Europe's drive to rival US biotech hubs is hit by the market crisis

Europe’s drive to rival US biotech hubs is hit by the market crisis

Europe’s attempt to build more sustainable life sciences business clusters must be hurt by a sharp drop in biotech valuations, prompting renewed concerns that US buyers are swooping in to European startups.

A rapid decline in the Nasdaq biotech index – down 13% this year due to scientific setbacks and after a surge caused by the pandemic – has made it more difficult for biotech companies around the world to raise funds. But European companies are particularly affected as they tend to raise funds in smaller shifts, leaving them less than a cash cushion to fall back on.

Geraldine O’Keefe, an Amsterdam-based partner at venture capital firm EQT Life Sciences, says fledgling European companies tend to partner up or sell out earlier than their US counterparts, because they can never be sure of securing enough funding. to grow independently.

“We have the science, technology and innovation in Europe,” he says. “We just don’t seem to be that good at financing it.” O’Keefe adds that Europeans have a different mindset, tending to take setbacks more seriously than Americans.

Overall, risk finance for biotechnology is increasing in Europe. However, it still lags behind the US and China.

In a McKinsey study comparing the years 2015 to 2017 with the period 2018 to 2020, the average early-stage funding round grew 13% to $ 20.5 million in Europe. By comparison, it increased 17% to $ 36 million in the United States and 18% to $ 46.2 million in China.

Late-stage rounds have increased by about 20% across all regions, but from a higher base in the US and China.

Analysts are now predicting a boom in mergers and acquisitions as large pharmaceutical companies try to fill their drug pipelines by buying assets or entire companies that, after declining indices, have more attractive valuations. Although many US companies will initially look home, even lower valuations in Europe could look like rich earnings.

Vishal Gulati, a UK investor at Molten Ventures, says he knows two US-based senior bankers who are opening a week-long shop in London to look into the companies. “Normally they don’t even get calls from the UK,” he notes.

In Boston, Daphne Zohar, chief executive of PureTech Health, which develops medicines for conditions affecting the brain, gut and immune system, says she believes investors will look to European companies with good test results to see where they are. ‘is a “value disconnect”.

He says this gap between a company’s price and true value may be greater in Europe, as investors are often more cautious about their approach to no-income companies.

“In the US, there are more specialists who are excited about the next catalysts and they can really increase the value of a company,” he says.

Pierre Jacquet, vice president of medical practice at LEK Consulting, says the “very, very drastic correction” could mean that more European companies seek funding ahead of schedule and enter into partnerships with other companies.

“The main threat to European biotechnology is that capital market conditions are very difficult for them,” he says. “Many of these companies trade in cash” – which means that the market values ‚Äč‚Äčthem for the cash amount on their books, without placing any value on the drugs they are developing – “without the ability to finance a pipeline and a platform. complete “.

While the acquisition might be the right option for a smaller biotech company, it is also a loss to the European life sciences industry, making the continent’s biotech hubs less able to withstand storms than established centers. like Boston.

When a biotech is sold, it forgoes the possibility of becoming a larger standalone company capable of retaining more talent in a local hub, who could possibly work for other start-ups.

“It’s the same in any kind of industrial ecosystem,” says Jacquet. “If you attract investors, partners, talent and scale, it becomes sustainable enough and resilient to a market downturn.”

Mario Caria, managing director of Paris-based Kuste Biopharma, chairs a working group at the European Federation of Pharmaceutical Industries and Associations that examines financing for small businesses.

He fears that European companies do not have access to sufficient capital to finance the late stage trials that are essential for obtaining drug approval. “If, in Europe, we are unable to carry out phase 3 trials, the industry will be dead,” she warns.

While many European venture capitalists are calling for regulatory changes to make it easier for pension fund managers to finance early stage life science companies, Caria goes further and believes that the European Investment Bank and the European Investment Fund should be more active in reducing risk.

He would like them to do this by guaranteeing returns to institutional investors and making it easier to become a risk investor by reducing the need for years of experience.

He believes that acquisitions are not inherently bad, but says: “The problem is asymmetry. Europe should take back all these kilometers that we are behind the United States.” He would like to see more advanced European companies reach the stock market and some assets they buy from the US.

He predicts Asia will soon overtake Europe, as measured by the number of fundraising rounds, pharmaceutical compounds put on the market and deals concluded. If things continue as they are, “in two years, Asia will vastly overtake the EU,” she estimates.

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