Market Insights Life Sciences

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1 Market Insights Life Sciences Key Facts Scotland hosts the UK s second largest life sciences cluster and one of the most sizeable in Europe. The life sciences sector contributes 3.1 billion turnover and 1.5 billion GVA to the Scottish economy (2008 figures). The Scottish life sciences sector has an ambitious plan for growth: By 2020, the industry s mission is to double the economic contribution made by Scotland s life sciences sector, increasing turnover to 6.2 billion and Gross Value Added (GVA) to 3 billion. The two largest life science subsectors are medical technologies (this includes diagnostics) and pharmaceutical services. Scotland is home to over 140 medical technology (including diagnostics) companies that collectively generate around a third of the life sciences sector turnover. This business sector has grown at around 13% (CAGR from ) which is more than twice the sector average (6%). Large medical technology companies in Scotland include Axis Shield (soon to be acquired by Alere), LifeScan Scotland and Ethicon (a Johnson & Johnson company). Scotland has an established network of over 50 pharmaceutical clinical trial support and research organisations that undertake both pre-clinical as well as clinical activities. Five of the world s top 10 Contract Research Organisations are based in Scotland: Quintiles, PPD, Charles River Laboratories, INC Research and Aptuit. The majority of Scotland s core life sciences organisations focus on human healthcare, including drug discovery and development, diagnostics, medical devices, and contract research services. However, significant expertise is also resident in animal health, agriculture and environmental technologies that will be influential in addressing future markets around sustainability and the low carbon environment. Why is the Life Science sector important for Scotland? Life sciences in Scotland is a diverse and flourishing sector with significant strengths across the academic and business base. The life sciences sector contributes 3.1 billion turnover and 1.5 billion GVA to the Scottish economy. There are over 640 life science organisations employing more than 32,500 people. (2008 Figures) Scotland is home to the second largest life science cluster in the UK & one of the most sizable clusters in Europe, with a significant international presence including Charles River Laboratories, Life Technologies, GSK, Johnson & Johnson, Pfizer Inc., Millipore (now Merck KGaA), and ClinTec. Scotland has internationally recognised capabilities across life sciences including: translational medicine, stem cell and regenerative medicine, contract research, medical technologies, drug discovery and development, and bioinformatics. Edinburgh BioQuarter is a landmark life sciences real estate development which will establish Edinburgh and Scotland as one of the world s top ten centres for biomedical commercialisation. Located alongside the new Royal Infirmary of Edinburgh across a large greenfield site, BioQuarter is a major public and private sector collaboration offering unrivalled opportunities for life sciences companies looking for world-class facilities. 1

2 Sector Update In the face of a large number of patent expiries, and the lack of new proprietary drugs to replace the lost revenue stream, the pharmaceuticals industry is undergoing global restructuring. The industry is consolidating quickly, outsourcing more of its R&D activities and is searching externally for innovation. As a consequence, both opportunities and threats arise for Scotland: The downsizing threatens the footprint of multinational subsidiaries in Scotland (e.g. loss of Merck at Newhouse) but creates opportunities for forging new early-stage collaborations with our world-leading medical researchers (as evidenced by two recent GSK deals, see below) and Scottish contract research organisation. Globally, there continues to be substantial merger and acquisition activity across the life sciences sector. The downturn in the public equity markets and lack of access to funding makes many companies vulnerable to aggressive takeover bids. Equally it affords more stable companies an opportunity to consolidate their position of strength. Scottish companies are equally vulnerable to acquisition by international companies, an example being Kendle s acquisition by INC Research and Axis-Shield s by Alere. Despite current economic conditions, the outlook within Scotland s life science sector remains positive, with a number of companies looking to expand facilities and take on new staff (e.g. GSK s potential expansion of facilities in Scotland) and several reports of increased company turnover (e.g. Optos, Omega Diagnostics). Many parts of the industry are experiencing pressure on product prices, increased regulation (e.g. FDA regulation of medical devices) reduced public healthcare budgets, an increasing demand to provide evidence of the cost-benefit of new products to purchasers. This is a particular challenge for Scotland where companies continue to struggle to get products tested and adopted by the NHS, their major local market. Scotland has proven success in creating life science start up companies with one of the highest numbers of start ups per capita in the UK (UK Life Science Start-up Report 2010, Mobius Life Sciences) but the challenge remains to support growth of our smaller businesses into high growth firms and sustainable companies of scale. Life science companies continue to seek investment with a number of companies currently looking to raise funds. As global markets are largely closed to new IPOs, VCs cannot exit from their investments and so struggle to free up equity to support new starts. The lack of fluidity in the VC market will continue to be a problem until some optimism and stability in global markets returns. Of concern, VC funds are shifting away from life sciences into investments in technology (e.g. social media and healthcare services) where faster returns are possible. Many early stage businesses and those seeking following-on funding report that securing investment whether from private sources or from banks is becoming increasingly challenging. A key area of focus for SE is to address the investment gap and to attract a VC firm that specialises in LS investments to Scotland. For the future we can foresee the emergence of new market opportunities as healthcare will be challenged by the needs of the ageing population, the rapid rise of chronic hardto-manage diseases such as diabetes and obesity, and the need for more judicious and cost-effective therapy that better addresses an individual s disease (i.e. stratified medicine). Life sciences also finds applications in products and services outside of human health: biotechnology finds application in animal breeding, nutrition and health, the development of new crops, biofuel production, and the creation of novel materials to name but a few. Here collaborations between life sciences companies and those from other sectors (e.g. food and drink, textiles, energy) will become increasingly important. 2

3 Recent News As a testament to the excellence of Scottish medical research, GlaxoSmithKline has forged two (of only 10 globally) Discovery Partnerships with Academia Initiatives with Scottish Universities, o One of Scotland s flagship science parks has signed a deal with GlaxoSmithKline (GSK) to develop new medicines to treat acute pancreatitis. It is Edinburgh BioQuarter s first major contract with a major player in the pharmaceuticals industry. Under the terms of the arrangement, biologists from Edinburgh University will develop the medicines with GSK scientists. o In July, GSK entered into an agreement with the University of Dundee to discover and develop new medicines to treat a rare and debilitating skin disorders Recessive Dystrophic Epidermolysis Bullosa (RDEB). o Separately TPP Global (a drug development company) raised 9.6 million and has (over the past 12 months) forged collaborations with the University of Dundee s Drug Discovery Unit, the University of Aberdeen and University of Edinburgh. Aircraft Medical, has signed an exclusive agreement with Covidien, a leading global provider of healthcare products. Under the terms of the deal, Covidien will distribute and sell Aircraft s latest product the revolutionary low-cost McGRATH MAC video laryngoscope in the US, UK, Japan, Latin America, Australia and New Zealand. Glasgow-based clinical research organisation, ClinTec International, has won a Queen's Award for Enterprise certificate. ClinTec, a full service contract clinical research organisation, was granted the award in recognition of its substantial growth in overseas revenue and commercial success. The company has established operations in over 40 countries across 5 continents and is recognised as a specialist in delivering excellence in clinical research within both established and emerging markets. Touch Bionics, developer of the world s first commercially available bionic hand, raised 2.5 million to fund expansion of its Livingston-based business. Retinal imaging company Optos acquired the eye testing instrumentation division of the US-based Opko Health for 11 million. Medical diagnostics company Axis-Shield, based in Dundee, is to be acquired by US company Alere for 235 million further strengthening the In Vitro Diagnostics cluster in Scotland. International Update Recent export performance has been positive. The number of companies looking to export has increased this year, with companies starting to look further afield to markets such as China and Japan, where there is a growing demand for western medicine. Tradition Chinese Medicine (TCM) is still the default health treatment for the majority of the Chinese population, however western medicine s reputation for quality is becoming more attractive to the growing and more affluent middle class population. There is apprehension among some about moving into these markets due to lack of information on available opportunities and companies perception of the difficulties in entering these markets. In an attempt to overcome this SDI have carried out market research into the potential opportunities available within the Chinese life science market. (See below for further details) There is growing demand in the Middle East, with medical technology (covering diagnostics and medical devices) a particular area of interest. SDI have been attending a number of key events (trades shows and partnering conferences) to promote Scottish life sciences, such as BioEurope, Medica, AdvaMed 3

4 and have reported an increase in participation from Scottish companies at key events this year. The low value of sterling is providing some advantage for sales of existing products, however many new life science projects tend to be over the longer term. Therefore companies have to consider what would happen should it rise again and factor this into their decision making process to take account of potential future costs. In terms of barriers to export, there is a real need for investment so that companies can scale up and take advantage of export opportunities. Also many Scottish life science companies require assistance around international marketing and sales. There are also potential future opportunities developing in several new areas, such as Wellness, Assisted Living, Stratified Medicine and Sustainability. In terms of inward investment, there are a reasonable number of potential prospects, considering economic conditions and limited finance for investment. The majority of investment is coming from existing investors, looking at expansion within Scotland. However there are also several new small investors looking at Scotland to gain a European base and tap into Scotland s academic strengths. SDI has had positive feedback on Scotland life sciences proposition, with the lead proposition areas including Edinburgh BioQuarter, Stem Cells, Regenerative Medicine and Translation Medicine. The challenge for SDI here is to better understand companies expansion plans to match these opportunities with Scotland s capabilities. SDI life sciences team continues with its targeted approach to secure an anchor tenant for the Edinburgh BioQuarter and there has been recent interest from a number of stem cell related companies. Scotland main competitors in terms of attracting inward investment include other major UK clusters, Germany, France and Denmark. In terms of lower cost manufacturing locations, Scotland faces competition from Eastern Europe and Asia. International Focus The Chinese Life Science Market China s life science industry has experienced significant growth over recent years, driven by the Chinese government s efforts to simplify regulations, enhance trade relations and develop investor friendly policies aimed at stimulating foreign direct investment. The Chinese life science market is large, complex and diverse and the cultural difference encountered when conducting business in China makes it a difficult market to enter. However, there are thought to be significant opportunities for those Scottish companies that have a differentiated product or service and the right market entry strategy. Opportunities Then main export opportunities are for medical devices and diagnostics. A number of Scottish companies have successfully launched medical devices into the Chinese market. Branding is a key determinant of success in the Chinese medical devices market and foreign medical devices are attractive to the rising Chinese middle class population due to their reputation for quality. Also a strong brand profile can also help to provide a good defence against cheaper copy-cat products. Hospitals are the main care provider that Scottish firms would be selling into either directly or through a national distributor. The hospital supply market is intensely competitive, opportunities for Scottish firms are mainly in the larger hospitals that have a broader range of medical equipment and larger budgets. 4

5 The Chinese pharmaceuticals industry has demonstrated strong growth in recent years, as well as prescription pharmaceuticals there has also been a massive growth in over the counter brands as more Chinese consumers move towards self-medication through retail pharmacies. There are also a number of potential inward investment opportunities for Scotland. For instance collaboration with Chinese university research teams could attract additional research finding into Scotland. Also by attracting investment through the increasing number of global Chinese companies who will seek a European base to expand their international presence There is also the potential opportunity to access the Chinese risk capital market by establishing deeper relationships with Chinese venture capitalists and investment groups. Challenges The current level of healthcare investment by the Chinese Government is unsustainable and eventually costs will have to be cut. Companies that can establish themselves during this boom time will be in a much better position to compete in a cost-constrained environment. China is thought to be relatively weak at protecting IP and there are a number of cheaper copy-cat products. Key to overcoming these problems is having a high quality product and developing strong brand recognition. Scottish CRO companies could face a serious threat from the leading Chinese CRO s who can offer significant discounts and faster turnaround times due to the staffing advantages they possess. In the past Western companies could reply on their higher quality service as a competitive edge, but this may become more of an issue due to the skill-drain of returnees back to China from the US and Europe. Strategy & Economics November