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Last week, another life sciences company declared its intention to exit the junior market, citing better opportunities to raise capital privately than on AIM.
Pharmaceutical DestinationIf its shareholders vote in favour of a delisting, it will join the likes of Redx Pharma, C4X Discovery, e-therapeutic and antimicrobial specialist Byotrol in exiting the market.
The clinical-stage biotechnology company is currently seeking a partner to advance Phase III development of its XF-73 Nasal anti-infective.
Destiny chairman Nigel Rudd, a former Boots boss, painted a grim picture if the company did not exit the public market: “Without taking this route, we believe liquidation of the business is the most likely alternative,” he added.
Destiny Pharma, if its shareholders vote in favour of a delisting, will join the likes of Redx Pharma, C4X Discovery, e-therapeutic and antimicrobial specialist Byotrol in exiting the market.
But why have we reached this situation?
The answer is simple: access to capital. Since the start of the war in Ukraine more than two years ago, the market has entered an ice age phase, with little or no cash available for those who need it most.
Drug developers that have received significant injections of new capital have relied perhaps on one or two key investors with easy access to cash.
Faron Pharma, for example, has managed to secure around £26m in new funding, but its success is the exception rather than the rule.
In addition, the costs associated with listing on AIM, which was initially conceived as a “lightweight” exchange for early-stage companies, have become quite onerous.
A smaller company must pay a corporate broker and a designated advisor, or NOMAD, who acts as a regulatory overseer.
Light touch, high cost
Add to that legal, accounting, auditing and financial public relations fees, and costs can quickly add up.
A thrifty CFO might manage these expenses at £500,000, but once a business is up and running, the bill can easily double or triple.
As a result, a company raising £2m could spend that sum in less than two years on regulatory and professional fees alone, leaving little to invest in drug development.
With interest rates well above their two-decade average, capital that could be invested in British small-cap companies is instead flowing into safer, higher-yielding investments such as government bonds.
This trend is changing somewhat as hopes for rate cuts increase, but risk-averse sentiment persists.
Amid an uncertain economic and political backdrop, investors are favouring safe havens such as US Treasuries and gold over growth stocks.
Fund managers are exacerbating this problem by investing funds overseas, especially in the United States, rather than domestically.
Many fund managers are also structurally prohibited from investing in AIM shares.
The proposed market reforms may encourage British institutions to invest more in the country, but it remains to be seen whether this will be reflected in AIM.
Sectoral decline
Life sciences companies have been particularly hard hit. In 2021, during the peak of the Covid-19 pandemic, drug developers had easy access to capital markets due to increased interest in the sector.
However, interest has been steadily declining and the life sciences sector is now at a level last seen eight years ago.
UK companies are choosing to list in the US where valuations are higher (as seen with Zura Bio) or stay private where funding is still accessible (such as Myricx Bio).
The AIM All-Share Healthcare Index has almost halved in value since hitting a record high in April 2021, reflecting heightened interest in small-cap drug developers.
If the sector is indeed cyclical, previous rallies from lows to highs in 2016 (71%) and 2020 (66%) may offer hope. However, companies are not willing to sit back and test this theory.
Following the delisting, companies are turning to organisations that can connect buyers with sellers, such as JP Jenkins or Asset Match, which organises regular stock auctions.
Some, such as e-therapeutics (ETX), appear to be waiting for the right time to list in the US, where the investment community better understands life sciences, leading to competitive valuations.
Disappointing
ETX’s Ali Mortazavi, which raised nearly £30m from two key investors before going public, has expressed his frustrations with AIM.
He said he was “extremely disappointed by the lack of institutional interest in our innovative, technology-driven value propositions in the UK.”
Mortazavi added that ETX had difficulty engaging with most of the institutions it contacted, reflecting the risk aversion of the UK market.
‘This trend has been a consistent theme over the past four years, with the company raising funds primarily through the two current key shareholders, who continue to support the company regardless of its listing status.
“Therefore, we believe there is a limited available audience in the AIM market for companies like ETX,” he concluded.
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