Europe's Iceberg 2005

Europe's first generation of biotech companies failed to yield a critical mass of bellwethers with market caps above $1 billion. Now that the next generation is in the clinic, with at least 129 companies with lead compounds in clinical testing, the key question is whether Europe will succeed this time. The consensus is that this generation is better prepared than the first.

A number of factors argue in Europe's favor. According to BioCentury's third annual survey of Europe's financing needs, the funding needed to get clinical stage companies beyond Phase II is not overly large. And many companies at this stage look very different than Europe's first generation of biotechs: They are more product-focused and have better, more experienced management.

Also on the pro side, some investors argue that companies have reached reasonable valuations, while risk is overstated by institutional investors. If a few success stories change this perception, valuations should escalate, generating a self-energizing mechanism.

On the other hand, even though the bigger venture rounds have caught up with U.S. rounds, the financing base of European companies remains smaller (see "Average Venture Rounds," A2).

Indeed, many investors looking for success from the private plays think that the most likely scenario will be big money for a select few, an opinion that is reinforced by the data.

The opportunities for exits also remain clouded. The recent IPO withdrawal of Speedel Group (Basel, Switzerland) and the underwater performance of high-profile companies that did float have not improved the picture.

Moreover, on the public equity side, listed companies are finding that risk-averse European investors remain stingy with follow-ons and PIPEs.

Adding up the behavior of the private and public funding sources, it appears that clinical-stage companies are not immune to capital rationing, which may lead some to conclude that a trade sale is the best route.

Meanwhile, VCs and fund managers think that even the best companies in Europe still need to reinforce their pipelines and add critical mass via acquisitions or in-licensing. But interesting assets are as hard to get in Europe as in the U.S. given the competition for in-licensing.

The bottom line is that while a new class of bellwethers is in the making, by some estimates it could take another three to five years to create them.

Europe's biggest

In 1999, prior to the biotech bubble, the five companies with market caps exceeding $1 billion were supply company Qiagen N.V. (FSE:QIA; QGEN, Venlo, the Netherlands), U.K. drug delivery plays Galen Holdings plc and PowderJect Pharmaceuticals plc, and two U.K. product companies, Shire Pharmaceuticals Group plc (LSE:SHP; SHPGY, Basingstoke, U.K.) and Celltech Group plc. Serono S.A. (SWX:SEO; SRA, Geneva, Switzerland), then regarded as a pharma play, had a market cap of $8 billion.

The situation has not changed much. There are still five companies exceeding the $1 billion mark, including SHP and QIA, which have market caps of $5.1 billion and $1.8 billion, respectively. Powderject was acquired by Chiron Corp. (CHIR, Emeryville, Calif.), while Galen became specialty pharma company Warner Chilcott plc, which was bought last year by Waren Acquisition Ltd. (London, U.K.) and de-listed from the London Stock Exchange.

SEO now has a market cap of $9.3 billion. The newcomers are Actelion Ltd. (SWX:ATLN, Basel, Switzerland), with a

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