After years of playing the juniorpartner to the US biotechnologyjuggernaut, European biotech isgrowing up. According to Ernst &Young’s annual survey, Europehad more than 1,000 companiesin 1997, an increase of 45% inone year. Most of these compa-nies are private, located in clus-ters in the UK, Germany, France,the Benelux countries, andSweden. Since 1994, employmentby European biotechnology com-panies has increased 42%, andR&D spending is up 27%, bothtopping US growth rates. Perhapsthe most promising sign forEuropean biotechs is the fact thatpharmaceutical company executives are nowsearching aggressively for partnershipopportunities on the eastern side of theAtlantic with the same vigor previouslyexhibited in North America. As a bonus,politicians across Europe—particularly inGermany—have jumped on the bandwagon,making clear that they want to make this sec-tor a success.

A significant change within the Europeanventure capital community has enabled thisgrowth. European venture capitalists havealways been a different breed from their risk-taking North American counterparts. Formuch of the 1980s, providing seed capitaland early-stage financing was a marginal partof the business on the European continent.Certainly, there was interesting research withcommercial potential coming from Europeanuniversities, but it was of little interest to ven-ture capitalists, since much of this work wasnot protected by patent applications orlicensed to the pharmaceutical industry. Inaddition, those of us in the venture capitalgame did not see many attractive, well-devel-oped investment proposals for early-stageprojects. And when we did, the entrepreneurs

were usually not prepared to leave theirsecure, well-paid jobs at large pharmaceuticalcompanies to take the risks of founding oreven working for a biotech company. It wasnot part of the European mindset then toparticipate, either with time or money, inhigh-risk ventures.

Venture capital¾as defined on theEuropean continent¾was focused on man-agement buyouts (MBOs) and on financinggrowth projects in low-technology indus-tries. Funding startup biotechnology andhigh-technology companies was just not apriority. Pension funds and private investorstended to put their money in real estate,bonds, and loans to the government. Even if aventure capitalist had the inclination toinvest in a biotech startup, there were no exitopportunities in the stock markets of Europe,and thus no easy way to redeem an initialinvestment in such a high-risk venture. Mostof the traditional European stock exchangesrequired that a company demonstrate astrong financial track record in order to gaina listing on their exchanges. As a result, aninitial public offering in Europe was more apaper exit opportunity than a reality. In con-trast, US venture capitalists could construct atimeline from seed capital to a NASDAQ list-ing before investing a penny.

A new worldWe have come a long way since the dark ages

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of the 1980s. We can now seemany more promising researchprojects at universities. Academicinstitutions understand theimportance of patent protectionand are motivated to set up spin-offs to create value out of theirtechnology. An increasing num-ber of experienced managers andscientists are willing to leave theirsafe positions at pharmaceuticalcompanies and universities toenter the high-risk, high-rewardworld of emerging Europeanbiotech.

In addition, the financial envi-ronment has changed greatly inEurope. There is more seed

money and early-stage financing availabletoday for high-tech startups, largely due tothe continent-wide drop in interest ratesthat has made investments in bonds andgovernment debt instruments less attrac-tive. Real success stories, such as Genset(Paris), Innogenetics (Ghent, Belgium),PowderJect (Oxford, UK), and MorphoSys(Munich, Germany), proved to the financialcommunity that you could make as much, ifnot more money with emerging high-techcompanies as you could with MBOs orgrowth financing projects. As a result, thereare now dedicated life science venturefunds, such as the Medical Research CouncilFund in the UK, and existing venturegroups like Atlas, Abingworth, Apax, andTVM, with offices in several countries, havesucceeded in generating larger pools of ven-ture capital for investment in life sciencecompanies. There are even venture groupson the European continent that act on aninternational basis and collaborate in syndi-cates, in much the same that US venturecapital firms operate.

According to figures from the EuropeanVenture Capital Association (Brussels), USventure capitalists still provide more moneyto their biotechnology startups, but the gapis getting smaller. While investments by USventure capitalists in biotechnology were flatin the US over the past several years, invest-ments almost doubled in Europe. While

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Economic trends in European venture capitalGovernment initiatives, growth of small-cap markets, and a change in investor attitudes has promoted an increase in European venture funding.

Patrick Van Beneden

Patrick Van Beneden is executive seniorinvestment manager of GIMV, The InvestmentCompany for Flanders, Karel Oomsstraat 37,2018 Antwerp, Belgium (patrickvb@gimv.be).

Pharmaceutical company executivesare now searching aggressively for

partnership opportunities on theeastern side of the Atlantic.

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much of this new activity has been centeredin the UK, Germany has seen recent gains,with investments in biotechnology almostdoubling between 1996 and 1997.

An important reason for the growth inbiotechnology venture investing is thatEurope now has financial markets accessibleto smaller companies. London has gone thefurthest with the London Stock Exchangeand its small-cap cousin, the AlternativeInvestment Market. After a strong start,AIM celebrated its third birthday in June1998 with over 300 new companies quotedon the market. Approximately $3.2 billionhas been raised on AIM, and approximately50 have since moved to a full listing on theLSE. The success of this market has proventhat small companies can both raise moneyand have an exit opportunity that can pro-vide venture backers with a return on theirinvestments.

Despite a miserable year for UK biotech-nology sector—the BioCentury LondonIndex fell 41% in 1998—there were notablesuccesses, too. PowderJect Pharmaceuticalswas ranked as the UK’s largest biotech com-pany after it signed a deal with GlaxoWellcome (London) and with Ares-Serono(Geneva). Product advances provided sub-stantial gains for both Shire Pharmaceuticals(Andover, UK) and Celltech (Slough, UK).During the last 18 months, several companieshave joined the public markets. On the LSE,new public companies included QuadrantHealth Care (Nottingham, UK), OxfordAsymmetry (Oxford, UK), OxfordGlycosciences (Oxford, UK), and BioglanPharma (Hertfordshire, UK). Shire, whichlisted on the LSE in 1996, achieved anothermilestone for the European sector by success-fully raising additional funds on NASDAQ.

The rise of EASDAQ has also been wel-come news for biotechnology investment inEurope. EASDAQ has now approximately 40companies listed and a total market cap ofalmost 17 billion euros. Already, there are fivelisted biotechnology companies:Innogenetics (Zwÿnaarde, Belgium),Chemunex (Maisons Alfort, France),Pharming (Leiden, The Netherlands),Orthovita (Malvern, PA), and Antisoma(London).

Both the Nouveau Marché and the NeuerMarkt, the small-cap company exchanges ofFrance and Germany, respectively, havegained considerable support over the pastfew years. It is fair to say that both Frenchand German companies still have a prefer-ence for a listing on their native exchanges.In France, Genset, Cerep (Paris), andTransgène (Strasbourg) completed successfulIPOs, with Transgène and Genset also quotedon NASDAQ. There have also been limitedsuccesses in going public on the Brussels,Copenhagen, and Stockholm exchanges.

Government initiatives, which are havingan increasing influence on the European sec-tor, will further sustain investments inbiotechnology. The European Commissionconsiders the biotech sector a priority, and asa result, European money will be made avail-able for transnational research programs. Inaddition, individual member states arebecoming more active. The German govern-ment, for example, has created one of themost biotech-friendly environments, settingup matching programs offered to companiesthat are backed by venture capital. Othercountries have similar programs in placedeploying research grants, guaranteeschemes, tax incentives, outright loans, andearly-stage financing.

Germany’s efforts to become a worldplayer in life sciences, and to close the leader-

ship gap between itself and the US and theUK, are also attracting foreign companiesand investors. One of our portfolio compa-nies, Ribozyme (Boulder, CO), foundedAtugen Biotechnology in Berlin, a $50 mil-lion target validation company. Also, Sugen(S. San Francisco, CA) announced inNovember 1998 that it intends to establish aEuropean affiliate in Switzerland and hopesto have its shares listed on the Neuer Marktby the end of this year.

Remaining issuesThough the funding environment in Europehas improved substantially over the past fiveyears, there are still many obstacles to over-come. The number one problem may be oneof human rather than capital resources—alack of experienced managers to run startupbiotechnology companies. Startups are allchasing the same limited pool of experiencedmanagers who are ready and willing to leavelarge pharmaceutical companies. In thisregard, the ongoing consolidation of thepharmaceutical industry might ease this bot-tleneck. European companies are also tryingto lure European-born managers of USbiotech companies back to Europe.

In addition, Europe may now be suffering

from an embarrassment of riches, in whichtoo much money is chasing after a limited,albeit growing number of interesting invest-ment opportunities. This has produced someunrealistic valuations and deals that havebeen structured in a less-than-optimal man-ner. There are also storm clouds on the hori-zon as US and UK venture capitalists havepulled back from biotechnology. Many won-der if the private and public markets on thecontinent will follow a similar path.

We would also like to see the Europeansecondary exchanges attract more IPOs as away of reaching a critical mass and of attract-ing the attention of investors and analysts. Asof the middle of 1998, NASDAQ still listed135 European companies. One step thatcould help would be for the existing marketsto harmonize. As they stand today, each sec-ondary market still holds a national flavor.EASDAQ is intended to be the pan-Europeanmarket for high-tech companies, but approx-imately 25% of all companies listed on EAS-DAQ are Belgian. And although Europe’s sec-ondary markets are technically linkedthrough the Euro-NM agreement, no regula-tory or legal harmonization has occurred. Asa result, stocks on the Neuer Markt, NMAX,and Nouveau Marché are almost entirelynational. This is even more stressed by thefact that institutional investors in France andItaly seem to receive fiscal incentives to investin companies in local markets.

Another obstacle is that the bigger invest-ment funds want to be in liquid names. As aresult, all of Europe’s secondary markets aredriven by a few large names. On London’sAIM, the top 10 companies represent 19% ofthat market’s capitalization. On the NouveauMarché, these companies account for 33%,with figures of 38% on the Neuer Markt and44% on EASDAQ. The industry would getbetter service if there were one unified stockmarket in place for growth companies andnot several, smaller, nationally inspired stockmarkets.

ConclusionsNevertheless, the overall outlook for theindustry looks positive. Venture capitalistsare now paying more attention to high-technology and biotechnology projects,and investors on the continent seem to havea greater appetite for these new emergingcompanies. Entrepreneurs are coming for-ward with better business plans and gov-ernments are creating an environment thatencourages and supports young biotechcompanies with infrastructure and fund-ing. We expect to see more partneringactivity, not only between biotechnologyand pharmaceutical companies, but alsobetween biotechnology companies, whichwill not only raise funds but also awarenessamong investors. ///

The European Commissionconsiders the biotechsector a priority, and as a result, Europeanmoney will be madeavailable for trans-national researchprograms.

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