This post was written by Ros Deegan, CBO of Bicycle Therapeutics, as part of the From The Trenches feature of LifeSciVC

When I first moved from the UK to the US, I told my parents that there was more biotech VC investment in Cambridge, MA each quarter than there was in the whole of the UK in a year. Since then, my mother has been cutting ‘biotech is booming’ articles out of British newspapers to tempt me ‘home’. This stack of press clippings reflects the UK’s intention to become the ‘third global biotech cluster,’ which highlights the reality that aside from the top two clusters in Boston and San Francisco, the US looks a lot like Europe (as discussed by Bruce Booth in ‘The Inescapable Gravity of Biotech’s Key Clusters’). The heat of the biotech ecosystem in these coastal cities is gathering talent, science and investment from cooler areas (including overseas) in a twister phenomenon that currently shows no signs of abating. However, just as the global weather pattern is changing, climate change indicators are visible on the horizon in biotech.

Temperatures Rising

Traveling from New England to old England in the summer of 2018 was a strange experience. Britain’s ‘green and pleasant land’ was dusty and brown. On the other side of the English Channel, the mercury topped 110 degrees Farhenheit in Spain and Portugal.  Roads melted, train tracks buckled and gorillas in French zoos received emergency banana ice cubes. It was hot, hot, hot in Europe…and European biotech was no exception.

During the first half of 2018, European therapeutics firms raised $3,904 million, dwarfing the $2,302 million raised during the equivalent period in 2017 (itself a record year for private biotech financings). In the space of just three business days in the usually ‘quiet’ month of August, we saw Orchard, Artios and Theracon raise a combined total of $294 million. In the same 72 hours, Astellas bought the UK ophthalmology company, Quethera for over $100 million. I have identified three changes in European biotech financings that I expect to continue the positive impact of Europe, and in particular the UK, on the global biotech scene.

1. Concentration of capital. While no match for the top decile of US companies in 2017, the average private financing for the top decile of European company was a sizeable $74 million, more than twice the US average. This suggests that investors are concentrating their investment in ‘big idea’ companies that have the potential to become European bellwethers. At my company, Bicycle Therapeutics, we benefitted from the third largest UK private financing in 2017 and are using this investment to move multiple programs forward across three core oncology platforms.
2. Transitional cash. Most of Europe’s private capital has historically been deployed in early-stage financings, which can leave companies dependent on suboptimal deal terms or poorly timed public financings as they take on the significant costs of clinical development. Two recent fund launches will help to bridge this gap: the $340m Sofinnova Crossover fund and the $300m Medicxi Growth fund.
3. Global demand for European innovation. Each of the top European venture rounds in 2017 attracted at least one US-based investor and four of the top ten also included money from Asia (Bicycle’s Series B included investment from Europe, US and Singapore). In addition, many leading European biotech companies are accessing public capital in the US. Nearly all the largest follow-on transaction and IPOs in the first half of 2018 occurred on Nasdaq.

I expect the temperature to keep rising in European biotech (and in ex-European biotech founded on European innovation) thanks to the quality and productivity of its science base. The UK may only input 2.7% of global expenditure on R&D, yet it is home to nine of the top 100 universities, 15% of the most highly cited publications, and nearly 10% of the world’s science and engineering downloads. Britain also boasts the second highest number of Nobel Laureates. And it was Bicycle’s founding British scientist, Sir Greg Winter, who discovered the technology currently used in most monoclonal antibodies, the backbone of the biotech industry. I anticipate, however, that European success will continue to be dependent on the US. The US acts as a source of talent, capital and exit opportunities in addition to providing the major market for pharmaceutical products.

Brexit will, of course, deliver a lightning strike to European biotech, particularly in the UK. Yet even here the signs suggest that Britain will either maintain a close relationship with the EU (to the benefit or both) or exit without a deal but adopting most of Europe’s healthcare regulations.  To see the real storm in global biotech, we must look further east.

A storm is brewing

While Europeans sweltered in near record heat, Beijing experienced its worst rainfall in 60 years. In South China, flooding led to over a million evacuations. From a global biotech perspective, China is kicking up a storm that has started to impact countries beyond its borders.

The Chinese government is committed to developing biotechnology in China. The latest five-year plan stipulates that the biotechnology sector should exceed 4% of gross domestic product by 2020. It is estimated that more than $100 billion has already been invested by state, provincial and local governments to hit this goal. Public money is being combined with significant private capital as Chinese investors look to diversify their portfolios away from property and manufacturing to create a rich (valuations might suggest too ‘rich’) environment for innovation. The recent vaccine scandal combined with trade tarifs have dampened some of the enthusiasm, however, capital is still plentiful and is outpacing quality demand. This has triggered inflated prices and encouraged some Chinese investors to seek better opportunities outside their borders. But capital flows both ways: China-based companies such as BeiGene, Zai Labs and WuXi Biologics all enjoyed successful public listings in the US. Added to this are the newly changed listing requirements for the Hong Kong Exchange.

Scott Gottlieb, head of the FDA, was interviewed by Reuters in 2017 about China’s impact on pharma/biotech and said, “I think it’s going to be a long transition…we built up an ecosystem in this country over decades and decades.” While I agree that we work in an industry with long lifecycles and China is starting from a low base at an estimated 4 percent of global drug innovation in 2016, the pace at which change occurs here should not be underestimated. During my first trip to Beijing in 2002, I struggled to use the maps in my just-published guidebook because entire hutongs had been erased, re-built or relocated in the month since the book went to press. There are also three tailwinds that make me think that China’s global impact will continue to increase at pace:

1. Talent. A combination of hype, start-up biotech companies willing to pay top dollar, and government initiatives such as the Thousand Talents Plan (financial incentives for both returning Chinese and foreign-born scientists, academics and entrepreneurs) are building up the talent pool. At least seven senior bankers and analysts from top-tier securities firms have quit their posts in Asia since the end of 2017 to join local biotech firms. Multinational drug companies in China are also fighting to hold on to top talent, with senior executives from AstraZeneca, GlaxoSmithKline, Johnson & Johnson and Pfizer switching to Chinese companies in recent months. The question is whether this growth in talent can keep pace with new company formation and whether the skillsets on offer are appropriate to fulfil the requisite C-suite vacancies.
2. Unmet local need and regulatory change. There are significant unmet medical needs in China, particularly in cancer, neurology and diabetes. In addition, the country has a rapidly aging population and a growing middle class. Although China is the world’s second largest pharmaceutical market (after the US), some of the most effective modern medicines are not yet on sale. In January, Nature reported that of the 42 cancer drugs approved globally in the past five years, only four were available in China. This, however, is old news. Recent regulatory changes allow clinical data generated outside China to be useable towards an NDA in-country. In early August, China released a list of 48 drugs already approved in the US, EU or Japan that could be eligible for priority review in China and two of the oncology drugs on the list (Alecensa and Lynparza) were approved before the end of the month. The fact that fruquintinib, being developed by Eli Lilly and Hutchison China MediTech Ltd recently received approval in China significantly ahead of its anticipated US approval is another indicator of the growing importance of the Chinese market. This burgeoning market opportunity combined with pre-revenue listing options on the Hong Kong exchange and the possibility of a local M&A market give all the ingredients for US-independent exit opportunities. We are not there yet but this is a tantalising mix for investors.
3. Scientific impact. The average citation rate per paper in China is double what it was a decade ago. Historically, China has secured a strong showing in global research just from the massive scale of its research inputs and the increasing impact scores highlight the growth potential to come.

Winds of change

Putting aside China and Europe, I believe that we will also see changes in the US in the next decade. Using the tech industry as a model, we should expect to see other biotech centres emerge alongside Boston and San Francisco as we reach a point of diminishing return to the benefit of concentration. Google, Facebook and other large tech companies have recently opened offices in places like Boulder, Colorado in response to changing employee needs. (A recent survey by Edelman indicated that 58% of Bay Area Millennials were considering moving away.) There is a point where the commute, the competition and the cost of living push people to new locales. This raises a question as to whether we should proactively decide where to build the next ‘supercluster’ instead of doubling down on Boston and San Francisco?

Forecasting ahead

My vacation destination in 2018 was Iceland during its worst summer for 100 years – an impact of the same weather system that was burning Britain. And as money and science become increasingly global, there will also be winners and losers in biotech.

Every good weather report ends with a forecast and so here are my three predictions for the top ten global biotech clusters in 2029:

1. Shanghai will challenge for second place
2. The gap between San Francisco and Boston and other US clusters will narrow
3. My mother will continue to send me press clippings as the UK retains a top 5 position

With thanks to Kevin Lee, Carolyn Ng and Jacques Police for reading drafts of this blog post.