Europe's Iceberg 2011: Unlocking hidden value

BioCentury annual report on financial condition of European biotech

The European biotech industry is now about a generation old - long enough for investors and managements to benefit from the experiences of several business cycles. While it is easy to complain about the flaws in Europe, from too little capital to managements that are still catching up to their U.S. counterparts, experienced European VCs and public equity managers are seeing opportunity where others see a glass half empty. They are placing their money accordingly and are likely to do very well.

Thus, while companies complain there are too few European VCs and hence too little capital, the top European venture players are seeing an open playing field where they can invest in assets at a discount compared to the U.S. - and then sell those assets at global prices.

On the public equity side, selected European companies are getting more money than in the past, even though European stocks are lagging compared to their American counterparts. That, too, should provide upside for investors in European companies that hit their milestones.

The acknowledgement that there is opportunity in Europe "is music to my ears," said Antoine Papiernik of Sofinnova Partners. "We've been so long trying to prove with LPs and our colleagues in the U.S. that Europe has something to offer. I certainly believe Europe has come along and there are great quality companies at both early stage and late stage."

Indeed, BioCentury's 9th Annual European Iceberg Survey reveals the largest ever cohort of private companies that have reached the clinic and beyond. While the survey's original goal was to document the underlying demand for finance in Europe - the "iceberg" - the newest review suggests a different type of iceberg is forming, where growing hidden value may be raised to the surface over the next few years (see "A Rising Tide; Demand to Match," A9).

Thus the situation is becoming ripe for investors who face little competition that would drive up entry valuations, who foresee even more opportunities emerging from downsizing pharmas, and who can see value in tamped down public names that have not recovered along with biotechs listed in the U.S.

"I like this situation. Prices are good now for investing and they'll be good for selling in three years," said Reinhard Ambros of the Novartis Venture Funds.

Venture opportunity

"All the action in Europe is in the private area," said buysider David Pinniger, IBT investment manager at SV Life Sciences Advisers. "Assets are cheap and there's not the VC feeding frenzy."

"There are two pieces to it," said Managing Partner Denise Pollard-Knight of Phase4 Ventures. In terms of capital, she noted Europe represents about 23% of venture capital going in and is winning a similar percentage on the exit side. The multiples on exits in Europe are also very similar to exits in the U.S.

"However," Pollard-Knight said, "some of the European exits have been earlier than the U.S. exits, while there's been less capital that's gone in - so you get the money sooner and you spend less."

The second piece, Pollard-Knight said, is the changing VC landscape on both sides of the Atlantic. "Many of the funds are getting smaller and in Europe we have a smaller base to start off with. So there is a paucity of capital, which means there's less

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