Euro Biotechs: Mating for Survival
DECEMBER 26, 2002
NEWSMAKER Q&A:TECHNOLOGY
Euro Biotechs: Mating for Survival
With smaller outfits struggling to stay afloat, mergers are sure to increase, says Lehman Brothers health-care expert Maarten de Jong
This past year was tough for Europe's fledgling biotech industry. Financing options were few, the industry is regarded as risky, and investors, eager for both profits and products, have fled.
So why is investment banker Maarten de Jong optimistic about the sector's long-term prospects? He believes that consolidation will allow stronger players to emerge, and several outfits have promising pipelines. De Jong, the director of Lehman Brothers' global health-care group in London, spoke with BusinessWeek London Correspondent Kerry Capell about what biotech investors can expect in the year ahead. Edited excerpts of their conversation follow:
Q: How has the past year been for European biotechs?
A: For many of the companies, it has been very challenging. The financing window is practically closed. When there's an overall downturn in the markets as there has been for the last year, investors look for the least risky propositions: The larger companies with an established infrastructure, business model, and cash-flow base. And the problem for biotech -- and technology companies in general -- is that it's perceived as a relatively risky sector. As a result, the Lehman Brothers European Biotech Index came down by 50% over the last 12 months. The Nasdaq Biotech Index decreased approximately 40% over the same period.
Compared to the U.S., Europe's biotech industry is still at a relatively early stage, and there are only a limited number of companies in Europe that have been able to get products approved. This partially explains why the European Biotech Index showed a more negative trend than in the U.S. While the U.S. biotech industry did see some financing getting done, the window in Europe remained fully shut.
With the capital markets largely closed, biotechs have had no real option to raise funds other than by pursuing lucrative collaborations with major drug companies to co-develop or co-market their biotech products. (See BW Online, 12/26/02, "From Proteins to Profits").
Q: What's the common denominator among those biotechs that have managed to do relatively well?
A: The companies that had the best performance in the last year have been the larger ones. These either had products already on the market or very diverse and mature drug pipelines.
Q: What's the outlook for mergers and acquisition activity in the sector in the coming year?
A: Further consolidation can be expected, both between the smaller companies trying to obtain a more balanced and lower- risk business model, and by the larger ones in their pursuit of further strengthening their established position. Mergers would offer the smaller biotechs the opportunity to enhance their capital-markets profile, obtain greater liquidity, and a chance to create a larger combined pipeline of new products.
Q: Is it more likely that European biotechs will look at home or abroad for potential partners?
A: Ideally, it makes sense for European companies to consolidate at a European level first. The question is: Can you really find the right bride here in Europe? The sheer number of biotech companies is much greater in the U.S. than in Europe, so it's only natural that many European companies are also taking a look at their counterparts in the U.S.
There are [some] companies here in Europe that have developed into global biotechs with products on the market that would be able to play a proactive role in any global consolidation strategy. Examples include Actelion and Serono in Switzerland, with market capitalizations of $950 million and $9.5 billion, respectively. Britain's Celltech, with a market cap of $1.5 billion, is another. As for the rest, it's really a question of whether they will be the dinner or the diner. And it looks like many of these European companies are more likely to be the former.
Q: When will IPO activity pick up?
A: We don't think that the biotech IPO market will return anytime within the next six to nine months in Europe. There's no real trigger that could open the [European] market, and activity in Europe will only start when the IPO window opens again in the U.S. We don't expect any significant biotech IPO activity in the U.S. for the first six months of 2003.
Q: What types of companies will go to market first?
A: The lower-risk propositions: Companies with broad and late-stage product pipelines, combined [with] management teams with proven capabilities. And there are only a limited number of companies in Europe that fall into that category.
Q: Which European countries offer the most opportunity for biotech companies?
A: It seems that Britain and Switzerland are the two best markets. They both have strong and knowledgeable institutional support. These markets also have a longer biotech track record, and they have seen the most biotech success stories.
Q: Which biotechs look the most promising?
A: Actelion [a spin-off of Roche] has done very well.... Celltech has several products on the market, has an established revenue stream, and has a broad drug pipeline. They also did a big deal with Sweden's Pharmacia [now merged with Pfizer (PFE ) in the U.S.] to collaborate on a compound, CDP 870. It's in Phase III clinical testing for rheumatoid arthritis, and it also has some other possible indications.
NicOx in France is collaborating with Britain's AstraZeneca (AZN ) to develop and market a drug called NO Naproxen, and that product should move into Phase III soon. Spain's Zeltia has a number of oncology compounds in clinical trials, and their lead compound, ET-743 for soft-tissue sarcomas, is currently being reviewed by the European Medicine Evaluation Agency. They're likely to gain approval in the first half of 2003.
There are also a few interesting vaccine companies, such as Acambis and Powderject, both based in Britain. They generate significant amounts of cash as they both have several vaccines already on the market. They have proven that they can get products on the market, sell them very effectively, and still manage to aggressively develop their pipelines.
Q: In the past few years, the German government has offered significant financial support to biotech startups. How have they fared?
A: The decision to build a biotech industry in the Munich area based upon strong government support was a good one in principle. Many of the German companies were able to obtain significant government funding through soft loans or development programs. There was lots of investor interest.
The equity culture was quite new, and many people invested largely based on hype rather than the fundamentals of these companies. This helped German biotechs to raise incredible amounts of capital in 2000. But now these relatively inexperienced investors are walking away due to all the volatility. Of course, all European [biotech] companies have seen their liquidity fall dramatically in the past year, but German companies were among the hardest hit.
Q: What are investors looking for in today's market?
A: We saw the creation of lots of companies during 1999 and 2000 that were based around very narrow product platforms and only very limited drug pipelines -- if any at all. Today, investors want a company with a very strong pipeline of compounds in late stages of clinical development and a platform capable of sustaining the flow of new drugs.
On the private-equity side, there's still money around for such companies, and deals are getting done. Private-equity investors also want to see proven capabilities, and that's why we have seen several spin-offs from big pharmaceutical firms.... We'll see more spinoffs because it's a very good way to meet investor demands, and it's also a good way for Big Pharma to retain some of the value of teams and efforts that are no longer part of their strategic focus.
Q: How do European biotechs stack up against their rivals in the U.S.?
A: Europe has a very good science base, and this scientific background should be able to support a thriving biotech industry. The biotech industry in Europe is not yet as mature as in the U.S. If you look at the roughly 50 publicly traded companies here in Europe, fewer than half have a product beyond Phase II. Around 25% don't have a product beyond Phase I.
The combined market cap of the European biotech companies is less than $25 billion. That may sound significant but once you remove big biotechs such as Serono, Celltech, and Germany's Qiagen, the combined market cap of the remainder is about $12 billion. In contrast, the combined market cap of all the biotechs in the U.S. is closer to $200 billion.
If you look at big U.S. biotechs such as Amgen (AMGN ), Genentech (DNA ), or Genzyme (GENZ ), it has taken them 10 to 15 years to reach their current size. It will only be a matter of time before we will see more U.S.-style success stories in Europe. Many European companies certainly have that capability. Perhaps we're just too impatient.
Edited by Patricia O'Connell
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