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May 25, 2015
 |  BioCentury  |  Finance

Innovation underfed

Europe's Iceberg 2015: Finance at root of translational gap in innovation

Europe's Iceberg 2015

Despite world-class research institutions and a crop of novel drugs making their way through the clinic, European biotech is finding it hard to reach the end zone with its innovations.

Stakeholders almost universally agree there is tremendous research coming out of European institutes. And new companies are continuing to be formed to commercialize European science.

European companies also are driving programs into the clinic, which is reflected in an increasing demand for cash. BioCentury's 13th European Iceberg survey shows that, on a euro basis, demand for capital by private companies with a lead asset in Phase II has continued to grow, while the demand for funds by unprofitable public companies with a lead asset in Phase III has grown faster than any segment in the survey (see "Cash Cravings," page 8).

Yet Europe continues to lag the U.S. in the share of approved innovative drugs based on the drug's origin, rather than by which company filed it.

The key problem with translating Europe's innovative discoveries into drugs appears to be the struggle to finance companies looking to generate proof of concept, or to complete the transition from Phase II to Phase III.

This excess of demand for money over the supply, which BioCentury has chronicled as Europe's "financing iceberg," is reflected in the 225 private Phase II companies polled in the surveys over 2011-13. Only 13% of that cohort have moved into Phase III or beyond.

For those that make the grade, innovation is a predictor of success in attracting funds. In the 2011-13 cohort, the 133 companies (59%) whose lead program is innovative - defined as either first- or second-in-class molecules, or products using advanced technology such as gene or cell therapy - raised significantly more cash, struck more lucrative partnerships and were more likely to be acquired than non-innovators.

"The bottom line is that innovation pays," Apposite Capital's Allan Marchington told BioCentury.

A slew of registration and Phase III data milestones expected over the next two years could reset the innovation scorecard in Europe.

End of the telescope

Nine investors who spoke to BioCentury agreed that Europe's science is competitive with any region in the world. But they said there is a perception that Europe hasn't been as good at translating academic discoveries into approved drugs.

Omega Funds' Otello Stampacchia's comment was typical: "Where there's a fundamental issue in Europe is the translation capability of getting that science into a commercial endeavor and then to develop it properly," he said.

Certainly some of the hottest discoveries now making their way through industry's pipeline originated in European institutions, for example, the gene editing technology CRISPR-Cas9 (CRISPR-associated protein 9) and next-generation T cell receptor (TCR) therapeutics. Further back, the founding patents for RNAi came out of European institutions.

The pace of newco formation also has been steady. In each of the past 10 years, Europe has contributed 30-39% of the total new companies founded in the U.S. and Europe combined.

Moreover, the number of European seed and series A rounds has increased in the past five years. Over 2000-09, Europe averaged 10 seed rounds per year. That number jumped 50% to 15 seed rounds annually over 2010-14.

Similarly, while Europe averaged 23 series A rounds per year over 2000-09, that pace has increased to an average of 31 in the past five years. In 2014, European biotechs scored 42 A rounds, the largest tally since BioCentury began keeping records in 1994.

Overall, the financing environment for European private biotechs appears to be improving. Last year saw a 21% increase in the average raised by European venture stage companies to $17.5 million from $14.4 million in 2013 (see "Capital Rationing").

But looking through the other end of the telescope, European biotechs are lagging U.S. biotechs in originating new drugs.

The gap is not new. A 2010 paper in Nature Reviews Drug Discoveryanalyzed the origins of 252 drugs approved by FDA from 1998 to 2007. The study found that about 118 (47%) new drugs originated in the U.S., while 98 (39%) originated in Europe.

More significantly, Europe depended on traditional pharma to invent 75% of its drugs, while only 25% came from academic or biotech origins.

In the U.S. group, 61% of the approved drugs were discovered by academics or biotechs.

The paper's author noted that Europe's contribution to the total number of approved drugs could be underrepresented because the analysis looked only at FDA approvals. However, BioCentury's analysis of the origins of 81 new drugs approved by both FDA and EMA since the start of 2014 also shows a smaller share for Europe. Thirty-one (38%) originated in Europe vs. 41 (51%) in the U.S. The remaining 11% originated in Asia, Canada, Australia or from discovery deals where the partners were from multiple regions.

Looking only at the subset of 43 innovative drugs - defined as either first or second in class - only 12 (28%) were discovered in Europe vs. 25 (58%) in the U.S.

Investors who spoke to BioCentury say Europe's translational lag is a consequence of fundamental ecosystem issues, such as less funding, or European biotech clusters that lack the scale or necessary ingredients found in U.S. clusters.

In fact, while series A rounds have proliferated, the average size has dropped 15%, from $11.9 million in the 2000-09 period to $10.1 million...

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