Europe’s Iceberg 2006

Europe’s biotech sector has reached a stage of maturity where companies need to raise substantial amounts of money to support product development. In recent years, VCs have stepped up to the plate, with top-tier privates now raising sums on a par with their U.S. counterparts. And the public equity markets are more open to IPOs than at any time in the recent past, having finally recovered their nerve after their drubbing in the genomics bubble. But a E50 million IPO will get a company only so far - so the real question for European companies is where the next E100 million will come from.

In recent years, the search for catalytic cash has led some European companies to seek out U.S. capital by re-inventing themselves as U.S. companies, either by simply shifting their headquarters to the U.S. or by acquiring or reverse-merging into U.S. companies.

But there are now signs that Europe is more willing and able to support the heavy cash demands of biotech companies that have reached late-stage clinical development. For example, GenMab A/S (CSE:GEN, Copenhagen, Denmark) completed the standout European follow-on offering this year when it raised DKK845.3 million ($138.1 million) (see BioCentury, Jan. 30).

Funds are not freely available across the whole of the continent, however, as markets such as Denmark and Switzerland are more open to biotech stories than those in Germany and France. Furthermore, pre-emption rights in Europe have a constraining effect on the ability to raise consequential sums.

Nevertheless, quality companies now have a choice among multiple funding strategies, ranging from big bolus equity financings to investor-financed M&A deals to reverse mergers to relocating lock, stock and barrel to the U.S. or another, more favorable marketplace.

At one end of the spectrum are the de-risked opportunities such as specialty pharma plays and pharma industry spinoffs, where European investors have demonstrated an appetite. At the other end are companies looking to develop novel molecules from proprietary platforms; they may be better off looking to the U.S. markets.

Some choices are easier than others, and some fit different kinds of companies. It is up to management to figure out which strategy is best for its particular circumstances and then execute. The key is that they now have models to follow.

The need

A proxy for assessing the maturity of Europe’s biotech sector is the number of candidate compounds now in clinical trials. With at least 108 European companies developing products in clinical trials and beyond, the question is whether Europe will be able to adequately finance the industry without slowing its progress.

History says it can be done: more than 30 European companies have each raised more than E100 million in total equity, while 10 of these have raised more than E100 million post-IPO (see "Proof of Principle" ).

A year ago, BioCentury’s third annual survey of public and private European biotech companies indicated that to have enough money to get through the three years to the end of 2007, clinical stage companies needed about $2.7 billion, including $2.4 billion for private companies and $327.6 million for publicly traded names. The cash burn of unprofitable public companies with products on the market added another $437.3 million over the three years, bringing the total to about $3.2 billion.

European companies more than covered that number in 2005 alone, although that included money raised by companies that haven’t yet reached the clinic as well as service plays. Nevertheless, the European sector collected $3.3 billion in 86 venture rounds, 23 IPOs and 35 follow-ons and other vehicles. The 2004 total was $3.7 billion in 77 venture rounds, 12 IPOs and 46 follow-ons and other vehicles. These years were the third and second best financing years ever for Europe’s biotech industry.

During the first quarter of this year, the sector raised $935.7 million, including $369.5 million in 24 venture rounds, $100.9 million in five IPOs and $465.3 million in 16 follow-ons and other vehicles. This outpaced the $824.8 million raised in the first quarter of 2005, including $488.5 million in venture rounds, $207.1 million in IPOs and $129.2 million from other vehicles.

Europe’s share of global biotech financing has been steady, coming in at 17% in 2005 and 18% in 2004. Excluding a $5 billion debt deal by Amgen Inc. (AMGN, Thousand Oaks, Calif.), Europe’s share in the first quarter of this year was 18% (see "Money Flows,"

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