We are fast becoming an innovation hub but lack of investment risks sending best talent abroad

The announcement earlier this month that BioNTech is to trial its cancer therapies in Britain is great news. This brilliant German company developed the first licensed Covid-19 vaccine based on revolutionary mRNA technology. Its choice of Britain as a test site doesn’t just mean Britons will get early access to personalised cancer treatments, it is also a vote of confidence in the British life sciences sector.

With the British car industry collapsing, and tech and financial services firms shedding jobs as fast as Tory governments shed ministers, a lot of hope is being invested in life sciences. The optimism is well-founded, because Britain has a couple of huge advantages in the sector. Four of the eight top healthcare universities in The Times Higher Education league table are British, and the “golden triangle” they inhabit — Oxford, Cambridge and London — is spawning firms. “This is the most vibrant innovation hub in Europe,” says Andrew Williamson, managing partner of Cambridge Innovation Capital, who joined the firm from Silicon Valley six years ago.

The NHS is the world’s best testing-ground for drugs. It gives 65 million Britons a unique identifier they carry with them from birth to death. From a standing start in March 2020, the Recovery (Randomised Evaluation of Covid-19 Therapy) trial recruited 10,000 patients within eight weeks and a month later found the first of the four effective drugs against Covid-19 that it has identified. It wasn’t just the NHS, it was the whole ecosystem, according to Ugur Sahin, founder of BioNTech. “The NHS, academia, the regulator and the private sector worked together in an exemplary way.”

This should be the moment at which the industry takes off, but it’s struggling. In 2021, according to the BioIndustry Association, the UK biotech industry raised £4.5 billion; in 2022 it raised £1.8 billion. Most of the money comes from America and when times are tough in the capital markets, as they are now, American firms give up on difficult, far-away investments and focus on those that are easy and near-at-hand.

British start-ups are neither. Talent is one problem. The fall of sterling has made recruiting researchers harder. A young scientist with a PhD in biotech earns on average £40,000 ($50,000) in the UK and $70,000 in the US. Housing costs in the US are, on average, lower than in Britain’s overheated golden triangle. Clever post-docs are in demand all over the world and a home secretary who makes it clear that foreigners are unwelcome in Britain will encourage them to take job offers elsewhere.

Getting lab space is tough too. According to Bidwells, an estate agent, in the Cambridge area there is demand for over 1 million square feet of lab space; only 10,000 is available. Alchemab Therapeutics, which is developing therapies based on individuals’ immune systems, splits its research across two sites in Cambridge, which is not ideal. “Drug discovery is really hard,” says Jane Osbourn, the firm’s chief scientific officer. “You’d have thought getting hold of office space should be easy.”

But the biggest problem is raising money. That seems odd, given that Europe’s most successful life sciences innovation hub sits next door to its largest financial centre, which invests the vast pools of capital that pension funds look after. The problem is not so much seed money for tiny firms but the cash they need in order to grow. The City focuses on established companies that produce dividends, not start-ups that lose money, and the rules on where pension funds can put their money have tightened since the financial crisis. Only 20 per cent of defined-benefit schemes are invested in equities these days, down from 61 per cent in 2006. Most of the rest goes to bonds issued by governments or big corporations.

The government’s decision last year to halve the tax credit for research and development for small and medium-sized companies doesn’t help. The move is understandable, because low-growth companies were claiming it for run-of-the-mill expenses, but it has done real damage to the kind of companies the government wants to foster. According to Kate Bingham, vaccines tsar and partner in SV Health Investors, a venture capital firm, the start-ups in which her company invests “are moving jobs abroad and fewer clinical trials are being done in the UK” as a direct result.

The shortage of capital in Britain means start-ups tend to look to America when they want to raise cash. Dependency on American capital means that, when times are tight, British firms lose out; and when the capital flows, a firm’s centre of gravity shifts towards America. In the end, it tends to get listed on the US stock market or bought by an American company, with the result that the jobs, profits and tax revenue from which Britain might benefit go to America instead.

The government is well aware of these issues and their solutions. A more liberal planning regime would ease the lab shortage and lower housing costs: the idea of an “Oxford to Cambridge arc”, over which the government has been shilly-shallying for years, would allow that to happen. The City can be made more friendly to start-ups: Lord Hill’s review two years ago pointed out how. Pension funds could be allowed safely to invest a small slice of their funds in high-growth companies: it happens in Canada, Australia and France, with no detriment. The R&D credit could be restored: it needs to be targeted on knowledge-intensive sectors, not sprayed around the economy as a whole.

All of these changes are in discussion or in the works. To get them implemented we need a government that’s focused on the long term, not distracted by scandal and panicking about the next election.