Take $8.5 billion? No. Take $10 billion? No. Gilead, last month bidding against itself, paid $11.9 billion to acquire Kite Pharmaceuticals.
I am sad. Not because I was one of the funds who sold short Kite (and 18% of outstanding shares were short; for the record, you can see my firm held 0.75m shares of Kite on 31 June 2017). But because Kite may have developed into a $40bn, maybe $100bn, market capitalisation company over time, and now we will never know.
Kite Pharmaceuticals is a small US biopharmaceutical company focused on cancer therapies and CAR-T (chimeric antigen receptors T-Cell) technology. As of January 2017, Kite had a market capitalisation of $3bn and it had its IPO in 2014. Gilead had to raise its bid several times before Kite’s board succumbed. The boards and shareholders of smaller companies such as Kite are unlikely to be able to resist cashing out to dollar-rich, large drug makers. Gilead’s management indicated limited value was attributed to CAR-T success in solid tumors or Kite’s earlier stage technology.
This trend is intriguing as it suggests that the new creation of large biopharmaceutical companies organically from small ones may never happen again. Certainly, it seems unlikely that the UK will create another bio-pharmaceutical powerhouse such as GlaxoSmithKline or AstraZeneca. The US might still establish a new one.
The reasons are threefold: the UK has under-invested and continues to under-invest in science; the network effect where scientists creatively clash to form new ideas is diminished in the UK, and, as I described earlier, large, cash-rich global biopharma companies are now in the habit of acquiring their smaller peers before they grow large.
This has negative long-term implications for UK science and private wealth creation. Private company inventions often rely on publicly-funded ideas. Investors speak of the Chomsky trade, after Noam Chomsky, which suggest if you want to know what’s worth investing in, look at what US federal research funding organisations, like DARPA or the National Institutes of Health (NIH), are investing in today, and then go long. DARPA—the Defense Advanced Research Projects Agency— was established in the late 1950s to accelerate development of U.S. satellite technology. Research at DARPA led to a number of breakthroughs, including GPS technology and the Internet. The inventions at Kite were based on ideas first formed by Dr Steven Rosenberg at the NIH. Kite fits the Chomsky trade.
Sir John Bell recognised this value in his Life Sciences: Industrial Strategy report for the UK government (August 2017, green paper). Bell proposed an Health Advanced Research Programme (HARP) which looks to be modelled on the US DARPA, and suggested ideas to reinforce the UK science value proposition. Bell sees the NHS as a source of value particularly in the data sets that it owns on behalf of UK patients, and suggests a strategic goal for the NHS to engage in 50 collaborative projects with the life science industry over the next five years ranging from late-stage clinical trials to large-scale data analysis and evaluation of medical technology and diagnostics. So all is not lost, but the challenges look fierce.
One of the world’s leading neuroscientists, who is under 40 years old told me: “Ben, none of my neuroscience colleagues want to work in the UK. Not even Cambridge University and the like. Funding is 50% lower, salaries are 50% lower, there are many interesting labs in the US or China. We will not come to the UK. There are several cutting-edge science labs in the UK but post-graduates and professors, if they have a choice, are joining US labs; or increasingly settling in China. The US government risks this innovation too with possible cuts to the NIH.
Scientists (in a now closed Pfizer lab) in Sandwich, UK, discovered that experimental heart drug UK92480 had a specific side effect on male subjects – plenty of erections. Viagra was born. Serendipity came into play, much like it did in 1928 when Alexander Fleming discovered penicillin as a result of mould falling on his petri dish. Black Swan author, Nassim Taleb, has advocated for the need for randomness in drug discovery. As Google scientists have noted, creative ideas happen around ‘focused serendipity’. A network effect from sharing and debating new scientific ideas tends to happen round hubs and those hubs are in short supply in the UK. Arguably, Cambridge, UK, has a hub. A Cambridge-Oxford-London (with the EU drug regulator in London) triangle has possibilities. But Brexit has ended the London location of the EU drug regulator and Cambridge is still nothing like the huge biopharmaceutical hubs of Boston or California in the US. Senior management at Genentech mentioned to me that there are over 250 biotechs currently in the south San Francisco area alone. The lack of UK hubs, combined with the paucity of leading scientists and fewer occasions for serendipity, discourages the discovery, nurture and growth of fledgling biopharmaceutical companies.
Brexit is unhelpful. For all Brexiteers talk of trade, isolation dampens creative networks. More damaging is the time and energy spent on figuring out Brexit that could otherwise be spent working out how best to support and nurture UK science. Hopefully Bell’s proposal will not be lost in therexit noise. There is also the cost of UK institutions losing EU funding, which is likely to be substantial. If the UK government materially increased funding in science (perhaps using Bells’ HARP modelled on the USA’s DARPA) this would be an investment for long-term gain, with the value felt over generations (penicillin, for example, was a 1920s discovery which we continue to benefit from.) This would be investment worth borrowing for.
Psychologists, such as Daniel Kahneman, show humans are often poor at making good long-term investment decisions. I am not confident the UK will invest. There’s always still hope from serendipity. The UK will need it.
