Why European biotechs should start courting U.S. capital now
European biotechs not only missed out on the extended bull market that allowed U.S. biotechs to fill their coffers, but also on what could have been an arbitrage opportunity for U.S. investors who found domestic valuations too rich.
The reason was not as simple or obvious as distance, logistics or inconvenience. Neither was the culprit an overabundance of me-too, NRDO and repurposing companies - familiar criticisms of European biotech in years past.
U.S. investors who spoke to BioCentury did say the hurdle for innovation is higher for investing in European companies. But unique or highly differentiated assets are prized wherever they come from.
Rather, with a handful of exceptions, U.S. investors say the European cohort lacks the kind of ambition needed to compete on a global scale. By and large, compared with U.S. companies, European biotechs tend to prosecute their pipelines in a more stepwise and less aggressive fashion. The European group also tends not to persistently nurture U.S. investor relationships or embed international development and regulatory experience into their companies.
On the private side, valuations can be a bit higher in Europe than in the U.S., and European managements can take a shortsighted view of dilution that limits the ability to raise larger sums - and reach much higher valuations.
With European financings continuing to lag and the U.S. sector in an indefinite - but not permanent - holding pattern at or near the bottom, managements should be thinking about how to position themselves to access U.S. capital if and when valuations separate again.
According to 22 buysiders, VCs, bankers and executives from the U.S. and Europe who spoke to BioCentury, the recipe for attracting U.S. investors has at least four common ingredients.
After having differentiated assets or technologies, setting an ambitious development agenda tops the list. This means executing on parallel development of multiple products or indications with an eye on global markets, not just regional ones.
Management teams and advisory networks with U.S. or international perspectives also can help. Serial entrepreneurs in the C-suite may not be necessary, but they are highly prized.
U.S. investors also advise European companies to choose a syndicate with a strong local investor that can alleviate concerns of U.S. VCs who are wary of the geographical distance. On the other hand, European investors with unrealistic expectations around valuations can scuttle any attempts to attract U.S. capital.
"European valuations are often a bit higher than in the U.S. for assets of similar stage, risk and scarcity," RA Capital's Peter Kolchinsky told BioCentury. However, he added, "anyone can get on a plane, so if Europe cures cancer, we'll find a way to invest."
During the bull run, U.S. biotechs saw their share prices grow at nearly twice the rate of their European counterparts. But even as U.S. investors began to complain that valuations of domestic biotechs were getting too rich, most declined to put money to work in any significant way in cheaper European names (see "Missed Opportunity").
As U.S. companies were filling their war chests, European financings failed to keep pace. The region's share of total capital raised in the U.S. and Europe declined three years in a row, from 26% in 2009 to 15% in 2012. Europe's share of capital didn't climb much over the next three years, never exceeding 20% (see "Competition for Capital").