Imperial wins with scientific approach to making an investment

Innovations traces its history back to 1986 when Imperial College London set up a technology transfer office.

It struck out as an independent group when it floated on Aim in 2006. During its first few years as a public company it remained focused on commercialising the intellectual property (IP) of Imperial College. But these days, the group fishes from a bigger pond, having struck deals to gain access to the science of Oxford, Cambridge and University College London too.

It has invested £160m in start-up life science and technology companies since 2006, and last week indicated that it has an appetite for more, announcing plans to tap the City for another £150m.

Russ Cummings became chief executive in July last year at a pivotal moment for the group, whose investments have started bearing fruit after years of meagre returns.

He has already presided over three stock market debuts, starting with medical imaging analysis company Ixico and diagnostic specialist Oxford Immunotec at the end of last year.

But the most eye-catching did not come until March, when Circassia, a company developing a cure for cat allergies, burst onto London’s main market, raising £200m from City investors.

Its initial public offering, thought to be the biggest for a British biotech company, was widely hailed as a sign that the City had regained its appetite to invest in life science.

Innovations’ stake in Circassia is now worth more than £75m, three times the £25.5m it has poured in over the past eight years.

It is perhaps fitting that Cummings rose to the top of Innovations just as this early bet paid off. It was one of the first companies he backed after joining as chief investment officer in 2006.

Cummings came across Circassia just after it was founded by serial bioscience entrepreneur Steve Harris and his colleague Charles Swingland. The pair had spotted a business opportunity in an allergy vaccine technology being developed at Imperial, had snapped up the IP and were searching for early stage funding.

“The reason I liked Circassia was that it was not only founded on great science but also had a strong management team,” he said.

Innovations started small, supplying £2m for Circassia to conduct more robust clinical trials to bring the early evidence up to the standards required by the pharmaceuticals industry.

It then led or co-led every subsequent funding round for the company, progressively attracting investments from bigger players such as Invesco Perpetual and Lansdowne Partners.

Circassia managed to raise £100m as a private company before finally tapping the public market earlier this year.

The company is now worth around £560m but it has no prospect of making money until late 2017, which is the earliest it could bring its cat allergy treatment to the market.

Innnovations’ shareholders have got used to playing the long game, though.

Unlike conventional venture capital, it makes bets on start-ups right at conception. Some of its companies were little more than a team of academic scientists with a promising piece of IP when the first investment was made.

Cummings admits it is a risky business, but he says Innovations has avoided getting badly burned by carefully staging its investments.

“We’ve definitely had failures, but thankfully we’ve kept them to small ones,” he says, adding that the most Innovations has lost on a single investment is around £2m.

“The important bit is we try not to make that £10m or £20m investment until we are satisfied [that there is a viable market for the eventual product].”

Cummings also credits Innovations’ investment team, which boasts around 12 PhDs spanning neuroscience to engineering, for making the company better than most at picking winners.

Innovations also enlists the help of “entrepreneurs-in-residence”, veteran tech and bioscience bosses, some of whom have run multinational companies, when setting up the strategy for a new company.

For Cummings, spin-outs are worth the risk if it means securing a strong management team from the outset.

“In the old days, university spin-outs were unfunded so you limited your choice and calibre of management.

“We’ve turned that on its head by trying [not only] to bring modest amounts of capital earlier, but experienced management talent much, much earlier.

“They come and work with us and our companies because they know there’s a continuity of funding that lies behind that. We’re not risking large amounts of capital at that stage, but there is an ability to follow through.”

Innovations is also selective. It screens around 350 invention disclosures a year but will only make seed investments in four to six projects.

“The prize has got to be worth fighting for,” says Cummings. “We’re aiming for billion dollar-plus markets.”

Innovations’ technology transfer model, where companies are built around one laboratory’s research, has its detractors. Some say it would be more effective to follow the US and match-make the intellectual property being developed in universities with existing companies, rather than take all the risk associated with a start-up.

But Cummings says it is hard to draw comparisons with what happens across the Atlantic. “Places such as Harvard, MIT and Stanford exist in established venture capital communities, where there are a lot of investors and serial entrepreneurs.

Cambridge is the closest we’ve got to having that here in the UK, but we haven’t got the same critical mass of early-stage investors, with the capital and the skills to extract IP from the research then commercialise it.”

He says the UK is coming out of a “dark period” for biotech funding, in which a shortage of good-quality, listed companies has led to a dearth of investor expertise, and appetite, in the sector.

Circassia’s float, and others which have followed this year, have provided early evidence that the London stock market has started to look favourably on biotech again.

But Cummings is swift to point out that Innovations is not dependent on wider investor appetite for high-risk, research stage companies.

Even if biotech has gone out of fashion for City investors again in five years’ time, he says, “we’ll still be here”.

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