Review: Deepbridge Life Sciences SEIS
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
The UK has a proud history of discovery, innovation and development in life sciences, from the discovery of penicillin through to the more recent and world-leading 100,000 Genomes project. Life sciences are vital for the UK economy, providing almost half a million jobs and annual turnover of £64 billion. The government is keen to support UK life sciences: in August 2017 it announced a funding package of £160 million for the sector.
The Deepbridge Life Sciences SEIS – now in its fourth iteration – aims to capitalise on the UK’s strength in life sciences and the government’s commitment to it. The intention is to provide UK science and technology start-ups with private capital to supplement government grants. Investors can expect a portfolio of around ten companies developing a disruptive technology or scientific breakthrough in biopharmaceuticals, biotechnology or medical technology with the potential to develop a new market or replace existing solutions in an established market.
Like all SEIS offers this is very high risk and investors should expect failures. However, for those prepared to take the risk, this offer could be a compelling way to access high-growth businesses at a very early stage.
- Portfolio of up to ten early stage science or technology-based companies
- Specialising in biopharmaceuticals, biotechnology or medical technology
- Highly experienced team with strong science background
- Potential to attract government and regional grants and matched funding
- Each investee company will have strong intellectual property and must demonstrate scalability
- Target return of 250p per 100p invested after 6 years (net of fees), returns not guaranteed
- Minimum investment £10,000
Deepbridge Capital brings together over 200 years of combined scientific and commercial experience.
It was set up by Ian Warwick in 2010. He started his career in the Royal Navy, then became an oil engineer in Houston and worked for one of the biggest printer companies before settling on technology start-ups in New York. When he founded Deepbridge,Mr Warwick didn’t have experience of managing money but he and his founding partners all had experience in technology and in floating businesses.
The Deepbridge Life Sciences Team, headed by Dr Savvas Neophytou, is responsible for selecting, establishing and managing the Life Sciences SEIS. Dr Neophytou worked in the City for 15 years as an investment banker at JP Morgan, Bear Stears, Shore Capital, Cantor Fitzgerald and Panmure Gordon. He holds a PhD in psychopharmacology and a degree in pharmacology.
His team is monitored by the Supervisory Investment Committee. The seven-strong committee has a very strong pedigree.
Professor Nagy Habib for instance pioneered novel clinical trials for the treatment of cancer and was named one of Britain’s top surgeons by the Times in 2011.Lloyd Price co-founded Zesty in 2012 and three years later his business was selected as 1 of the UK’s 30 finest early stage technology businesses. In 2016, he was voted one of the most influential people in HealthTech globally.
Professor Chris Wood, who acts as the Senior Medical Adviser on the committee, founded and exited two biotech companies including Bioenvision which sold for $345 million after seven years. Chris is a fellow of the Royal College of Physicians & Surgeons of Edinburgh.
Investors will hold a portfolio of around ten SEIS-qualifying companies. The first three iterations of Deepbridge’s Life Science SEIS portfolio have each invested in 11 to 12 companies with a focus on life sciences and medical device technology.
Deepbridge believes a dearth in traditional sources of funding in recent times alongside demand from large pharmaceutical businesses for new drug treatments means there are plenty of opportunities for private investors.
Intellectual Property (IP) is a vital component of investment. In a recent Life Sciences report from BDO, IP was described as the ‘X factor.’ Prior to investment, Deepbridge must be satisfied each company possesses strong IP, has a scalable proposition and not need too much capital to develop the business and possibly take them through to Phase 1 Clinical trials.
Deepbridge will take an active executive role on the Board of the investee companies. Deepbridge will also encourage the investee companies to seek funding from regional development funds and government grants. An investment of £100,000 for instance might be matched by a grant of £100,000. The company therefore has £200,000 of capital to deploy but an investor has only invested £70,000 (net of tax reliefs). Leverage of this nature doesn’t carry the same risks as bank debt or private loans. Please note, there is no guarantee the investee firms can attract these grants. Tax benefits depend on circumstances and tax rules can change.
Deals are sourced from a wide network of formal and informal relationships and from members of the Deepbridge partnership board. Examples of academic institutions Deepbridge have ties with include Imperial College London, University of Liverpool and the Daresbury Sci-Tech science campus.
In theory, Deepbridge should be able to participate at low valuations as these are such early stage firms and there is potentially a shortage of capital available to them. Deepbridge’s investment criteria give them a good chance of identifying potential winners – but even so, investors should anticipate failures in the portfolio. Understanding a company’s potential at such a youthful stage of development is no mean feat.
Deepbridge anticipates the majority of exits to be achieved by a trade sale, an IPO or a liquidation, although there are no guarantees. Given the nature of the sector a trade sale to a larger rival seems the most likely option of the three. Deepbridge encourages their investee companies to work with multi-nationals in distribution deals. Part of the driver for this is the hope they can make potentially profitable connections.
Due to the recent launch of the Deepbridge Life Sciences SEIS, no exits have yet been achieved to date: it only began investing in 2016.
Deepbridge targets a return of 250p for every 100p invested (not guaranteed) excluding all tax reliefs, after a period of six years. This is an ambitious target, and the risk of failure is high.
Portfolio company examples
Previous portfolios of this SEIS fund have invested in 34 companies. To give investors a flavour of what to expect, three examples from the first SEIS tranche which closed in 2016 are shown below.
Renephra Ltd is a UK based medical device development company that has developed and patented technology that addresses the significant ongoing medical problems associated with treatment resistance of fluid overload within the body. Health issues often associated with fluid retention include heart failure and chronic oedema / lymphoedema in vascular, oncology alongside other impacting and personally debilitating diseases. Renephra’s medical device removes excess fluid from the body by removing it from the skin. It uses microneedles to access fluid located in epidermis/dermis and negative pressure to remove it.
Renephra will be the first medical company to use negative pressure to extract excess fluid via its patented device and know how. The product has the potential to vastly reduce the time (in days) a patient spends in hospital with fluid retention health problems thereby saving the NHS potentially millions annually. Patients can self-administer the treatment safely in their home. Renephra estimates the global market is £1bn.
Stent Tek is developing a novel catheter system that enables patients to receive haemodialysis (HD), specifically for kidney failure, in an improved manner. Currently, patients receiving HD must undergo a surgical procedure to create a surgical connection between an artery and a vein, the vein then acts as a ‘vascular access’ through which a dialysis machine is connected. The surgical connection between the vein and artery is known as an ‘arteriovenous fistula’. At present, there are more than 2.5 million patients world-wide who require HD due to renal failure. Fistulas, whilst an established technology, are unreliable often blocking up and requiring repeated costly repair operations. In short, the patient’s life is dependent upon dialysis, and the dialysis is dependent upon a fully functioning fistula.
Stent Tek has developed a minimally invasive procedure that uses a ‘stent graft’ (in effect, a synthetic tube) to form the fistula which is then inserted using a proprietary technology named ePATH), a process that is significantly less traumatic than surgery. The resulting fistula is ready in a shorter timeframe and less likely to fail, thus resulting in fewer patients suffering secondary infection and potentially life-threatening medical complications.
There are opportunities for the company in direct sales of the ePATH device, direct sales of the proprietary stent grafts, licensing of intellectual property; and the sale of a defined list of peripherals and replacement parts.
Within the UK, a total of 17,000 people receive HD for kidney failure, with 5,500 people per year starting treatment for kidney failure, of which 40% receive HD.
Aurio has come up with a patented core technology that potentially eases the effects of Tinnitus. Tinnitus is a perception of sound in the absence of an external source. Although it is often referred to as ‘ringing in the ears’, tinnitus can also be perceived as many different sounds including hissing, clicking or whistling. A common condition, it affects approximately 1 in every 10 adults, especially those over the age of 60. Common causes are excessive or cumulative noise exposure, head and neck injuries, and ear infections. In a small number of individuals, tinnitus is a sign of a serious underlying medical condition. The adverse impacts of tinnitus include insomnia, poor concentration and performance, irritability, anxiety and depression.
There is currently no cure for tinnitus. The development of ‘Aurio Soundscapes’ enables sufferers to more effectively manage their condition and thereby improve their quality of life. The Aurio technology currently runs on iOS mobile devices, and the underlying algorithms that manage the individual’s unique sets of ‘brown’, ‘pink’ and ‘white’ noise are fully controllable and customisable by the user.
According to Aurio, the immediate reachable market for Aurio Soundscapes is estimated at 49 million across the USA, UK and Canada – with further potential worldwide.
Other evidence of Deepbridge’s wider skills can also be seen in the case of Bioenvision – note this is not an investment held by the fund but it was a firm founded by Professor Chris Wood who sits on the supervisory investment committee. Bioenvision was set up in 2000 with the mission of developing new treatments for cancer. Seven years later, Bioenvision was acquired by Genzyme Corporation for $345 million. Bioenvision identified and licensed compounds from universities which had significant potential. Product approval was gained in the US and Europe. Genzyme Corporation bought the company primarily to gain exclusive rights to clofarabine, a cancer treatment for children.
These are very early-stage life sciences businesses, which makes this a very high-risk investment. By their very nature these firms will be more prone to failure than later-stage, more mature businesses. Out of ten portfolio companies held, all of them could fail.
Specific risks in this sector include failed clinical trials, failed results and intellectual property infringements.
Investors should also be aware these are long-term investments and are illiquid. Capital is at risk and investors should not invest money they cannot afford to lose.
Tax rules change and the value of tax benefits will depend on circumstances.
There is an annual maintenance fee of 2% levied against the investee company.
Deepbridge will charge the Investee Companies a corporate advisory and arrangement fee of up to 2.5% of funds invested in that Investee Company. Dealing and custodian fees are also charged at 0.65% and 0.5% respectively.
Deepbridge is entitled to a performance fee of 20% of returns above a hurdle rate of 150p per 100p invested. The performance fee is due if the total cash returned to investors exceeds the amount of the initial investment by 50% or more.
Deepbridge and Enterprise IP, the manager, retain the right to charge additional fees to investee companies to meet costs relating to future fundraising, marketing and administration.
When you invest via Wealth Club, you pay no initial fees from the subscription, so you should receive tax relief on the full amount. Deepbridge fees are paid by the investee companies.
The Life Sciences sector is an exciting one, especially in the UK. The Deepbridge Life Sciences SEIS offers an opportunity for wealthy and experienced investors to back the youngest companies in this cutting-edge sector, with the benefit of SEIS tax reliefs. Deepbridge has a highly experienced team with a good reputation – both on the investment team and the supervisory committee – which adds considerable strength to the offer and should help them identify and secure deals.
Wealth Club aims to highlight investments we believe have merit, but you should form your own view. You should decide based on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination. 04.10.2017