London (Stock Exchange) calling: Trends in London IPOs

Over the past month there has been some impressive data on life sciences investment into London and the UK. Earlier in November, we saw data from London and Partners and Beauhurst showing a nine-fold increase in healthcare investment into the UK since 2016. In parallel, another notable trend in 2021 has been the amount of capital raised through IPOs on the London Stock Exchange, and the flow of US life sciences companies coming to London to list.

Sarah Haywood, MedCity’s former CEO and now Board member, has worked with the London Stock Exchange since 2014 on the annual Future of Healthcare Investor Forum. Sarah sat down with Chris McGahan, Research & Analytics Manager, Primary Markets, at the London Stock Exchange to explore changes in healthcare company IPOs over the past five years, and the reasons behind the current listing momentum.

Sarah:
Given the increase in investment into the life sciences sector that we’ve seen this year, it would be interesting to know what your data indicates about life sciences companies listing in London, say over the past five years.

Chris:
In 2021, we’ve noticed a significant jump in the amount of IPO capital being raised in healthcare deals on the London Stock Exchange. From 2017 to 2020, for example, we saw an average of £119 million raised each year. In 2021 the amount of IPO capital raised has jumped to £739 million (as of November):

Sarah:
Which countries have been the source of life science listings on the Exchange this year? Are you able to give us a breakdown?

Chris:
They are largely UK companies but not all – Uniphar, Faron Pharma, Novacyt are European examples. We also had MGC Pharmaceuticals from Australia and Kanabo from Israel IPO this year. But the thing I would really highlight over this last 12 months is the smaller US life sciences companies choosing London to IPO. We’ve seen five during this time period — Verici Dx, Trellus, Belluscura, Spectral MD and LungLife AI.

Sarah:
It’s interesting that three out of five of the companies you’ve mentioned are diagnostics companies. And, of course, Oxford Nanopore hit the headlines last month as a UK diagnostics-focused company which has chosen to list in London rather than the US. That is notable, given that many promising UK companies looking to scale have chosen to go to the US to IPO. Diagnostics is a subsector that has really gained traction with investors over the past 18 months, cutting across medtech, AI and other modalities. Diagnostics is also a particular focus for MedCity, where we have convened a network of expert institutions — the Diagnostics Growth Hub – to help diagnostics companies overcome hurdles to commercialisation. Are there any examples of diagnostics companies which have successfully leveraged AIM listing to grow their business and technology?

Chris:
Yes. Renalytix is one of several companies that have successfully used AIM to accelerate their growth story on public equity markets. Renalytix is a developer of AI-enabled clinical diagnostic solutions for kidney disease. They IPOed on AIM in October 2018, raising $29.3 million, then went on to secure FDA breakthrough designation and open a commercial testing facility. Following this route, their original £61.6m market cap has since risen to £521m. Renalytix CEO James McCullough describes AIM as a “brilliant pathway” in his interview here. There’s a plethora of great examples; among others, we’ve seen Polarean Imaging return to market on 5 occasions since their 2018 IPO as they’ve continued to grow. Not to mention Abcam which is now a multi-billion pound company and one of the largest companies on the AIM market.

Sarah: And what is the big appeal of a London listing for companies like Renalytix, and the five from the US who have listed this year, compared with their home exchanges?

Chris: There is a different size focus in the UK (especially AIM) compared to the US. The average market cap at IPO of an AIM company between 2018 and 2020 was $120m, compared to in excess of $1bn on NASDAQ and more than $2.25bn on NYSE. The price performance of these microcap (<$250m market cap) IPOs is far stronger, too, with an average of a 70% price gain in the UK, compared to just +15% in the US.

There is also a diversified, high quality institutional investor base for UK-listed health care companies. Companies can access European, US and Asian investors through a London listing (less than half of investors in LSE-listed companies are UK based). On AIM too, a traditionally more UK-focused market, companies can access global institutions, including some of the largest US asset managers.

Other considerations are that underwriting fees are cheaper in the UK (3-5%) compared to the US (around 7%), and in the UK we don’t have the litigation environment that you see in the US. For example, 334 new securities class action lawsuits were filed in 2020 alone in the US, whereas in the UK there have only been three since 2010.

Sarah:
And what is your view on how public market listing in London can help US and other international companies put down roots and bring other activities into the UK? I’m thinking for example of a New-York based investment company that MedCity has been in conversation with recently, RTW. They listed on the London Stock Exchange in 2019 and are now positioned to land in London to actively invest in UK life sciences start-ups.

Chris:
Definitely, RTW is a good example. And when accounting firm Grant Thornton reviewed the Economic Impact of AIM they found that AIM companies across all sectors have contributed £33.5 billion Gross Value Added (GVA) to UK GDP and directly supported more than 430,000 jobs.

Adding in wider economic activity through supply chains, and the expenditure of employees, increases the economic contribution to £67.2 billion in GVA and over 900,000 jobs. Revenue growth reported by AIM companies is above 40% year on year for the first three years and 20% for the fourth and fifth years following IPO. This growth is true for businesses of all sizes, with smaller companies seeing particularly strong growth in the first three years. In Health Care, AIM-quoted companies have experienced 12.5% compound annual revenue growth in their first 5 years as public companies, compared to 7.8% for their private counterparts.

About Chris McGahan: Chris joined LSEG as a graduate in September 2017 and now manages the Primary Markets Research & Analytics team. He was previously seconded to TheCityUK’s Recapitalisation Group to help identify methods of supporting British businesses in the wake of the Covid-19 pandemic. He has a Philosophy, Politics and Economics Degree from Durham University.

About Sarah Haywood: Sarah led MedCity for its first five years as CEO before taking on the role of Managing Director at Advanced Oxford. Sarah has a biology degree from the University of Oxford and was previously an NHS manager, Head of Operations for a neuroscience drug discovery unit, and led the Department for Business Bioscience Unit.