Hardman & Co Insight: Survival of the UK life sciences sector

For two years running, the Hardman & Co Healthcare index has declined, underperforming both the FTSE 100 and the FTSE All-Share indices. This is quite unusual for healthcare stocks. Apart from the general economic influences, which have made institutions more risk-averse, there was a common knowledge that several companies were in need of additional working capital; so, share prices were marked down in anticipation of equity raises.

However, the small- and mid-cap life sciences sector has always been capital intensive, so has anything changed? Consolidation within investing institutions and pension funds has created a much smaller number of groups with enormous funds under management that are much less interested in small, capital-intensive companies. Consequently, the pool of institutions interested in such investments has diminished significantly.

Because valuations commanded by several large London-listed companies are well below their international peers, rumours are circulating constantly about an exodus to overseas markets, particularly the US. It is no different for the life sciences sector. Among the small caps, three have already delisted from London this year over poor valuations, with at least one of them expecting to relist in the US when the time is right.

Things need to change. Institutional investors in the London market must be more supportive of its life sciences industry, which, historically, has offered them very good returns, otherwise, we fear that the sector could disappear within a few years.

But low valuations do throw up opportunities. We highlight Tissue Regenix, which has two regulatory approved tissue technologies that are in much demand; barriers to entry are enormous because of the regulation and controls involved in the processing of human tissue, with customers preferring to leave these technicalities in the hands of a specialist. Following investment in manufacturing capacity expansion, TRX is showing consistent, above-average sales growth, is cash generative and profitable. Yet the market values it at only $57m compared with the $150m spent to get it where it is today.

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