Midlife crisis

Investor enthusiasm for European biotech is falling away just as the industry's capital demand continues to rise in response to a plethora of maturing clinical programs. Investors are shying away from mid-stage companies, preferring either very late stage/commercial companies or very early stage opportunities.

As a result, European biotech companies with pre-proof of concept clinical assets that are running short of money are at risk of a Titanic-like collision with the iceberg that is Europe's demand for capital over the next three years.

Not only is the European biotech sector being hit by the credit crunch-inspired flight from equities that is gripping the global market, it is also being undermined by a weak dollar that makes European assets look expensive compared to the U.S.

It is likely that the majority of the equity finance that will be available to European biotechs will be from venture and private equity sources and then only for those companies that have marketed or near market assets, are already public but undervalued by the market, or are startups with a clear route to a trade sale.

Indeed, life science-focused VCs and private equity groups stand to benefit, as they see the current situation as an opportunity to buy assets at attractive valuations. Consequently a number of VCs and private equity houses have either just raised new money or are rushing to do so, which may explain the rather lackluster start to European private biotech fundraising this year.

Mixed bag

European biotech sent out very mixed signals during 2007. While fundraising by the sector hit an all-time high, stock performance across the whole continent - as measured by the BioCentury Europe and BioCentury London indices - was disappointing. For those companies that didn't take advantage of the funding boom of 2006-07, when European biotechs raised more than $10 billion, there is little doubt that money will be tight.

Indeed, while European biotechs accounted for almost one in four dollars raised in 2007, this year, so far, their share is only one in eight dollars raised.

Last year, Europe's biotech industry collected $6.9 billion in 100 venture rounds, 21 IPOs and 65 follow-ons and other vehicles. In 2006, the European sector collected $4.7 billion in 82 venture rounds, 21 IPOs and 60 follow-ons and other vehicles (see "U.S. & Europe Money Flows").

In 1Q08, the sector raised only $530 million, including just one IPO of $85 million, 30 venture rounds collecting $364 million and other vehicles bringing in a mere $80 million.

Companies with compounds in the clinic or products in the marketplace continue to attract the lion's share of the funds, although VCs put almost a third of the money to companies with research and preclinical assets (see "Clinical Rationing," A3).

Europe's share of the global pie in 2007 was 24%, substantially higher than the previous three years: 17% in 2006, 17% in 2005 and 18% in 2004. But in 1Q08, Europe's share has slumped to 12% (see "Global Competition for Capital," A4).

While more money was invested in the total European sector in 2007, there was little change in the amounts being given to individual companies, which are still significantly less than is put to work in U.S. companies. In 2007, the average European round was $15.1 million compared with $24.8 million for U.S. companies (see "Capital Rationing," A5).

Ironically, while the European industry was having a bumper financing year, public biotechs' valuations were taking a beating as the market responded to disappointing clinical and regulatory results at some of the industry's most visible companies while appearing to ignore any positive news. The BioCentury Europe index was down 18% in 2007 and slipped a further 11% in 1Q08. The BioCentury London benchmark fared even worse, down 34% in 2007 and 19% in 1Q08.

Meanwhile, according to the results of BioCentury's sixth annual survey of the capital demanded by European biotech, the amount of money

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