Will Life Sciences Get Healthier?
This essay is part of our New Year's series on what to expect in 2025, and can be downloaded as one compiled PDF for you to read at your leisure via the download form. Thank you
By Matthew Neal, Partner at 5654 & Company
In 2024, global elections kept investor sentiment in life sciences cautious despite early optimism, particularly early in the year and again in September on the Nasdaq. However, a more stable political environment now emerging in the UK and US should enable investors to assess risk more clearly and begin deploying capital.
Inflation remains a significant challenge, re-emerging in the fourth quarter in the UK. Businesses face higher employer contributions to National Insurance, introduced in the UK Chancellor’s first budget, which could exacerbate inflationary pressures and prolong elevated interest rates. Geopolitical instability also poses risks of sudden fuel cost increases. These macroeconomic challenges all have the potential to stymie the growth of life sciences.
However, the sector needs to move past this ‘doom and gloom’. Thriving in this environment requires optimism and a greater appetite for risk across the investment lifecycle. Existential challenges are now the norm, requiring us to adapt and operate within these constraints.
The new Labour Government has put saving the NHS at the heart of its political strategy for this Parliament. And it is trying to drive growth in order to create the funding the NHS needs.
Health and life sciences is critical to both goals and the Government is recognising this through action.
The Mansion House Compact is one such initiative. It encourages Defined Contribution (DC) pensions to move their assets into UK growth capital. Twelve pension funds have signed on, with over 100 venture capital firms expressing interest in deploying these funds. While broadly supported by financial services, the Government and the life sciences sector, the initiative faces pressure to deliver tangible results - money. Key questions remain about fund allocation, scale, management fees, and how the initiative will bolster UK equities. A thriving sector also requires public markets to actively fund life sciences.
Despite these challenges, the Mansion House Compact has strong backing. We anticipate money will be deployed in 2025, with acceleration thereafter.
The British Growth Partnership also holds promise. By pooling capital from pension funds and institutional investors, it diversifies risk while supporting high-growth, innovative companies. Backed by Aegon and NatWest Cushon and managed by the British Business Bank, it offers an additional source of scale-up financing for life sciences.
Similarly, the National Wealth Fund, aimed at investing in UK infrastructure, is set to bolster the life sciences ecosystem, potentially funding new science and innovation hubs, clusters and parks. Additionally, pooling Local Government Pension Schemes (LGPS) into ‘Megafunds’ will allow for diversified exposure to innovative companies while fostering localised investment in promising technologies.
For the sector to be a success, it’s not just the finances that need to be changed. The establishment of a new Regulatory Innovation Office is a positive step, aiming to cut red tape and accelerate the approval and commercialisation of technologies. Regulatory delays have been a major roadblock for UK companies, especially as they compete globally to advance innovation. Streamlining regulatory processes and fast-tracking exciting technologies should encourage companies to develop and sell their innovations domestically.
The government is also expected to address planning regulations. There is currently a shortage of labs and manufacturing facilities needed to support all the R&D happening in the UK and potential future commercialisation strategies.
Accelerating the development of these facilities is critical for capitalising on the UK's science and expertise.
Taken together, these financial, operational and regulatory initiatives create a supportive environment for life sciences, positioning the sector as one of the cornerstones of the UK’s new industrial strategy and a key driver of economic growth.
We believe that these measures will significantly support sector growth. More partnerships between pensions funds and VCs should be formalised soon with funding moving between them during 2025, and companies benefitting by the end of the year. To capitalise on this, companies must craft compelling narratives aligned with the risk appetite of these new investors, demonstrating clear upsides and transparent timelines for return.
With a more stable political backdrop, 2025 is poised to be more positive for life sciences, with expanding access to funding and growing pools of capital. However, the more meaningful benefits of the financial and regulatory changes made in 2024 are unlikely to fully materialise until 2026, 2027 or even later.