Europe's financing iceberg

OXFORD - European biotech may be about to become a victim of its own success. The phenomenal growth in the number of biotech companies in the latter half of the 1990s has created a potentially huge equity gap as companies start looking for larger sums of money to finance later stage development.

The increased interest in growth-style investing and the rise of state-sponsored entrepreneurism has enabled Europe to start a remarkable number of life sciences companies in a few short years. But the drive of venture investors to capture the value created by European science is not yet matched by the maturation of the public capital markets on the continent. Meanwhile, the U.K. has become more cautious as investors digest the industry's initial letdowns in Britain.

At the same time, it is clear that sustainable companies (and by extension, an industrial and employment base) cannot be built without the substantial support of the capital markets. This conclusion is based on the amount of money that has been necessary to reach sustainable status in the U.S., the finite amount of money available via partnering with big pharma, and the number of young European companies needing significant amounts of venture and mezzanine capital, as well as funding from public equity offerings.

Moreover, for many reasons, the excess of equity supply over demand looks like it will persist. In the immediate future, this is leading to a triage that promises to leave only a very few companies that are able to meet the threshold requirements for accessing the public markets, while a second tier will be fattened up for trade sale, and the third tier will disappear from view.

Although this filtering process will reduce the funds demanded by IPOs and follow-ons, the continued fragmentation of Europe's public equity market promises to remain a hurdle to the capital that must be amassed to build a sustainable industry. In addition, with a limited number of European institutions yet actively interested in life science investing, the route to a broader and deeper audience for biotech investing remains a puzzle that must be completed before the biotech sector can reach the

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