Europe’s attempt to build more sustainable life-sciences business clusters faces being damaged by a sharp drop in biotech valuations — prompting renewed concerns that US buyers will swoop on European start-ups.
A rapid decline in the Nasdaq biotechnology index — down 13 per cent this year amid scientific setbacks and after a pandemic-driven surge — has made it harder for biotech companies worldwide to raise funds. But European companies are particularly affected as they tend to raise money in smaller rounds, leaving them with less of a cash cushion to fall back on.
Geraldine O’Keefe, an Amsterdam-based partner at venture capital firm EQT Life Sciences, says fledgling European companies tend to partner up or sell themselves earlier than their US peers do, because they can never be confident of securing sufficient funding to grow independently.
“We do have the science, technology and innovation in Europe,” she says. “We just don’t seem to be quite as good at funding it.” O’Keefe adds that Europeans have a different mindset, tending to take setbacks more seriously than Americans.
Overall, venture funding for biotech is increasing in Europe. However, it still lags behind the US and China.
In a McKinsey study comparing the years 2015 to 2017 with the period from 2018 to 2020, the average early-stage funding round grew 13 per cent to $20.5mn in Europe. In comparison, it increased by 17 per cent to $36mn in the US and by 18 per cent to $46.2mn in China.
Late-stage rounds rose about 20 per cent across all regions — but from a higher base in the US and China.
Analysts now predict a boom in mergers and acquisitions, as large pharmaceutical companies seek to refill their drug pipelines by buying assets or whole companies which, after the fall in indices, have more attractive valuations. While many US companies will look at home initially, the even lower valuations in Europe may appear like rich pickings.
Vishal Gulati, an investor at Molten Ventures in the UK, says he knows two senior US-based bankers who are setting up shop for a week in London to examine companies. “They normally don’t even take calls from the UK,” he notes.
In Boston, Daphne Zohar, chief executive of PureTech Health, which develops medicines for conditions affecting the brain, gut and immune system, says she believes investors will be looking at European companies with good trial results to see where there is a “value disconnect”.
She says this gap between the price and the true value of a company could be larger in Europe, because investors there are often more conservative about their approach to companies without revenue.
“In the US, there are more specialists who get excited about upcoming catalysts and can really push a company’s value up,” she says.
Pierre Jacquet, vice chair of LEK Consulting’s healthcare practice, says the “very, very steep correction” may mean more European companies seek financing sooner than planned and enter partnerships with other companies.
“The main threat to European biotech is that capital market conditions are very difficult for them,” he says. “A lot of these companies are trading at cash” — meaning the market values them at the amount of cash on their books, assigning no value to the drugs they are developing — “without the ability to finance a full pipeline and platform”.
While being acquired might be the right option for a smaller biotech company, it is also a loss for the European life sciences industry, making the continent’s biotech hubs less able to weather storms compared with established centres, such as Boston.
When a biotech is sold, it forgoes the chance of growing into a larger standalone company that can retain more talent in a local hub, who might eventually go on to work for other start-ups.
“It is the same in any kind of industry ecosystem,” Jacquet says. “If you attract investors, partners, talent and reach scale, it becomes pretty sustainable and resilient to a downturn in the market.”
Mario Caria, chief executive of Paris-based Kuste Biopharma, chairs a working group at the European Federation of Pharmaceutical Industries and Associations that examines funding for small businesses.
He worries that European companies do not have access to enough capital to fund the late-stage trials that are essential to obtain drug approval. “If, in Europe, we are not able to do phase 3 trials, the industry will be dead,” he warns.
While many European venture capitalists call for changes in regulation to make it easier for pension fund managers to fund early-stage life sciences companies, Caria goes further and believes the European Investment Bank and European Investment Fund need to be more active in reducing risk.
He would like them to do this by guaranteeing returns for institutional investors and making it easier to become a venture investor by cutting the need for years of experience.
He believes acquisitions are not inherently bad — but says: “The problem is the asymmetry. Europe should take back all these kilometres we are lagging behind the US.” He would like to see more late stage European companies reaching the stock market, and some buying assets from the US.
He forecasts that Asia will soon overtake Europe, as measured by the number of fundraising rounds, drug compounds taken to market, and deals done. If matters continue as they are, “in two years, Asia will largely outpace the EU,” he estimates.