The consensus is that the stakes for UK and wider European healthcare – and much more besides – could hardly be higher.
“This is a momentous time, following the recent change of government in the UK and what might follow in the US, after the election of Donald Trump as president.”
That was Yogan Patel’s high-level summation of the evolving macro-environment in which the UK life sciences industry, medtech and pharma innovators must operate in the coming four or five years.
Patel, head of MHA’s pharma, life science and medtech sector, was speaking to In Vivo after a January keynote Westminster Health Forum presentation on key challenges and opportunities for the life sciences sector.
The immediate backdrop was the new Trump administration’s plans to look inwardly to strengthen the US economy, including the President’s much-talked-about plan of import tariffs on goods from China, Mexico and Canada (the executive order for which was signed in February and which has now been imposed) and threats of the same for Europe.
As March ticked around, EU and UK life sciences industries remained nervous – but clueless – as to the full implications of potential US tariffs on their trade with the US. The German medtech industry, for one, called for medtech products to be exempted from any future tariffs.
President Trump will not relent on his “America First-Business First and Tax Cuts” agenda, Patel said. Tax cuts are at the top of the agenda for Republicans; they wish to renew some $4tn in expiring US tax cuts.
And into this melting pot comes Robert F. Kennedy Jr. as health secretary. What will be his impact, Patel wondered? He was voicing the thoughts of many.
UK Life Sciences Are Holding Up
While the unfolding US agenda has generated much concern in Europe, the US view of UK life sciences is somewhat more positive.
UK industry growth has outpaced that of other larger European countries, such as France and Germany, Patel said, and the UK is seen as a destination of choice for many investors, especially in medtech and gene-based therapies.
In his dialogs with overseas contacts, Patel has gleaned that, despite Brexit, the UK is still seen as a gateway to Europe.
Statistics from gov.uk updated in May 2024 showed that UK life sciences businesses generated £108.1bn ($140bn) turnover in 2021-22, up 13% year on year. Turnover has been on an upward trend since 2014-15, it said.
Furthermore, data from a recent Oxford Economics analysis stated that life sciences performed better than many other industrial sectors in 2024, Patel reported. This reflected the fact that demand for pharmaceuticals is less sensitive to economic cycles than many other industries. UK pharma output will grow by an average 1.3% per year between 2024 and 2026, the report said.
Investment in UK life sciences remains strong, too, Patel claimed. Despite a global downturn in late 2023 going into 2024, the UK biotech sector secured £2.25bn VC funding across 113 deals, according to the UK BioIndustry Association’s (BIA) report on 2024.
Series B rounds dominated, highlighting a focus on scaling up more established ventures. BIA said the suspicion is that VC is not delivering the mega rounds needed for later-scaling companies. This makes the reopening of the IPO window even more important.
Pension Fund Watershed Moment?
Patel is cheered by the ambition of the Mansion House Compact, an agreement that opens the doors to UK pension funds further investing in sectors such as life sciences, which is one of the key sectors the government has designated. “A lot of cash is sitting there that could be invested in life sciences and this would help the UK compete with the US,” he said. “Let us accelerate the implementation of this.”
But while this journey must start, it needs cross-party support, he said, while cautioning that “things don’t happen overnight.” The BIA pointed out how UK chancellor Rachel Reeves has also highlighted the importance of pension fund reform to increase investment in UK equities and growth industries.
“It is unpredictability – the UK’s ‘Achilles heel’ – that sends many spinouts to NASDAQ for their initial listings rather than the LSE.”
Yogan Patel, MHA
Key here is a predictable and stable healthcare environment, such as might be delivered from a “10-year cross party healthcare strategy,” Patel believes. Such a mechanism would likely outlast its political sponsors and would be immune to often disruptive ministerial and government changes. “These changes can impact companies and how they operate and make their investment decisions, but investment must be there for the long term.
“It is unpredictability – the UK’s ‘Achilles heel’ – that sends many spinouts to NASDAQ for their initial listings rather than the LSE,” he said.
Investors need certainty, Patel stressed, observing that it is much harder to raise funding now than it has been for some time. Biotech and medtech IPOs are bumping along the bottom, with no listings in 2023 and 2024, and more companies are leaving the market over lower valuations and declining liquidity.
The forthcoming industrial strategy identifies the life sciences sector as one of eight priority sectors, based on its ability to drive economic growth and investment. The final industrial strategy and growth-driving sector plans will be published alongside the UK government’s spending review in spring 2025.
Patel bemoaned the fact that for far too long the UK has not had “a genuine long term life sciences strategy.” The new government’s clear strategy and its significant parliamentary majority offer a glimmer of hope, but “in spite of there being pockets of brilliance across the country, a lack of coordination hinders [the UK’s] true potential,” he said.
Creating a Competitive Environment Through Tax Reform
The stakes are high because the global stage is more competitive than ever. Companies are mobile and able to seek the best opportunities for growth with an approach that is often agnostic to historic roots and market loyalties. The UK must offer an environment that not only wins, but retains, vital players, Patel advised.
Tax is a factor when international companies consider where to base their operations and/or look at acquisitions. The UK is middle ranking in international comparisons of corporation tax, with a rate of 25%. But the US rate is 21% (and likely to go lower because of Trump), while Italy’s is 24%. Ireland’s is just 12.5% (and a minimum 15% on the profits of large multinationals, irrespective of how they are structured following the implementation of BEPS Pillar 2).
France, like the UK, charges 25%, and Germany 30%, although it is thought likely to reduce its rate following the recent election and the state of the economy.
“What attracts entrepreneurs, businesspeople, FDI and investors? Tax rates is certainly a factor, so why not consider dropping the tax rate?” Patel asked. This could still result in the same amount of tax being raised due to more companies making profits and greater contribution in other taxes, such as VAT and employment taxes thanks to higher salaries and employment growth.
“The UK [already] has one of the least favorable corporate tax rates, seen against its competitors; it needs to encourage, not disincentivize.”
Yogan Patel, MHA
Additionally, Patel advocates more generous tax credits on R&D expenditure to encourage R&D and investment. R&D tax credits can be a cash line for start-ups and pre-revenue companies. Smaller businesses need such funding in their earlier stages, when most of their major outgoings are staff costs.
Frustratingly, there have been delays in reclaims being remitted by HMRC, the UK’s tax, payments and customs authority. The delays are often up to six months, if not longer – too long for some smaller innovators.
Patel said: “The UK [already] has one of the least favorable corporate tax rates, seen against its competitors; it needs to encourage, not disincentivize.” Once UK-based companies are acquired, their R&D is often moved to more favorable tax regimes - like Australia, among others. “We should look at reversing this.”
Patel also recommends increased grants for areas like accelerating drug discovery, diagnostics and clinical trial optimization.
However, the UK’s grants were 30% down in 2024. “I’d like to think the government would continue to fund the grant system in this sector. A lot of companies rely on it as an important source of finance.” Instead, the sector awaits the spending review with some concern, fearful of the impact on grants given by Innovate UK and other bodies.
On a positive note, the UK’s governing Labour party has pledged to streamline National Health Service adoption of innovation as a means of incentivizing innovation. Also, the Darzi review in autumn 2024 – which has done much of the groundwork for the forthcoming NHS England 10 Year Care Plan – called for “a tilt to technology and prioritizing collaboration and stronger partnerships in the life sciences sector.” This resonated deeply, Patel said.
Green Shoots Afoot?
This is because investment in life sciences is a win-win for the health system and the economy, he added. But the combination of measures that will increase National Insurance (NI) payable by companies from 6 April, announced in the UK chancellor’s autumn 2024 statement, will do nothing to stabilize the foundations.
“The NI hike won’t help small businesses. A lot of companies are pre-revenue, but they employ people and cannot easily just push [the cost] elsewhere as some businesses in other sectors may find it possible to do,” Patel said, asking: “How will they manage their budgets or will the talent migrate overseas?”
Upping NI means companies may make fewer hires and give lower wage increases, particularly when their budgets are tight. “We’d like to see more green shoots, but at the same time we wonder: Have you shot yourself in the foot?”
In summary, there is a lot of concern for 2025. The UK life sciences sector is strong, but “this year is pivotal,” Patel said, “as we set the course for the next decade.” The sector stands at a crossroads where the government has set the stage, and “we must seize the opportunity to collaborate and innovate,” he added.
“We need certainty. The US has presented a serious challenge, throwing in the wild card of deregulation. But a campaign against big pharma could damage it. This makes for uncertainty, but as well as risks, it presents opportunities for the UK,” Patel said.