any information otherwise supplied at any time to the recipient.

The value of investments can fall as well as rise and can be subject to large and sudden swings. In addition, it may be difficult or impossible to buy, sell, or obtain accurate information about the value of, companies or investments mentioned in this report. Past performance is not necessarily a guide to future performance.

This report does not form part of any contract and is provided for information purposes only. It is not, and is not part of, an invitation or inducement to buy, sell, subscribe for, or underwrite any investments and shall not be construed as such. Any recipient of this report who intends to acquire shares or securities in any company which is the subject of this report shall make such acquisition solely on the basis of its own assessment and investigations. The L.I. Group shall not be liable to any recipient of this report for any decision made or action taken in reliance on information in this report. Except as disclosed in the report, L.I. Group does not hold any positions in companies mentioned in this report but may perform services or solicit business from companies mentioned. L.I. Group’s founders, officers, employees, agents and members may have a position in any such companies or in related investments. L.I. Group does not provide regulated investment services, and is not authorised to do so. Nothing in this report shall be taken to constitute advice or recommendations on transactions in investments, or any other regulated investment service.

Copyright

© 2009 L.I. Group. All rights reserved. This report or any part of it (including its words, graphics and layout) must not be copied, printed, scanned, stored, communicated to the public or otherwise reproduced, distributed or made available in any way whatsoever, including by electronic means, and whether directly or indirectly, without the prior written permission of L.I. Group.

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Endnotes

1 For the period January 2007 to November 2008

2 HE-BCI Survey 2006-2007

3 HE-BCI Survey 2006-2007

4 Joseph P. Newhouse, “Medical Care Costs: How Much Welfare Loss?”, Journal of Economic Perspectives 6(3 Summer 1992): 3-21.

5 Technical Review Panel on the Medicare Trustees Reports, Review of Assumptions and Methods of the Medicare Trustees’ Financial Projections (December 2000), www.cms.hhs.gov/ReportsTrustFunds/02_TechnicalPanelReports.asp#TopOfPage

6 Richard A. Rettig, “Medical Innovation Duels Cost Containment,” Health Affairs (Summer 1994): 15.

7 Productivity Commission, Australian Government, Impacts of Advances in Medical Technology in Australia, August 31, 2005, Melbourne, Australia

8 Federal Food, Drug, and Cosmetic Act (2001).

9 IMS Health, MIDAS, MAT.

10 Yorkshire Forward, Healthcare Technology Industries: Mapping Study 2006.

11 This includes Biotechnologically based procedures or developments, especially the more medically and organism based “Red Biotechnology” sector.

12 Source: Sami Hamade - Developing medical technologies, presentation.

13 American Heart Association and the National Heart, Lung, and Blood Institute.

14 Eucomed, 2008, www.eucomed.org

15 McKinsey, (Internal Docment), 2008.

16 The Outlook for Medical Devices in Western Europe.

17 Eucomed, 2008, www.eucomed.org

18 EVCA: Benchmarking Study 2008; Kortum S. and Lerner J.: Does Venture Capital Spur Innovation?, NBER Working Paper No. 6846.

19 For a comparison of the venture capital investment activity in the UK and the US see the forthcoming report from the Council of Science and Technology: Corporate Venture Activity in the UK.

20 www.yorkshireuniversities.ac.uk

21 www.yorkshireuniversities.ac.uk/unis.php

22 www.russellgroup.ac.uk

23 www.fusionip.co.uk/OurPartners/NikkoNPIVenturesLtd

24 www.yhef.co.uk

25 www.yorkshirepost.co.uk/businessnews/Young-firms-that-welcome-a.4823985.jp

26 www.syif.com/news/news271.asp

27 www.fusionip.co.uk/News/Axordia+Sale.htm?p=1

28 www.intercytex.com/icx/news/releases/2008/2008-12-22

29 www.platform-diagnostics.com/about-overview.htm

30 www.kirkstall.org

31 The University of Sheffield: U-Inspire – Knowledge Transfer Newsletter, Issue 4, Summer 2008, p12.

32 PWC: 11th Annual Global CEO Survey 2008. Pharmaceutical and Life Science Summary.

33 www.bloomberg.com/apps/news?pid=20601203&sid=a5VZKJLMOfkY&refer=insurance

34 Interview with Kai Ingo Seidel from Close Bothers in Going Public, Special Issue 11/2008, page 26-27.

35 Transkript 2009 (Vol. 15), Nr. 1-2, p.6.

37

Abbreviations

AIM – Alternative Investment Market

CAG – Compound Annual Growth

CEO – Chief Executive Officer

DTI – Department of Trade and Industry

EBITA – earnings before interest, taxes and amortisation

EVI – European Venture Intelligence

FDA – Food and Drug Administration

GDP – Gross Domestic Product

GNP – Gross National Product

HE-BCI Survey – Higher education-business and community interaction survey

hESC – human embryonic stem cell

IP – Intellectual property

IPO – Initial Public Offering

KfW – Kreditanstalt für Wiederaufbau

LSE – London Stock Exchange

Ltd – Limited

M&A – Mergers & Acquisitions

OECD – Organisation for Economic Co-operation and Development

ONS – Office for National Statistics

Plc – Public limited company

R&D – Research and Development

SYIF – South Yorkshire Investment Funds

UKTI – UK Trade and Investment

WHO – World Health Organisation

WRSTF – White Rose Technology Seedcorn Fund

YABA – Yorkshire Association of Business Angels

YHEF – Yorkshire & Humber Equity Fund

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Grant Thornton is a leading business and financial adviser, delivering unparalleled service standards and tailor-made solutions to over 40,000 corporate and individual clients. It is the UK member of Grant Thornton International, one of the world’s leading international organisations of independently owned and managed accounting and consulting firms.

Quotec is a technology and innovation strategy consultancy that utilises a wide network of technology and market experts to assist industry and the public sector in technology commercialisation and knowledge transfer. In the area of health technology Quotec develops and manages industrial innovation programmes for the UK Department of Health. These include the Small Business Research Initiative and other elements of the Invention for Innovation (i4i) programme. Quotec also works directly with health companies large and small on technology development and exploitation. It provides help and support for many small technology based companies seeking investment finance.

BITECIC provides specialist R&D services to support organisations aiming to take new concepts through to market in all areas of healthcare and medical device technology. Drawing on expertise from a world-class team of business, clinical and research personnel, BITECIC applies its regional knowledge to developing and managing the local, national and international collaborations that will add value to its customers.

NOTES

L.I. GroupSt. John’s Innovation CentreCowley RoadCambridgeCB4 0WSUnited [email protected]

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