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Hybrid funds could boost the life sciences sector

Private sector investors are being turned off from industries such as pharmaceuticals. Picture: AP

Private sector investors are being turned off from industries such as pharmaceuticals. Picture: AP

  • by Neil McInnes
 

It has been recently documented, both by the UK government and press, that Scotland’s life sciences sector is facing an increasing challenge when it comes to gathering investor support.

It appears private sector investors are being turned off from industries such as pharmaceuticals and biotechnology in favour of areas such as ICT or renewable energy due to fear of risk and complex regulatory processes.

Meanwhile, specialist life sciences investors are also moving away from early stage investing and refocusing on less risky medical devices or contract service sectors. Those that do remain committed to drug development are largely focussed on drugs that are already in clinics.

So, how can Scotland’s developing life sciences sector, which employs 32,000 people directly and indirectly and contributes around £1.3 billion gross value added to the economy, avoid being stifled by the cautionary approach still adopted by many investors?

One of the most promising steps towards a solution is the hybrid funds investment model, which I believe is already playing a significant role in moving things forward.

This model suggests that if the private sector, rightly or wrongly, is actively deciding not to invest in this space, the public sector must intervene.

This idea has already been rolled out in a number of countries, including Scotland with the establishment of Epidarex Capital (formerly Rockspring Ventures). This is a £50 million fund with around half the money coming from various public sector bodies.

These hybrid funds are essentially committed monies that are handed over to specialist investors for investment in the local sector following clearly defined parameters such as size of company, type of technology, date by which the money must be spent and the investment amount.

Due to the way hybrid funds are set up there is no risk that the money will be diverted into alternative opportunities. The public contribution also provides the fundamental “security factor” to private investors.

It is still early days, but I am confident that this type of model, working alongside other financial institutions, could begin to help the funding challenges facing Scotland’s early stage life sciences companies.

• Neil McInnes is advisory director at Grant Thornton UK LLP, Scotland

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