At the beginning of 2004, hopes were high
for the biotechnology and life sciences
sector. After going through the financial
mill for several years, it was thought that
the much anticipated upswing might finally
be in sight. VC investments were on the
increase and IPOs were finally back on the
horizon.
But while many looked forward to a more
prosperous time for the sector, others were
not quite so positive in their outlook.
Martijn Kleijgwegt, managing director of
Amsterdam and Munich-based venture capital
fund Life Science Partners, was quoted as
predicting 2004 to be the last window of
opportunity for biotech companies in Europe
to go public for the next three years, according
to his study of previous biotechnology IPO
patterns.
Whether it was concern that he might be
right, or the enforced wait of the previous
years, there was definitely a rush to take
advantage of the window when it did open.
While companies like Ark Therapeutics, Basilea
Pharmaceutica, Zentiva and BioMerieux on
average did very well, only a few European
life sciences companies managed to float
before the window slammed shut in their
faces.
SEP’s Healthcare and Life Sciences
Director, Brian Kerr, points to several
reasons for the fleeting recovery of the
IPO market for European companies:
“The ‘window of opportunity’
phenomenon is partly a self-fulfiling prophecy.
When people believe that they don’t
have much time, they are forced into rushing
out too soon. They feel the need to float
when the market is ready, regardless of
whether the company is actually ready for
the market.
“That leads to too much competition
on the one hand, and also the problem that
the market may not like the general quality
of what it sees coming forward, leading
to demand dropping off. In the US, where
the IPO market stayed open, they had a steady
flow of companies at the right stage of
development, rather than a glut of companies
desperate for cash.”
Kerr believes that, although many might
throw their hands in the air and say there
is nothing that can be done about market
factors like these, it is within the control
of the biotech and investment communities
to change market conditions in Europe and
aim for the more stable US environment where
the ups and downs are evened out and less
dramatic.
According to Kerr, the seeds for this current
scenario were sown in late 2000 when many
VC investors swung from hardware and software
investments to life sciences after the bottom
fell out of the technology market.
More life sciences companies were funded
than normal during that period. On the face
of it, that seems like a good thing for
the sector. However, with funding rounds
for life sciences companies generally increasing
in size each time, it led to a very cash-hungry
environment.
Then in 2002-03, the lack of life sciences
exits for VCs, meant VC investors started
to run out of cash. So while demand for
funds soared higher and higher, supply was
dropping off. The only thing that could
really save the situation was the opening
up of the IPO market, creating a new pool
of money for life sciences companies. Consequently,
it was inevitable that there would be a
race to float when there was even a glimmer
of light at the end of the tunnel.
But that glimmer was snuffed out in the
ensuing rush, which means that even the
higher profile, more mature life sciences
companies who were more than ready to IPO
have lost their opportunity to get a good
valuation in the short term. With such a
depressing outlook for the sector, the question
must be asked - what now for European biotech?
On the other side of the Atlantic, the
last year has been much more positive. Even
though the US market has not been immune
to fluctuations, 29 new companies joined
the publicly traded markets in 2004, raising
nearly $1.8 billion between them, and biotech’s
market capitalisation rose from $344 billion
to $400 billion, according to Burrill and
Company, a San Francisco based life sciences
merchant bank.
“While many people believe we’re
getting toward the end of the IPO window,
I believe the IPO scene is going to be very
robust in 2005,” said G. Steven Burrill,
CEO of Burrill and Company.
“In all, more than 40 biotech IPOs
are likely to get done in the US in 2005
and those offerings will do better than
the ones which launched in 2004.”
On the surface, while comparison with the
US is far from cheering, it does offer some
cause for optimism according to Sam Fazeli,
Senior Biotech Analyst at Nomura. In an
interview with the online financial broadcaster,
Cantos, he said:
“Return in the US has been higher,
but what is interesting to look at is that
the level that we are at now, from a number
of other indicators, is at about the same
stage that US biotech was at in around 1995-96
when the level of investment that had gone
into US biotech versus the total market
cap of the companies added together just
began to turn. So we would hope that there
is some truth in the view that going forward
over the next few years that Europe would
experience much the same as what they saw
in the US.
“This is a sector much like when
you drill for oil where you need a lot of
luck. Unfortunately you cannot measure luck
but what you can do is to try and see whether
the factors that are required to get a successful
sector are there already in Europe. We think
most of them are.”
Fazeli does not believe, however, that
an improvement in the prospects of the European
biotech sector will be an automatic process,
and that changes must be made within the
industry to make it happen:
“Management is one of the key things
to any biotech company - to any company,
basically. The sort of thing we need in
Europe, and that is slowly coming along,
is the churning of experienced managers
from successful companies into new ventures.
For instance, the chief executive of Arakis
used to be at a very well known US biotech
company SEQUUS.
So he’s got the experience of the
US biotech sector and he’s an experienced
drug developer. These are the sort of things
we need to see and we are seeing it slowly.”
Sam Fazeli also recommends that European
companies get through to fund managers by
showing that they have got a commercial
attitude to business:
“What they should do is try and find
some relatively low-hanging fruit, much
like the early US biotechs did. So unless
they are really lucky with a drug discovery
that suddenly takes them to $500 million,
they go after products which are maybe reformulations
of an existing treatment.
“That means they can talk about early
revenues which help support the development
of the big ideas and that’s a much
more interesting story than going to tell
a fund manager that I have got a great idea,
no idea whether it works but give me some
cash please and I will come back in two
years time and get some more off you. They
don’t like that much!”
SEP’s Brian Kerr agrees with the
benefit of having some revenue or a product
nearing completion, pointing out that 80%
of the US companies that achieved a post-IPO
market cap of over $200 million in the last
18 months were at phase III or beyond.
“Biotech has always been a long term
investment,” he said, “Experienced
investors in the sector understand this,
but fund managers and venture capital firms
alike are perhaps rethinking at what stage
in the development cycle is the best for
them to invest because, with the best will
in the world it doesn’t make economic
sense to go in at too early a stage.
“The financial model for biotech
is broken, and we need to re-think and re-engineer
it so that it works again. It now takes
an average of 9 years for a company to go
from start-up to IPO in biotech. Comparing
that with typical valuations in the US,
even if a company floated for £60
million, it would have cost at least £45
million to fund it over that period. That
doesn’t make sense - it doesn’t
make money for investors and it doesn’t
cover the high risk factor that has always
characterised the life sciences market.
“The move now is definitely much
more towards investing in companies at a
later stage, with proven products. What
we need to make sure is, that this is balanced
with a commitment to staying with companies
to a later stage again, beyond the exit
point they may previously have aimed for,
so they can list for much more money when
the time comes.
“Our view is that companies in Europe
tend to list too early. In the US, VCs recognise
that they need to make the investment more
secure for public investors. The market
doesn’t want to take the same sort
of risks as VCs. It needs to be a commercial
enterprise from the day it floats, not a
scientific R&D project.”
Kerr believes that the upheaval in the
life sciences market over the last few years
will lead to a fundamental shift in how
companies plan their path from start-up
to exit.
“Companies have to look at how they
can cut down the length of time they need
investment for, to attract investors back
to the sector. Some companies may be looking
at medical devices or other smart technology
that needs a shorter development cycle.
Others may look to working more on their
R&D within the university or corporate
environments so that more development time
has gone into it before starting to fund-raise.
“The latest addition to the SEP
life sciences portfolio, Rhytec, is a good
example of both of these points. It is a
start-up, but a corporate spin-out from
the Gyrus Group, with a medical device nearly
ready to be launched commercially.”
Kerr concludes: “We need to create
a bigger, more stable, quality environment
to invest in, with a nice steady market
that grows consistently. Biotech is a long
term game in more ways than one, and that
means that investors and companies alike
are going to have to rethink their approach
to make that happen.”
