Levelling Up White Paper and Life Sciences

The UK Government’s recently released “Levelling up White Paper” makes for interesting reading in the context of the life sciences sector.

In advance of a more in-depth review, here are some of the key points and my thoughts, focusing on two of the main areas of relevance to the sector: small company finance and R&D expenditure.

The White Paper does a good job of setting out the challenges. For example, it identifies that 86% of equity investment in the UK goes to companies in London, the South East and East of England. Data shown in the forthcoming UK Life Science Start-up Report states this figure as being 83%, very similar. The Paper further notes that more than eight in ten equity investment relationships meet the “two-hour travel time” rule. That is to say, investors generally invest locally, with people, and in environments, they are familiar with. Therefore, the 86% figure is partially explained because most significant investors are based in and around London.

The Paper’s response to this is rather thin. It re-announces the £1.6B funding for regional investment funds announced in the 2021 spending review. Although £1.6B may sound like a lot of money (although it is just one-third of the amount lost to Covid loan fraud), once it is salami-sliced firstly across the regions and then into multiple different pots, it’s not quite as impressive. Moreover, to date, a significant amount of the cash available in the regional funds has been in the form of loan finance, not a great deal of use for early-stage life science (or any science) companies.

Despite their small scale, these funds could be used to develop the research base, but they need to be run by managers that understand and feel comfortable investing in science. This is the case, for example, with the Midlands Engine Proof-of-Concept Fund, managed by Mercia, where most investments are in either life science or software companies. But the larger scale MEIF Equity Fund (East Midlands) has barely invested anything in science. At £35M, the existing fund is simply too small to make a difference in any case.

So, from a small company finance standpoint, it largely looks to be a bit more of the same, using previously announced money.

One interesting initiative that could make a difference is the plan to enable some of the £326B sitting in local government pension funds to have a local impact. The aim is for “up to” 5% of the funds to be invested locally. The “up to” being the small print – like the toothpaste that promises “up to three shades whiter”. Deployment of 5%, or £16B, into local investment and infrastructure, could make a real difference. The bottom end of the “up to” range- i.e. 0%- not so much.

Moving on to research and development, the White Paper highlights that 54% of Gross R&D expenditure takes place in London, the South East and East of England. Gross R&D includes all R&D expenditure- public and private- and 54% doesn’t actually seem too lop-sided. As far as I can see, the Paper doesn’t disclose how only the public funding of R&D is split across the country, which is important as private sector funding of R&D in London is low and could have brought the overall percentage down significantly.

Fortunately, the excellent 2020 report from NESTA (The Missing £4 billion), written by Tom Forth and Richard Jones, provides useful information on this matter. The report highlights how the level of public funding of R&D relative to private investment is much lower outside the greater South East. If the ratio were to be “levelled up”, the rest of the UK would receive an extra £4B in annual public research funding.

Whatever the statistics, the report does acknowledge that there is a disparity that should be corrected. I don’t think anyone in the life science industry is suggesting this should be at the expense of the greater South East. The proposed solution hangs on the back of the previously announced goal to grow UK R&D spend to 2.4% of GDP, the OECD average. While becoming “average” doesn’t sound like a lofty goal, achieving this target will involve a significant increase in public R&D spend to £20B by 2024-25 and includes a very welcome 36% increase in Innovate UK’s budget.

The plan for the distribution of some of this increased R&D budget is a little murkier. The headline figure is for a 40% increase in R&D expenditure outside the greater South East by 2030. However, the White Paper doesn’t say whether this is in real terms or simply compared to today’s budget. This is important because inflation could easily eat away at most of that 40% increase over the rest of the decade, leaving a real-terms increase of just a few per cent or possibly nothing at all.

The Paper also indicates an R&D budget increase over the current spending review period of 1/3 in the regions outside the greater South East, but the Innovate UK budget is increasing by 36% over that period, suggesting a relative decline. Still, a 33% increase is to be welcomed and the inflationary impact over this shorter period should be less, so even if it is not a real-terms increase, it should still be noticeable.

Finally, the document states that BEIS will aim to invest at least 55% of R&D spend outside the greater South East by 2024-25, but it’s impossible to judge this without a figure for BEIS current proportionate spend to compare it with.

Giving a verdict on the R&D section is therefore difficult because the percentages are reported on a range of different bases, but as with small company finance, there is no new money.

Overall, the White Paper identifies the challenges, which is a good start even if the solutions are somewhat lacking in substance. In the US, the NFL draft pick is organised such that the team at the bottom of the league, the previous season, gets first pick of the draft. This ensures the bottom teams have a chance to improve by bringing on good players. In the UK the first choice in the “R&D draft pick” has historically gone to the winners, with the result that those at the bottom struggle to improve. Perhaps the ‘Levelling up White Paper’ could at least be the start of a change, but it feels like there’s a lot more to do.