Winning in Europe
Transcript of BioCentury This Week TV Episode 122
Antoine Papiernik, Managing Partner, Sofinnova Partners, Paris, France
Gilles Nobecourt, Partner, Edmond de Rothschild Investment Partners, Paris, France
PRODUCTS, COMPANIES, INSTITUTIONS AND PEOPLE MENTIONED
Actelion Ltd. (SIX:ATLN), Allschwil, Switzerland
Amgen Inc. (NASDAQ:AMGN), Thousand Oaks, Calif.
Genentech Inc., South San Francisco, Calif.
Institut Pasteur, Lille, France
Karolinska Institute, Stockholm, Sweden
Steve Usdin, Senior Editor
University of Cambridge, Cambridge, U.K.
University of Oxford, Oxford, U.K.
Eric Pierce, Publisher
ERIC PIERCE: In the innovation race, is Europe falling behind the U.S. and Asia? Two venture capitalists say no. I'm Eric Piece, welcome to BioCentury This Week.
NARRATOR: Your trusted source for biotechnology information and analysis, BioCentury This Week.
ERIC PIERCE: Europe's academic institutions and research institutes rank among the world's best. But getting that science into the hands of VC-backed entrepreneurs to create breakthrough solutions for patients is a different story.
Europe has never been as open to risky investments as the U.S., but as the economic downturn drags on, biotech in Europe looks especially risky. The net effect? Fewer European VCs funding innovator companies. But a hardy core of European VCs remain. And they are making good returns from their investments in European innovations.
More importantly, they're doubling down on the continent with millions in fresh funds.
To find out why, we're joined by two long-time venture investors in Europe, Antoine Papiernik, managing partner of Sofinnova Partners in Paris. Sofinnova has just raised more than $300 million for a dedicated biotech fund.
He's not the only French VC with that kind of money. We're also joined by Gilles Nobecourt, a partner at Edmond de Rothschild Investment Partners. His firm has over $400 million dedicated to the life sciences.
Gilles, your fund also had a recent first close as well. So some fresh capital that just came in.
GILLES NOBECOURT: Yeah. We currently are raising a new fund. We are 80% in raising a $260 million new fund, which should be closed by spring.
ERIC PIERCE: And Antoine, you had some fresh capital come in as well?
ANTOINE PAPIERNIK: Yeah, we close on December 10th, big party time. $320 million, that is our 7th fund since the beginning of Sofinnova.
ERIC PIERCE: You guys have been investing for a couple decades. Let's take a step back and just say, make the case for Europe. Why are you putting your money to work in European companies?
ANTOINE PAPIERNIK: Because we make money. I mean, that's the only question. The only thing that our investors want to see is, can we make money investing in European life science venture? And we've demonstrated that we could. So that's the proof in the pudding.
ERIC PIERCE: So the returns are there? But also, there are some other things that are outside of the returns that sometimes investors may keep them out of the market, which is like liquidity. And venture capital is not the most liquid asset out there.
Gilles, what are the LPs telling you?
GILLES NOBECOURT: LPs are telling us they're happy with liquidity because we manage liquidity. We built -- in the end, our financial product, which I'll manage from liquidity standpoint -- we built portfolio in such a way that we can begin to return money three years after beginning of fund.
ERIC PIERCE: How do you do that?
GILLES NOBECOURT: Just by building a portfolio of company, which are balanced in [INAUDIBLE] and liquidity. A fund was raised in 2005. We return money beginning in 2008. Fund in 2008, we begin to return money 2010. And those funds-- I mean, our investor on the fund 2005 are out of the risk. We've returned almost all the fund. And on the fund 2008, we have returned about half of the fund. So there this is liquidity. They can look at the rest of the portfolio developing nicely without any risk for them, so the return is fine.
ERIC PIERCE: So you've made some money off of some of the later stage companies and now you have sort of a portfolio of companies that could develop some upside?
GILLES NOBECOURT: Yeah, we sold a company in December, 10 times in a year and a half. So that provides 50% of the fund back to the investors.
ERIC PIERCE: Antoine, you've had some success with IPOs, and also trade sales, M&A exits. Talk a little bit about that.
ANTOINE PAPIERNIK: Yeah, we had a number. I think that's also recipe to being able to raise a fund in this market is that we had a number of exits over the last three years. We had six or seven exits. All of them above $500 million in size. And in total, representing about $3.5 billion in company value. And we were every time, the first and largest investor in these companies. So this is the recipe.
You need to invest in companies that ultimately you're able to sell. It's a simple business.
ERIC PIERCE: You also were, at sort of looking at it structurally, in a space that wasn't necessarily hot from a macro view. You were sort of investing in health care in Europe and things that weren't necessarily-- we referred to them, I think offline, as the three deadly sins.
ANTOINE PAPIERNIK: Yeah. I often say that venture, life science, Europe are the three deadly sins. So being able to survive those, I think is important if you want to succeed over the longer term.
Certainly, Europe, from an American perspective, has been deemed complicated. Geopolitical risk and currency risk. But even in this environment, just the science is there. The great institutions that we have all over Europe, from Pasteur to Karolinska, to all the great places where science is being done in Europe is on par with the science being done in the U.S. So that's what counts at the end of the day.
ERIC PIERCE: And Gilles, you mentioned earlier about your portfolio strategy. Do you behave differently with your portfolio companies in today's marketplace because things are challenging? Maybe there are fewer VCs to syndicate with?
GILLES NOBECOURT: We make sure that we have enough money just to support the company up to the point we have really created value. That might be a change over seven, eight years ago where you could build on different syndicate.
Now you've got to make sure that you'll have, from day one, all the resources necessary to achieve significant step. That's a change.
ANTOINE PAPIERNIK: And at the same time, you have to do more with less. The times where you could have 100 people, $100 million, 100 years to develop your product just doesn't work anymore. So you have to be just aware of that. And capital efficiency within this constrained environment is absolutely key.
ERIC PIERCE: And we're also in sort of a compressed environment for returns as well. Regardless of what asset class you're in, it seems like the returns have sort of come down. Have the LPs sort of managed their expectations? We've got about 30 seconds. So I'll start with Gilles.
GILLES NOBECOURT: Yes, as far as we're concerned. Provide returns to the LP, which are exactly in the ballpark they're expecting from beginning.
ANTOINE PAPIERNIK: I think, in fact, this is where we have a chance to show how important it is for them to invest in us. Because getting double digit internal rate of returns in any environment, from buyouts to turnaround, is difficult. We have been able to show that. That's what should be attractive now and in the years to come.
ERIC PIERCE: We'll continue the conversation in just a moment. But first, here's a picture showing how much more VC money has gone into U.S. biotechs over the past five years compared to Europe.
NARRATOR: You're watching BioCentury This Week.
ERIC PIERCE: Is Europe falling behind the U.S. and Asia in funding innovation? We're talking to Gilles Nobecourt and Antoine Papiernik.
Antoine, we left the last segment talking about the returns that biotech has been generating, and relative to other asset classes, they're actually looking a bit more improved. Discuss how that plays into the whole landscape of fundraising?
ANTOINE PAPIERNIK: Well, in the last 10 years, buyouts have had the top position.
ERIC PIERCE: And buyouts are?
ANTOINE PAPIERNIK: Leveraged buyouts, mature business that are bought using debt. And then, resold years later.
In comparison, this is a much less risky investment to biotech. But those with issues with debt, leveraged buyouts returns have diminished over the last three, four years.
While, on the biotech side, nobody lends us debt anyway. So we have to deal with an environment where we develop compounds and bring drugs to market. And our returns have been very stable, while in fact, increasing over the same period. So all in all, if you compare ourselves to other asset class, like buyouts, I think we're doing very well.
ERIC PIERCE: So the blush has maybe come off the rose a little bit on a top performer, like buyout funds. But at the same time, biotech is still a very risky investment. It's a risky asset class. Gilles, what's your take on--
GILLES NOBECOURT: It's a risky asset class. But what Antoine just said is very important in the stability of the time. I mean, those asset class, which are dependent of the economy. When the economy goes down, they go down with it. In our asset class, we've been delivering constantly year over year over year. And we've been returning money every year since 2004, regardless of the economy.
I think it's a very important feature for junior investors to consider that when they consider the asset class. And in terms of risk, indeed there is developing risk. One risk we don't have is the end market risk. Two-third of human diseases do not have proper treatment. And this requires an answer.
ERIC PIERCE: So clearly, there's an unmet need. And that's only going to expand.
ANTOINE PAPIERNIK: Yeah. What I often say is that people die and they would rather not. So clearly, we don't have as a problem. So yeah, the market is there. And I think one of the things which is different from other financial instruments is that not only are we providing returns to our investors, but we're doing something right. We're bringing drugs to market, drugs that are treating intractable disease. We've had in our experience, wonderful situations where, thanks to our money-- of course it's the entrepreneur who makes the drug. But thanks to our money, we ended up developing drugs that saved tens of thousands of patients. That really is something that is-- we can't get in any other area.
ERIC PIERCE: Why don't you give us an example or two of a drug that was developed by a portfolio company that had an impact?
ANTOINE PAPIERNIK: So the epitome to me of the biotech industry in my portfolio is Actelion. Actelion is a company we started at the end of the '90s-- '97, '98, for people coming from a pharma company. And they developed a drug for pulmonary hypertension, a disease that was lethal-- that is lethal in most cases. And it brought to market a drug, an orally available drug to treat that indication. Today, they became the market leader and really the reference for this indication with a drug called Tracleer that makes over a billion in sales. And the company has a market cap of over five billion. So that's creating value. You create value, and you do good to society.
ERIC PIERCE: And Actelion, an interesting case study because it's a standalone company after all these years.
Gilles, you've also had some companies with some success as well.
GILLES NOBECOURT: Yeah, we sold companies in oncology, treating untreatable breast cancers. Medical device company treating very difficult conditions. And Antoine is right, this is also very, very strong motivation. Our team, [INAUDIBLE] company drug development side [INAUDIBLE] in industry and even now. I think there's strong motivation, just being conscious that you're pushing drugs which are going to treat people to whom there is no proper solution now is indeed.
ERIC PIERCE: So there's a social responsibility sort of angle that's involved in biotech as well. Is that resonating with the LPs and with what--
GILLES NOBECOURT: Yes, it is. It is more and more. And it's an asset class which has proven for those who are still around that you can deliver proper return. But not only do that, but to socially use in better care of patients. This is very important.
ANTOINE PAPIERNIK: You can't use that argument if you have lousy returns, that's for sure. But clearly, the LP community also wants to make sure we do something which is important.
ERIC PIERCE: U.S. biotechs get bigger venture rounds than their counterparts in Europe. Here are the numbers.
NARRATOR: Now, back to BioCentury This Week.
ERIC PIERCE: We're talking about financing biotech innovation in Europe with Antoine Papiernik and Gilles Nobecourt. Antoine, we were talking earlier about how Europe sort of behaves a little bit differently in terms of accessing the science. Talk a little bit about how you are accessing science in some of these European institutions.
ANTOINE PAPIERNIK: I think it's less concentrated than in the U.S. because there's a multiplicity of countries. So you will have fantastic centers in France, in the U.K., in Sweden, in Italy, and that creates a difficulty because you have to access those dozens of centers, as compared to maybe more limited, larger centers in the US. But that does also increase diversity. So we think that's one of the good things about Europe.
ERIC PIERCE: Gilles, how are you going about it?
GILLES NOBECOURT: Yeah, I think it's-- seen from the U.S. [INAUDIBLE] based in Paris, or the French funds, but that's-- I mean, we tend to see Europe as a domestic market as a whole. So, as Antoine said, you've got to access the best centers. In each country, you've got very good research, and very good clinicians, so it creates a great diversity, and create multiplicity of opportunities.
ERIC PIERCE: Indeed.
GILLES NOBECOURT: Each time, you've got to tailor it to the very specific countries. But in the end, that's all domestic markets. It's how you should be seen.
ERIC PIERCE: And so, you're having to spend a lot of time at a lot of different institutions. How do you actually get access to those institutes? What type of networks do you need to build to create that type of access that a VC needs?
ANTOINE PAPIERNIK: One thing is simple-- when people know you have money, they come to you. That's the baseline. So people know who has money, and who hasn't. But, of course, we have networks, deep networks into those institutions that are built over years.
I mean, Sofinnova has been created forty years ago, so we've had time to do spin-offs and create companies from various institutes. So that creates the long network that allows us to access when scientists invent something, and patent something. Then the technology transfer unit of Cambridge or Oxford or Karolinska will contact us and propose to talk to us about the innovation.
GILLES NOBECOURT: I think a key element is trust. You've got to make sure that the research institute and researchers know who you are, that you have money, and that you are a trustful partner to develop their innovation. That you've done it in the past, and trustful in terms of doing it, knowing it, and respectful of the entrepreneur. I think it's a key word.
ERIC PIERCE: That's an interesting point, because with respect to the entrepreneurs, that's been one of the sort of gating factors of Europe that we've heard, which is the scientists are maybe-- I don't want to say less entrepreneurial, but there's almost occasionally--
ANTOINE PAPIERNIK: You should say less entrepreneurial. That's the reality of our business.
ERIC PIERCE: Is that changing? And if it's not, how do we sort of embrace more of an entrepreneurial attitude?
ANTOINE PAPIERNIK: It is changing, but you can't change mentality overnight. So, I've been in this business 20 years. It takes a generation to change mentality. So, if you look back to the '90s, it has immensely improved. So that's what we should look at, is how much we have improved. So yes, maybe we're not as entrepreneurial de facto because that's the makeup of who we are in Europe. But we made huge progress, and I think the results that we have also are indicative of the fact that we have cracked that nut. We have found the entrepreneurial-- or, enough entrepreneurs to back.
ERIC PIERCE: And I also think that sort of plays into something we talked about earlier, which is access to a better management. People who have maybe lived a cycle or two within an earlier stage of biotech.
GILLES NOBECOURT: And then we have significant movement of people in the U.S., have gone in the U.S., willing to return to Europe. Or, even now, Americans willing to take European experience. That's happening more and more. It didn't used to be.
ERIC PIERCE: How important is that, to have that access to a solid management team? Because we deal a lot in it. This is a science-based industry, however.
GILLES NOBECOURT: It's key. A wonderful management team with an average technology will do better than a bad management team was excellent technology.
ERIC PIERCE: We've got about one minute. But let's--
ANTOINE PAPIERNIK: But, so this is a philosophical-- we have a lot more-- philosophical view. We need a lot more than one minute. But, this debate about assets-centric versus people-centric is really a debate within our industry. We believe that if you have the right management team, clearly those assets that you find in academic labs will be properly developed.
ERIC PIERCE: We've also seen an increase in corporate venture capital activity. Does that change how institutionally VCs behave? Antoine?
ANTOINE PAPIERNIK: Well, it is just another element-- a very good marker of the interest of pharma to access very innovative products. So in a situation where traditional VCs have less money, or no money, clearly we've learned to work with corporate venture capitalists. And we, I think, found a good balance. We have several case of a good relationship where even more than one corporate venture capital comes into a syndicate that we do. So, I think they are a member of the community right now that we are working with on a day-to-day basis.
ERIC PIERCE: Gilles?
GILLES NOBECOURT: Yeah, we've been co-investing with several of them, and they are professional as we are, and they bring a lot to the table, too.
ERIC PIERCE: And at some level, the corporate-- is it a validation of what you guys are doing when a big pharma company sets up an established venture group?
GILLES NOBECOURT: Whenever an investor invests along with you in a company, it's a validation because they do due diligence as we do. So in that sense, it's a validation, yes.
ERIC PIERCE: And are there-- how do you align the overall strategies? Some of the corporate VCs are financially driven. Other corporate VCs are maybe driven more to access technology-- [INAUDIBLE] driven?
ANTOINE PAPIERNIK: Well, I think you bring them into a round, you need to make sure they are financially aligned with you, whether they have ulterior motives, strategic motives, is there on their side. Clearly, we need to make sure that, financially, we are aligned, and there's no disconnect between that.
GILLES NOBECOURT: And we'll make sure that whenever corporate VC comes in that they don't hamper the possible evolution of the company, and it's possible value in the future. It has to be clear from the get go.
ANTOINE PAPIERNIK: That's why if you have more than one, it's actually good. Because if you have--
ERIC PIERCE: It's sort of balanced out.
ANTOINE PAPIERNIK: It balances out.
ERIC PIERCE: Yeah, it's not like the 800 pound gorilla is here--
GILLES NOBECOURT: Exactly.
ANTOINE PAPIERNIK: People would assume that you are already sold to this party, while if you have two or three, I think people cannot assume that. Plus, you have the value that they bring, just the knowledge. Do they bring a better field and insight into what those pharma companies think, which is very important?
ERIC PIERCE: So are they assisting on the due diligence, as well, in terms of not only lending credibility to the syndicate, but also--
ANTOINE PAPIERNIK: Well, they made their own due diligence are using the pharma inside track, which ultimately will benefit the company. If they come in knowing that they've asked a question to their colleagues within the pharma groups, that clearly validates the approach, and helps the company further and refine its approach.
ERIC PIERCE: BioCentury has been supporting European biotech with a dedicated investment conference that's coming up soon. Here's more about the 14th annual BioEquity Europe Conference. We'll hear some more final thoughts next.
NARRATOR: You can see top European venture investors, and innovator European biotech companies, at the 14th annual BioEquity Europe Conference this May in Stockholm. Find out more at biocenturytv.com.
ERIC PIERCE: Let's get some final thoughts with Antoine Papiernik and Gilles Nobecourt.
We were talking earlier about sort of where we're at today. Corporate venture capital is playing a lot. There's an increased need for companies to access capital. You've been successful in raising money. Talk about that dynamic and how that's going to play out over the course of the year.
ANTOINE PAPIERNIK: I think in any business, buy low, sell high is the recipe to success. We are in this amazing environment where we have money, and there are hundreds of companies out there of great quality that are in need of money. So if we can't manage to make a success in this period, we should do something else with our time. So we are very optimistic that this is a fantastic period to invest money into the best companies out there.
ERIC PIERCE: And also, to the earlier point, like innovation is key. And pharma is-- depending on where you stand.
GILLES NOBECOURT: You can see it every day. Pharma is starving for innovation. So provided that you can properly develop this good, quality data, innovative product, then you'll find the acquirer for your company. As Antoine put it, I mean the downstream on the creating company, financing company starving for money. And then upstream, the pharma is looking for innovation. So you come up with proper product, good data package, and you'll find someone to acquire it.
ERIC PIERCE: Also, let's take a step back and say, what pharma is now looking for, in terms of pharma innovation and sort of pharma is now trying to become maybe a little bit more biotech-like, so where is that innovation happening in sort of the life science space?
ANTOINE PAPIERNIK: The pharma has really understood that they are not the best at generating the innovation. They clearly have understood that. They've restructured themselves in order to not spend billions and billions on R&D that was not necessarily the most innovative. And therefore, they only have one choice. It's to partner with our companies. And they are doing that in a very forceful way.
They've organized themselves. They've understood I think what biotech was good at really was not necessarily the best at. And that's what this relationship is being built as we speak between those two groups.
ERIC PIERCE: You bring up an interesting point, which is sort of companies that are built, maybe somewhat differently because of the pharma landscape. And you've mentioned Actelion earlier. Couldn't Actelion, if it was formed today, remain a standalone company? Are things built differently today in the venture community given the environment?
ANTOINE PAPIERNIK: I still hope that it is possible to redo an Actelion or a Genentech or an Amgen. I think that's why we wake up in the morning, is to try and find this company and build it. A reality of the businesses is that acquirers are there to acquire companies, and they often won't let us get to that point. But we certainly hope that it's doable.
ERIC PIERCE: We've got about 10 seconds.
GILLES NOBECOURT: No, I think there's no general rules. Every case is particular case. And some company will deserve and will make it to develop in fully integrated company, publicly traded. Some of them will not. We've got to be pragmatic. As long as we are here to develop properly the assets. I mean, it's a real building of value here. So takes different way.
ERIC PIERCE: Great. We'll be interested in following the strategies as we go forward. That's this week's show.
Thank you to Antoine Papiernik and Gilles Nobecourt. For Steve Usdin, I'm Eric Pierce. Thanks for watching.