life sciences outlook 2012 dutch biotech companies: from start-up

Life Sciences Outlook 2012

Dutch biotechcompanies:

from start-up to exit

3

Life Sciences O

utlook 2012 Dutch biotech com

panies: from start-up to exit

Preface.

This survey and our series of interviews confirmed,

first of all, that the Dutch biotech industry is densely

populated with highly professional, committed and

open-minded individuals.

Whether they are in a lab, a start-up or a more

mature company, or whether they are providing the

money or regulating the market, people in the life

sciences and biotech industry are all well aware that

the ambition to create new drugs, products and

therapies should be nurtured and promoted.

While there is a natural tendency to focus on the

science and the potential benefits, the people

involved do not forget that it is also a business, and

that it is often the business decisions that determine

success or failure.

NautaDutilh and Niaba reached out to professionals

in the academic, investment, government and

business communities. The result is the present

outlook, which brings together the perspectives

of these different professionals. One finding in

this outlook is that the interactions between those

communities are becoming more frequent and

more intense. Better results often start with a better

understanding of the various interests, roles

and limitations; hopefully this outlook can make

a contribution in this respect.

NautaDutilh and Niaba wish to thank all of the

many professionals who took the time to share their

valuable insights.

The NautaDutilh and Niaba team members

responsible for this outlook are:

NautaDutilh Netherlands Life Sciences Team:

John Allen

Christiaan de Brauw

Paul van Dongen

Bas van Hunnik

Bart van Kempen

Niaba:

Jan Wisse

Irma Vijn

Annika van Rosmalen

5

Life Sciences O



Preface 3

Introduction 6

Key developments in the life sciences world 6

The general economic climate 7

1. Start-up 9

Academic institutes as the Petri dish

for biotech companies 10

Too small, too early? More structure

needed for spin-offs? 11

Matching the guy in the lab with the suits

and ties 14

Funding it all: seed capital 15

The role of government 16

2. Investing 19

Separating the wheat from the chaff 19

The big squeeze 20

Big Pharma steps in 21

Weeding out the nonsense 22

The view from the receiving end 24

Towards a symbiotic relationship 24

3. Strategic co-operation 27

Sharing a future together 27

A lack of ambition or healthy realism? 28

Exceptions 29

How to manage the relationship between

biotech and Big Pharma 29

Implications 30

4. Exit strategy 33

Sale to Big Pharma as a much preferred

exit route 34

The end of the line for management 35

“An IPO? Can’t get it done!” 35

But what if? 38

Conclusions 40

Methodology 42

About NautaDutilh 44

About Niaba 45

Key contacts 46

Disclaimer 51

Room for notes 52

Table of contents.

6

Introduction.This outlook and the survey on which it is based

aim to identify and describe current trends and

developments in the Dutch biotech sector.

The survey took the form of a ‘self-assessment’

by approximately 90 key industry professionals.

Part of this assessment concerned the relevant

strengths and weaknesses of the Dutch sector,

compared to competing international biotech

clusters. NautaDutilh and Niaba were also keen

to collect industry views on what the role of the

government is and should be, and where there is

room for improvement.

This report is structured to reflect the life cycle of a

biotech company, from start-up (Chapter 1) to further

financing (Chapter 2), strategic collaborations and

alliances (Chapter 3) and, finally, exits (Chapter 4).

While the companies addressed in this outlook are

mainly in the biotech sector, a significant group of

medical devices and medtech companies also took

part in the survey. Where relevant we have tried to

address the specific situation of those companies.

We start the outlook with a brief overview of the

effects of the current economic climate and other

developments facing the life sciences industry at

large, and biotech companies and their stakeholders

in particular.

Key developments in the life sciences worldToday, the stakeholders involved in biotech

companies (whatever their stage of maturity) should

take a number of developments into account:

• Focus on healthcare economics: The pressure to

curb ever-increasing healthcare costs is affecting

everything and everyone, from government

budgets and healthcare insurers to pharmaceutical

and biotech companies that develop new drugs

and therapies. This is expected to bring about

a stricter selection at the entrance to the innovation

pipeline. Only innovations that promise to deliver

significant improvements in healthcare benefits or

cost reductions will receive funding and ultimately

succeed in entering the market, whereas in

the past there was more room for therapies or

treatments that brought marginal improvements

or merely provided ‘more of the same’. As a result,

more and more companies are now focussing

on areas where large healthcare benefits may be

expected, such as personalized medicine and

orphan diseases.

• Changing role of government: innovation sponsor

and industry partner. In its role as ‘innovation

sponsor’, the Dutch government has identified ‘Life

Sciences & Health’ as one of nine ‘top sectors’.

The national cluster organization prepared a plan

for the sector and also drafted an ‘innovation

contract’. This contract was recently signed and

a €2.8 billion support package for the sector was

agreed upon.1 A large part of this sum will come

from the industry. The government’s contribution

1) See: http://www.rijksoverheid.nl/ministeries/eleni/nieuws/2012/04/02/innovatiecontracten-ondertekend-2-8-miljard-naar-topsectoren.html

7

Life Sciences O



will flow through the Netherlands Organization

for Scientific Research (NWO) and various

research institutes (such as TNO). An example of

how government is partnering with the industry

can be found in its overhaul of reimbursement

policies. This overhaul has forced pharmaceutical

companies to very significantly reduce the prices

of many drugs. Furthermore, the first steps are

being made towards a system of conditional

reimbursement. This will facilitate a fast market

entry for new drugs after marketing authorisation

has been obtained.

• The ‘Top Sector Life Sciences & Health’ steering

group has formulated a dual objective2 intended

to make the Netherlands a global leader, from a

business perspective, by 2025: “Business activity

must be growing among the fastest three in Europe

(in terms of turnover and profitability); employment,

the development portfolio and turnover from

exports must be growing faster than the European

average; and more than 10% of turnover must be

invested in R&D.”

• Struggling Big Pharma. It is hardly news that

Big Pharma faces considerable challenges in

the current environment: “From 2000 through

2010 the market value of the top 20 biopharma

companies declined by more than 30% – a loss

of an astounding $720 billion.”3 This decline is not

necessarily caused by the present performance;

net income of these companies grew by 140% in

the same period. Instead, the drop in market value

primarily reflects investors’ reduced expectations

for the industry’s future prospects. Among the

challenges facing the industry are the ‘patent cliff’

which could wipe off tens of billions of dollars in

revenue from blockbuster drugs in the coming

years, the ongoing struggle to improve R&D

productivity,4 the continued pressure – especially in

Europe – on healthcare budgets (leading inter alia

to policies favouring generic entrants) and ever-

stricter regulation.

The general economic climateThis outlook was compiled in the midst of an

economic recession, with major cuts in government

spending in the works and ongoing uncertainty in the

financial markets. This uncertainty is reflected in our

survey: 39% of the respondents think that the current

economic crisis will hit the biotech sector harder than

other economic sectors (31% think it will be hit to

the same extent), mainly through a scarcity of capital

(more on this in Chapter 2).

At the same time, some optimism clearly remains:

the number of emerging biotech companies is

expected to increase, according to 60% of the

respondents. From an international perspective,

32% and 39% of the respondents expect the role

and importance of the Netherlands biotech sector to

respectively “increase” or at least “remain the same”.

A 65% majority of the respondents anticipate that the

government’s ‘top sector’ policy will have a “positive”

(56%) or “very positive” (9%) effect on the Dutch

biotech sector.

2) Source: “Introducing the Life Sciences & Health steering group - Facilitating the Life Sciences & Health top sector”, Cahier no. IV, p. 86 (Nov 2011).3) Source: “Can R&D Be Fixed? Lessons from Biopharma Outliers”, The Boston Consulting Group, p.3 (2011).4) See for example: “Changing pharma’s innovation DNA”, Bain & Company (2010).

9

Life Sciences O



1. Start-up. In 1939, Hewlett-Packard was famously started in

a garage with a seed investment of $538, an act that

is now seen as the symbolic foundation of Silicon

Valley. In 1975, two friends needed eight weeks of

programming to create their first software product

from scratch and to subsequently generate sales of

$1 million in Microsoft’s first year in business.

In 2004, Facebook was launched from a dorm room

at Harvard and is now, eight years later, headed for

an IPO that values the company at around $100

billion. Modest conditions at birth are apparently no

impediment for tech companies to grow quickly

and flourish.

Biotech is a very different game. “You don’t start a

biotech company in your basement,” as one founder

of several biotech companies puts it. The ideas on

which companies in this sector are founded only

spring to life in an environment where the proverbial

lab rats live alongside an electron microscope

worth the price of a nice suburban semi-detached,

and where stacks of permits and other paperwork

are required before one can tinker with genetically

modified organisms and radioactive materials.

There is another element that is needed, however.

“The industry is not geared up for discovery. For that,

you need an environment where not everything is

governed by strict procedures,” says a researcher

with experience in both academia and industry.

“In my field of research, my competitors in Big

Pharma have never discovered anything,” proclaims

a (former) university researcher. “Almost by definition,

the discoveries and breakthrough innovations in

biotech come from young people with new ideas

who are employed in government-funded jobs.”

The natural place, then, to start looking for signs

of a vibrant biotech sector are the research labs of

universities and other publicly funded institutions.

10

Academic institutes as the Petri dish for biotech companiesThe level of academic and clinical research ranks as

the fourth most important precondition for starting

successful biotech companies, according to our

respondents (see Figure 1).5

Perhaps this is so because the academic quality

in the Netherlands is somewhat taken for granted.

The level of research in medicine and life sciences

in the Netherlands is generally considered as very

good among our interviewees, and in some areas

as even better. “Fundamental cancer research in

the Netherlands is of absolute world-class level, on

a par with Harvard, Stanford or Beijing,” says one.

“The same is true for stem cells and vaccines. Those

areas should be the focus of the Netherlands life

sciences sector; we are world-class players there.”

The academic medical centres, all in close proximity,

with existing collaborations as well as shared

■ Most important ■ Important ■ Also Important

Weighted scores

Availability of early stage / seed investment capital

Availability of venture investment capital

Availability of highly educated researchers and staff

Favourable regulatory and intellectual property climate

Availability of tax stimuli for both companies and investors

"Entrepreneurial spirit" of scientists, management talent and

serial entrepreneurs

Quality and availability of experienced executive, business

development and commercial management

Level of academic / clinical research

Figure 1. What are the most important preconditions for starting a successful biotech company?

0 14020 40 60 80 100 120

22 2084

66 34 16

15 52 12

54 12

3027 16

149 7

4 4

4 3

9

5) Where respondents were asked to give multiple answers, their scores have been weighted by a factor of 3 for their highest ranking, 2 for their second ranking and 1 for their third ranking.

‘biobanks’ and patient databases, are considered

to be another strength. They are part of an

infrastructure that makes the Netherlands potentially

very well suited for the clinical adoption of therapeutic

and technological innovations.

11

Life Sciences O



The opinions of our respondents on how well this

high-quality research translates into spin-offs from

academia – in terms of both number and commercial

potential – are more mixed. While a combined

48% rate the result as “adequate” (39%) or “very

good/sufficient” (9%), an equally large number

consider it to be “insufficient” (47%). Interestingly,

respondents from government or academia often

have a favourable opinion (75% and 60% of them,

respectively), whereas investors are generally more

critical (70% answer “insufficient”).

This suggests that it is necessary to take a closer

look into the process by which scientific discoveries

are turned into business plans.

Too small, too early? More structure needed for spin-offs?The mixed assessment of the ‘spin-off potential’ from

universities and other research institutes matches the

wide range of opinions on the technology transfer

offices (TTOs) that have been established in most

institutes specifically to manage this process. Some

interviewees are harshly critical of the TTOs and

consider them “amateurish” and, in negotiations

about the terms and conditions for the transfer of IP,

as “showing a lack of realism and a total disregard for

the enormous amount of risks others need to bear

to bring such IP to commercial fruition.” Others have

a more positive perspective and prefer to emphasize

that “most TTOs have improved a lot in the past few

years” or that “some TTOs are doing quite well.”

In this regard, the ones that are specifically

mentioned are the TTOs in Leiden and Rotterdam,

as well that of the Netherlands Cancer Institute (NKI).

A common point of criticism is that the technology

transfer function in the Netherlands is very

fragmented – indeed, this is how the entire academic

landscape is often viewed – with each institute

running its own shop. This makes it harder and more

time-consuming for investors to scout for investment

candidates. Another commonly expressed view is

that many spin-offs from universities are too small

and are launched too early to survive, and could

benefit from maturing longer within a university.

“The number of spin-offs from Belgian universities is

much lower, but in terms of quality they are clearly

better,” says one venture capital investor. “For that

reason we are more likely to invest in Belgium than

in the Netherlands.”

A key precondition for the fostering of ideas into

successful spin-offs is perhaps quite a practical one:

there must be clarity and structure for a scientist

in terms of his/her position as a university scholar,

on the one hand, and as an entrepreneur with a

potential business, on the other hand. For example,

clarity is needed with regard to what is permitted

under employment contracts (e.g. the number of

hours to be spent on the entrepreneurial activities),

with regard to attracting outside investment and

with regard to the entitlement to IP rights. Another

point which is sometimes raised is that while existing

university facilities are usually sufficient for the

purpose of carrying out initial research, the facilities

for the follow-on phase are often suboptimal and

are not a priority for academia or, at any rate, for the

university’s management.

12

“You don’t start a biotech company

in your basement.”Founder of several biotech companies

13

Life Sciences O



It is frequently suggested that technology transfer

would benefit if those few individuals who possess

both an academic track record and experience in

building successful companies could be involved

in the process. At present, those responsible are

sometimes administrators or department heads,

whose main performance indicators relate more to

the department’s smooth operation and scholarly

success rather than to entrepreneurial output.

On an institutional level, universities should adopt

valorisation as the third pillar (next to research and

education) of their existence.

Several interviewees suggested that government

funding for entrepreneurial activities in the early seed

phase should be increased, more focused and

better structured.

Given these criticisms and suggestions for

improvement, it is not surprising that in many

interviews the Flemish VIB (‘Flemish Institute for

Biotechnology’) is mentioned as a ‘best practice’

in the technology transfer of biotech that could be

emulated in the Netherlands (see box on ‘VIB’).

Adoption of the ‘VIB model’ would ideally achieve

the following:

• The ‘Netherlands Institute for Biotechnology’

(‘NIB’) would be run by a very experienced,

well-connected industry champion with a high

reputation. Its focus would be on the developing

of start-up companies, which would be ready

for a further venture capital-backed existence.

Decisions on the selection of discoveries to be

taken on board would be made – similarly to the

way VCs operate – with strong input from top ‘NIB’

scientists.

• A clear and transparent organizational framework

for scientists who seek to develop their ideas,

discoveries and innovations into a proof of concept

and start-up business. The ‘NIB’ would provide

(follow-on) research and other facilities.

• A clear and incentivising structure on IP rights and

future entitlements from the business, with a fair

distribution between the university, the researcher/

entrepreneur and the ‘NIB’/financing party.

• Universities would co-operate and possibly

compete in having their ideas validated and taken

up by the ‘NIB’. Participating universities could,

for instance, each get a fixed basic amount of

remuneration based on the overall results of the

‘NIB’, with ‘tracking stock’ or a similar device

enabling them to receive additional revenue from

companies originating from their own university.

• A focused and efficient structure which the

government could initiate by making a relatively

limited investment, starting for example at €20

million per year (e.g. for at least 5 years). This would

have the potential, within a relatively short period,

to result in a self-supporting institute, with revolving

funding, that would simultaneously serve the

policy goals of healthcare economics and of Dutch

economic development.

14

Best practice in life sciences technology transfer: the Flemish Institute for Biotechnology (VIB).

Researchers, entrepreneurs and investors alike, many of whom have worked with the institute directly,

share a very positive opinion of the VIB: “They are a joy to work with” and “They have put in place an

excellent structure for technology transfer in the life sciences. We could just copy that in the Netherlands,”

are just two of the remarks from our interviews.

Founded in 1995, the VIB today comprises research groups from four Flemish universities. It focuses on

excellent fundamental research as well as on the translation of that research into economic and societal

value. This focus on excellence does not exist solely on paper: “The research groups are subject to tough

scientific review by peers: any bad ones are thrown out. It’s really about scientific excellence; political

manoeuvring is not accepted.” The VIB acts as a portal between these groups and the outside world;

external funding and technology transfer are channelled through the VIB to and from these groups.

“VIB has what our institutes, despite their own denials, lack: the very best Belgian scientists who search

for ideas and structure in order to spin out IP and start-ups in a very professional manner.”

VIB in numbers (2010)

• €37.5 million in funding from the Flemish regional government (56% of total funding).

• €13.5 million in revenues from technology transfer activities.

• 83 R&D or licensing agreements with commercial partners.

• Since 1997, 11 start-ups have raised €434 million in capital, roughly half from foreign investors.

• VIB start-ups employ 471 people.

• 10 publications in Cell, Science and Nature.

Matching the guy in the lab with the suits and tiesObviously, great science alone cannot be the single

ingredient for a business plan. An entrepreneurial

spirit among researchers is considered even more

important by the respondents to our survey (see

Figure 1). It is the ambition and the willingness to

take on an idea and to try and achieve benefits in

the very distant future, and requires a lot of stamina

and patience on the road to possible commercial

success.

Many interviewees point to an ongoing cultural

shift within academia in that respect. “When Dinko

Valerio left university and started Crucell in 1993,

that was just not done. It was looked upon as

something for people who weren’t smart enough

to ever become professors. Today you’re seen as

more of a hero when you take that step,” says one.

University researchers, particularly younger ones, are

increasingly open to exploring commercial success

for their ideas.

15

Life Sciences O



But trying to turn scientists into entrepreneurs will

only go so far. A much more fruitful approach would

be to “match the guy in the lab coat with the guy in

the suit and tie,” as one venture capital investor puts

it. To do this, according to several interviewees, it is

of crucial importance to have biotech entrepreneurs

and managers from pharmaceutical companies

who have experienced first hand what is required

to take a biotech product from start to commercial

success. The supply of such ‘guys in a suit and tie’

is said to be increasing, as former employees from

Crucell or Organon and professionals returning from

the US, for example, are available to “recycle” their

experience in new biotech start-ups. In addition,

many VCs have a network of experienced CEOs and

business development officers whom they link up

with companies if and when appropriate.

Perhaps these developments – the cultural shift

within academia and the expanding pool of ‘suits

and ties’ – explain why a remarkable 60% of our

respondents expect an increase in the number of

Netherlands biotech companies in the next two to

three years.

Funding it all: seed capitalRanking on top of our respondents’ list of the most

important preconditions for starting a successful

biotech company is the availability of early-stage or

seed investment capital, perhaps because this is the

‘ingredient’ perceived to be in shortest supply. After

all, the second mortgage and the contributions from

‘friends, family and fools’ will only go a short way.

In the Netherlands the number of seed-capital

investors is relatively high: “As a start-up company

you can easily visit five or six funds by bike, and

that should be enough. If your ideas are good and

you present them well, you’ll get money,” says one

venture capital investor.

The scarcity of seed capital is mentioned primarily

in relation to the point made earlier in this chapter

about the lack of maturity of university spin-offs.

“The real bottleneck is a lack of funding and freedom

to operate within universities to take an idea from

merely being a scientific hypothesis to a proof of

concept on which a business case can be built,” says

one venture capital investor. “Financing of academic

research is very much geared towards scientific

output, and not towards commercial or ‘valorisation’

potential.” Here there is a fundamental obstacle to be

overcome: “Investing in this very early stage is hardly

ever a viable activity. From a narrow financial point of

view, most money will be wasted, as most projects

will never generate any returns. But it’s no different

when building a bridge. Here the government has to

jump in.”

“Match the guy in the lab coat with

the guy in the suit and tie.”

As one venture capital investor puts it

16

The role of government“One thing is clear: the government’s role has

changed for good. The times when natural gas

revenues flowed abundantly to the life sciences

sector to sustain three ‘top institutes’ will not

return,” is what one interviewee concludes from the

government’s change of course as a sponsor of

innovation. While this could be seen as proof that

a consistent, long-term government policy towards

the life sciences sector is indeed lacking – an often

repeated criticism in our interviews – it also seems to

be accepted as ‘the new reality’: “I notice that players

in the biotech sector feel forced to co-operate more

and fight less”.

There is a plethora of government facilities through

which start-ups can obtain seed capital. One of

the most important facilities is the Pre-Seed Grants

Initiative of NGI, LSH and ZonMW. Through this

initiative, biotech entrepreneurs may receive up to

€250,000 to fund the costs typically incurred when

starting a small biotech company.

Another facility that is appreciated by our

respondents is the WBSO, which provides for the

beneficial tax treatment of labour costs for personnel

active in research and development. A related

measure is a corporate tax deduction for R&D costs.

However, since most biotech companies are not

profitable for almost their entire lifecycle, not many of

them can actually take advantage of this incentive.

Nevertheless this incentive can be useful for a

number of companies, especially those developing

and marketing medical devices, as they can expect

to become profitable earlier than biotech companies.

Some of our respondents criticize this incentive

because it mainly benefits big industry players that

do not need such incentives. Discussions within the

government and with the ‘Top Sector Life Sciences &

Health’ steering group are ongoing on how to adapt

these measures to make them more suitable for

unprofitable SMEs.

Other important forms of government support are

innovation credits and fund-of-fund investments.

Innovation credits are only granted to companies

which also have private funding. Many of our

respondents appreciate this approach because they

consider the private funding as a type of ‘quality

control’ for the government funding. Our respondents

regularly noted that pure government grants or

subsidies are often a waste of money because they

are given to too many companies with little prospect

of success. When the government acts as a co-

investor this problem could be reduced. With fund-

of-fund investments, the government invests in VC

funds which in turn invest in biotech companies.

This is also regarded as an effective and smart form

of government support.

17

Life Sciences O



“I notice that players in the biotech sector

feel forced to co-operate more

and fight less.”

19

Life Sciences O



2. Investing. At the point that a scientific discovery or an innovative

idea has been nurtured sufficiently to reach the ‘proof

of concept’ stage, and once a business plan has

been written, a management team assembled and

some initial funding secured, the young company has

in fact only taken its first baby steps. In an age where

the development of a new drug can easily take ten

years and can cost upwards of €1 billion, what lies

ahead is the long march through the proverbial ‘valley

of death’. Many promising biotech companies that

have set out on this journey have not survived, due to

a lack of intermediate funding. The bad news is that

the climate is becoming even harsher than before.

Separating the wheat from the chaffTo find out which biotech start-ups even stand a

chance, we asked respondents what the main criteria

are for venture capital investors when deciding

whether or not to invest in a company (see Figure 2).

There seem to be two ‘schools’ of thought on

investing in biotech. “Do you invest in the science,

or do you invest in the team? That’s a fundamental

difference,” is the way a banker puts it. The former

is seen as ‘European’ (and ranks first in our survey),

the latter as ‘American’. The first school focuses

on the innovative idea on which the business case

rests. Assuming that this idea is novel and promising

enough, and the IP is well protected, the rest follows:

“Above all else we look for breakthrough science.

■ Most important ■ Important ■ Also Important

Weighted scores

Clarity of the business case

Clear exit strategy and horizon

Therapeutic or technological field of activity

Number of products in the pipeline

Governmental incentives

Stable regulatory environment

Trust in management

Patented technology

Stage reached by the company in the

development pipeline

0 16020 40 60 80 100 120 140

1028114

51 2846

42 434

3621 13

161821

86

6 3

2

4

4

Figure 2. What are the determining factors for investors when considering whether to invest in Dutch biotech companies?

20

Science is a given, management you can fix,” says

one investor who subscribes to this school of thought.

The second school holds that the science, especially

in biotech, is so uncertain and unpredictable,

that the crucial factor behind success is to have

management that is flexible, creative, driven,

energetic, experienced and opportunistic enough to

change course whenever setbacks occur or when

new opportunities present themselves.

Regardless of which approach they favour, investors

look for commercial potential at an increasingly early

stage of a company’s life. Here again a big difference

between the US and Europe is reported. “From

day 1, an American start-up is able to tell you how

it is going to make money. European companies

start their presentations to investors with slides

showing strings of DNA, mice or state-of-the-art

technology. When you ask them how they are going

to make money, sometimes they don’t have a clue,”

exaggerates one interviewee.

Many entrepreneurs complain about wasting a lot of

time talking to VCs “who boast that they receive 400

proposals each year and invest in only 4 of those”;

these entrepreneurs feel they are being stalled, or

that the life cycle or the composition of a VC’s fund

matters more than their business plans.

Many VCs, as well as an experienced entrepreneur,

counter those criticisms: “If your science is good,

and your management is good, you will find funding.

It may take longer than in the past, but you will find

funding. If you don’t, then probably your story isn’t as

good as you think it is.”

The big squeezeAsked what is currently seen as a dominant trend in

the Netherlands biotech sector, many interviewees

point to the increasing scarcity of venture capital,

or ‘growth capital’ as it is known at this stage. “It’s

unheard of, the way our industry is being squeezed

right now”, says one partner of a venture capital fund.

In Europe, venture capital fundraising set a record

low: 41 funds raised $3 billion in 2011, a 20% decline

in the number of funds that attracted capital and an

11% decline in capital raised compared with 2010.6

These numbers point to a concentration of capital in

the pockets of fewer funds. Indeed, many interviewees

suggest that a shake-out is currently taking place

among venture capital funds; some will be forced out

of business as they fail to raise new funds.

Making the rounds among institutional investors and

raising new funds has become quite an ordeal for

many venture capital funds. The banks, insurance

companies and pension funds that make up a big

part of their investor base have become very risk-

averse, and they much prefer liquidity over multi-year

commitments to venture capital funds.

6) Source: Dow Jones press release: http://www.dowjones.com/pressroom/releases/2012/01122012-PEFund-0001.asp, accessed 9 April, 2012.

21

Life Sciences O



“We also have ourselves to blame,” says a partner

of one such fund. “In the past decade, returns on

investments in European life sciences or biotech have

just not been good enough. The top funds have done

well, but on average it has been a loss-making affair.”

Some VC firms respond by differentiating their funds’

strategies in order to better match their investors’

preferences. Whereas in the past venture funds that

invested in both ICT and biotech were common,

today we see specialized funds (sometimes even

within a single VC firm) that invest in just one type of

company, e.g. only privately owned, only late-stage,

or only early-stage companies, and even funds that

invest only in publicly listed companies.

The void left by institutional investors and the venture

capital funds they back has been filled, to some

extent, by the emergence of new types of investors

in life sciences. Family offices and informal investors

(‘business angels’), though professional, are not

driven solely by returns on their investments, but may

also be attracted to biotech’s promises of significant

benefits for humankind. Investments from charities

such as the Bill & Melinda Gates Foundation and the

Michael J. Fox Foundation for Parkinson’s Research7

can also be quite substantial.

7) See: http://www.tobbb.com/content/nieuws/2012_04_17_to-bbb_receives_michael_ j_fox_foundation_funding_for_parkinsons_disease_research.pdf

8) Another way in which Big Pharma invests in biotech is through ‘traditional’ VCs. See for example: ‘Index Ventures Launches New €150m Life Sciences Fund, with Investments from Two Leading Pharma Companies alongside Existing Anchor Limited Partners’; http://www.indexventures.com/news#news/index/news_id/321

9) Ernst & Young: ‘Beyond borders - Global biotechnology outlook 2011’, p.66.

Big Pharma steps inAnother increasingly active class of investors in

biotech companies are the corporate venture capital

arms of Big Pharma.8 Their importance is illustrated

by the fact that, in 2010, 12 of the 20 largest venture

rounds included a corporate venture investor.9

This trend is in line with Big Pharma’s strategy of

outsourcing larger parts of its research and early-

stage development efforts in order to address the

overall decline of its R&D productivity. “R&D in start-

up biotechs is done by people who are very focused

and driven; the survival of their company depends on

their achievements. That gives very different results

than you get from researchers in Big Pharma whose

job is relatively secure, and who need to operate in

a bureaucratic environment where decision making

is slow and subject to corporate politics,” says one

interviewee. Indeed, the primary mandate of some

corporate VC funds is to invest ‘strategically’

(i.e. in line with corporate strategy), rather than to

‘just’ generate financial returns.

However, this does not mean that corporate VCs

stake a claim to and are able to control the destiny

of every biotech company in which they invest.

Usually, they invest alongside ‘traditional’ VCs,

sometimes even together with the VC fund of one

of their competitors. Of course the participation of

multiple strategic players early in the game creates

some challenges in relation to the company’s future

destination. Some ‘traditional’ VCs only want to let

corporate VCs participate if there are at least two of

those, in order to maintain competitive pressure and

22

to prevent the choice of a final partner being made at

too early a stage. While this may reduce a corporate

VC’s chances of eventually scooping up the

company, even the ‘losers’ will benefit as long as the

competition between VCs drives up the company’s

value. Other VCs are more relaxed and point out that

it is more important to structure the investment in a

way which does not give away their power to control

the company’s destiny. That can be achieved even if

one corporate VC is involved.

Another noteworthy trend is that corporate VCs,

which are increasingly participating in early financing

rounds, are often invited to come on board and

share their expertise: “This trend is primarily driven

by smart financial VCs,” says one interviewee.

“Of course they do so with an eye towards exit

opportunities later on, but they also seek hands-

on advice from Big Pharma on what is needed to

successfully complete development, for example

how to structure clinical trials or how to avoid cutting

corners where you really shouldn’t.”

However, all these new investors together do not

compensate fully for the reduced firepower of

traditional venture capital funds, many interviewees

emphasize. So how much of a threat does this

scarcity of growth capital pose to the Netherlands

biotech sector?

Weeding out the nonsenseThe predominant view, not surprisingly, is that this

lack of capital is distinctly harmful to the Netherlands

biotech sector. “We have very good science coming

out of universities, and we are getting better at building

companies around that science. If we can’t sufficiently

fund those companies at an early stage, the only

option left is to bargain them away to Big Pharma at a

point when they’re not yet worth a lot. That is definitely

not good for the development of the sector.”

Some interviewees offer a more nuanced view,

though. One of them hopes for greater discipline on

the part of investors: “In biotech, where investors

judge science and scientists judge market potential,

there is quite a bit of naivety on both sides. So a lot

of nonsense is out there that is kept alive for a couple

of years by some VC. If a lack of resources could

make investors more critical and weed out some

of this nonsense, that would not be a bad thing.”

Another thinks that the climate will improve with the

passing of time: “It is merely a cyclical phenomenon.

With many start-ups chasing scarce venture capital,

VCs can now be selective and buy high-quality

assets ‘low’, and with cash-rich Big Pharma being

hungry for innovations, they can sell ‘high’. This will

improve returns for VCs in biotech, which will in turn

enable them raise more funds a few years from now.”

It is not just a question of the lower availability of

venture capital, another issue is the terms and

conditions under which capital is dispensed to

start-ups. In the past a company might immediately

receive the entire amount of capital raised in a

financing round; nowadays the capital raised is

made available only in tranches, if and when certain

milestones have been met. A frequently mentioned

“Above all else we look for

breakthrough science. Science is a given,

management you can fix.”

Says one investor

23

Life Sciences O



“Life sciences are far more difficult than rocket science. The product you develop

must be novel, path-breaking, safe and effective, must be right the first time, and must in the end

be accepted by a great many stakeholders who each have their own, uncoordinated and

sometimes conflicting rationales.” “Even with a fantastic product, in biotech

there are 20,000 ways in which you can fail to reach the finish line.”

Venture capital investor

24

Towards a symbiotic relationship?While the development of biotech companies

may primarily be a matter of ‘technology push’,

the ‘market pull’ factor is becoming increasingly

important. It has become common practice for

investors to identify, even before they make an

investment, where exit opportunities lie within big

pharmaceutical companies. On the other hand, the

latter have a vital interest in contributing, inter alia in

the form of venture capital, to a healthy ecosystem in

which many early-stage biotech companies survive.

Big pharmaceutical companies are well aware of

developments in VCs’ portfolios (and may co-invest

through their own corporate VC arm) and approach

these VCs with “shopping lists” for innovations that

would fit their strategic goals. “Spurred by venture

capital investors, Big Pharma and biotech have

formed a true symbiotic relationship in which they

have become dependent on each other for survival,”

is how one interviewee describes this development.

It may be premature to speak of symbiosis. However,

it certainly seems that there is a growing ecosystem

in which scientists, management, seed investors,

VCs and Big Pharma are communicating and

interacting more with each other, and becoming

more inter-linked. Each of these players may initially

be acting in its own self-interest, but ultimately the

development of this ecosystem will serve the greater

good of the industry.

difference between European and US VCs is that

whereas American VCs invest in large chunks

and trust management to act in their mutual best

interest, European investors tend to “drip-feed” their

companies. This style of investing is usually attributed

to the smaller size of European funds, their lower

risk appetite and, as a consequence of that, their

tendency to give management limited leeway.

The view from the receiving endThe worry among entrepreneurs is that the current

scarcity of capital will exacerbate this practice of

drip-feeding and that investors will put them on an

even stricter regimen: “The constant worries over

money are an enormous distraction”, says one

executive, echoing others. “Investors just nod when

you talk to them about this, but they don’t really care.

Yet they underestimate the consequences. Every

new round of financing takes up a huge amount of

time and energy that we could otherwise have spent

on actually developing our business. This slows us

down and forces us to lower our ambition level.”

So while a lack of venture capital may lead to fewer

but more promising start-ups, the start-ups that

manage to survive still suffer from the harsh climate.

To avoid being surprised by VC behaviour, some

interviewees from biotech and medtech companies

stress the importance of having a due diligence

investigation into the VC’s capabilities and exit

preferences, as well as its fund policies and horizon.

“The constant worries over money are an

enormous distraction.”Says one executive, echoing others

25

Life Sciences O



The evolving relationship between management and investors as companies mature: points of

tension and how to deal with those

A start-up run part-time by a professor or PhD holder may find an experienced investor and, in many cases,

will probably rely heavily on the investor’s advice and opinion. At this stage the company is not a real,

independent entity, but just a project. As the company becomes more successful and expands its investor

base, it becomes more of a stand-alone entity. Its investors may have conflicting interests, for instance on

the timing of an exit when they have different entry points or fund horizons. The company will have hired

more and more employees over time, and will have entered into various contracts and relationships with

government and other financing parties, clinical trial service providers and others, thereby expanding its

base of stakeholders and their interests.

From a Dutch legal perspective the management and supervisory boards are required to protect the

interests of the company and its business as well as those of all its stakeholders. While the interests of most

stakeholders may be aligned at the outset, tension may arise along the way. For instance, the interests of

investors looking for a full cash exit as soon as possible, usually through a trade sale to Big Pharma, may

be at odds with management’s ambition for the longer term success of the company’s business and its

continued stand-alone existence. A frequent interesting development in this respect is that, at some point,

management and/or investors will seek an experienced independent chairman of the supervisory board.

Such a chairman will more assertively voice the interests of the company as a whole, thereby offering more

of a counterweight to investors looking to take their money and run. In practice, however, such a chairman

is more likely to serve as a go-between and consensus seeker.

A few examples of issues on which management and investors may not see eye to eye

• Valuation: obviously a paramount issue at the time of the first financing round (valuation of the initial

business plan), during later rounds and, finally, at the time of the exit (when management may find itself

more and more aligned with early investors).

• Terms affecting management financially (e.g. liquidation preference and reps & warranties).

• Identity of new investors: having the right names on board is obviously key, e.g. by validating the pipeline

and attracting further financing rounds, alliances and even exits.

• Exit horizon and type of exit: where investors will usually seek a full trade sale, management may want to

pursue the options for the company to remain a stand-alone entity longer.

• Exit terms, e.g. management reps & warranties to the buyer in a trade sale exit; in an IPO scenario,

the post-IPO governance and level of independence.

27

Life Sciences O



3. Strategic co-operation.

As said before, there is a logical sequence in the life

cycle of biotech companies which at some point links

them with Big Pharma, whether through a corporate

VC, a licensing deal, a development partnership or, in

the most far-reaching scenario, a complete takeover.

Sharing a future togetherWith biotech companies, venture capital investors

and the pharmaceutical companies forming an

increasingly close-knit ecosystem, it should probably

not come as a surprise that many young biotech

companies see themselves sharing a future with a

big pharmaceutical company.

Percentage of respondents

To develop products up to phase I or II clinical trials and then enter into a strategic

alliance with big pharma to put the products on the market

Early takeover by big pharma, before market authorisation is obtained

To put products on the market autonomously and to pursue an exit after

market authorisation

To put products on the market autonomously and execute a stand-alone

business plan

Figure 3. What will be the predominant strategic goal of Dutch biotech companies?

0% 10% 20% 30% 40% 50% 60% 70% 80%

65

17

8

6

“Biotech companies and their venture capital

investors need Big Pharma for their exits; Big Pharma

depends on biotech for innovation”, as one investor

puts it. A majority – 65% – of our respondents seem

to agree (see Figure 3); they think that an alliance

with Big Pharma is the predominant strategic goal

of Netherlands biotech companies, after they have

developed products up to the phase I or II clinical

trials. A further 17% see an early takeover by Big

Pharma as the desired scenario for Netherlands

biotech companies. A mere 6% believe that the

predominant strategic goal of companies in this

sector is to put products on the market autonomously

and execute a stand-alone business plan.

28

A lack of ambition or healthy realism?The most important reason for biotech companies

to seek an early alliance with Big Pharma is to obtain

(non-dilutive) funding or capital (see Figure 4).

“To think that you can remain independent and

become the next Amgen or Genentech is just not

realistic given the financing requirements for new

drugs and the cost of venture capital. Of all new

biotech products that deserve further development,

95% end up in a licensing deal with Big Pharma.”

■ Most important ■ Important

Weighted scores

Obtain (non-dilutive) funding / capital

Increase the possibility of a complete takeover

Access to new markets through cooperation

with big pharma

Equity investment by big pharma

Access to the distribution capacity of big pharma

Validation of technology / valuation of

the company

Access the partner's know-how, IP and

development skills

Obtain funds, while retaining sufficient

freedom to exit the alliance

Figure 4. What would be the predominant goals of a biotech company in entering into a strategic alliance?

0 20 40 60 80 100

1280

24 19

14 9

12 9

810

2010

10 2

56

more as a (temporary) marriage of convenience than

as a prenuptial agreement. In fact, it’s not uncommon

to have alliances with several pharmaceutical

companies at the same time. But while a future exit

may not be the main reason to form alliances with

Big Pharma, investors certainly don’t mind. “If you

aim for a takeover by Big Pharma – and VCs certainly

do – you need to appear on their radar screen early.

Before an actual deal is done, they need to be able to

follow you for a couple of years.”

The second most important reason is that such an

alliance is seen as a welcome “stamp of approval” for

biotech companies.

Increasing the possibility of a complete takeover

through such an alliance ranks much lower. This may

reflect the fact that such an alliance is indeed seen

That access to a pharma partner’s know-how,

IP and development skills ranks almost equally low

is, according to some interviewees, a reflection of

several things. Among them is an underestimation by

many biotech companies of the difficulties involved

in later stages of development (e.g. regulatory

approvals) and clinical acceptance. Perhaps this

29

Life Sciences O



is explained by the fact that the main driving force

behind many biotechs is a ‘technology push’ rather

than a ‘market pull’. “Many biotech companies focus

on a ‘proof of concept’; what Big Pharma also wants

to see is a ‘proof of commercial relevance’,” as one

interviewee puts it.

A factor that contributes to the majority of biotech

companies driving themselves, or being driven, into

the hands of Big Pharma is the fact that the public

capital markets for biotech companies have been

closed, and are expected to remain that way, at least

for a while. “Five years or even three years ago this

picture would have looked very different. Now, the

conviction that there is a capital market for biotechs

is gone. The times that you could approach an

institutional investor with a nice prospectus built on

promises alone are over.” With no access to public

capital, biotech companies have almost nowhere to

turn except to Big Pharma.

ExceptionsA few biotech companies and a number of medtech

companies, however, have an ambition to remain

independent. As one executive describes his vision

for the future: “We really have the ambition to

become a leading company with a large footprint.

Ten years from now we will have partnered some of

our products with the Pfizers of this world, but we will

also have our own, global sales force to serve certain

niche markets. So yes, although everybody tells

us we need much more money than we anticipate,

we still believe that it is possible to develop into an

integrated pharma company. It just might take more

time in the current climate.”

So which companies are best positioned to at

least strive to remain independent, or in any event

keep control of their own destiny, while engaged in

relationships with Big Pharma?

• companies with platform technology and a broad

portfolio, enabling them to use some products to

generate cash for the development of others;

• companies that focus first on the development of

‘low-hanging fruit’, leaving the high-tech stuff for later;

• companies whose products require a relatively

low investment, e.g. low volume trials or a limited

sales force (for example, because the products are

distributed only to specialized hospitals);

• medtech companies, whose products have a

shorter time to market and require a lower level

of investment, thus enabling these companies to

generate their own revenues and profits sooner;

• companies with other cash-generating activities –

developed or acquired previously – which support

the development of products in the pipeline.

How to manage the relationship between biotech and Big PharmaBig Pharma often provides the best opportunity for

biotech companies to take the development of their

products a couple of steps further, but engaging in

alliances with Big Pharma calls for a certain degree

of caution on the part of biotechs. “Suddenly a

biotech company becomes one of 250 projects

that are going on within such a huge corporation.”

The priority and funding it receives may change at

any moment for any number of reasons: a change

of corporate strategy, shifts in R&D allocations,

bureaucratic infighting, etc.

30

The term ‘strategic alliance’ is “largely window

dressing”; the relationships are in reality quite

skewed, with power being in the hands of the party

with the money. “Big Pharma is not in the business

of paying milestones. The only certain payment is

the upfront payment, which is usually quite low.

Subsequent milestone payments may get stalled or

bogged down in legal battles.” Structuring the terms

of an alliance and potential equity investments is

obviously key (See box).

The end result of a strategic alliance and collaboration, but also of equity investments and exits, will

of course depend on the bargaining power of the parties involved and the competitive field. Clearly, a

company with urgent financing needs will often reach a worse deal than a strong independent player with

no need for a sale or alliance. From the company’s perspective it is key to structure deals so as to get the

benefits in the desired terms (upfront & milestone payments), while not bargaining the company away for

too little. This could be achieved, for instance, by limiting the scope of an alliance (to certain regions, parts

of the portfolio or indications only), by being very careful in agreeing to co-finance the products under

penalty of losing the product, and by agreeing appropriate termination provisions allowing the company

to regain control and a new future if the partnership for whatever reason does not work out. It may indeed

occur that the partner changes its strategy and decides not to acquire control over the company even if it

was planning to do so before. The company is well-advised to have made allowance for that situation in the

termination provisions, including by having a repurchase option for any equity held by the partner.

ImplicationsThe ecosystem described above perhaps reflects

– in an ideal world – the most efficient allocation

of means: agile, focused biotechs quickly take

scientific ideas and discoveries through the initial

phases of development. Professional investors select

the ones most likely to succeed, provide capital

and managerial support and broker deals with Big

Pharma. Big Pharma offers good exit opportunities,

takes new products through the final phases

of development and applies its marketing and

distribution power to create successful market entry.

Often management and scientific staff of biotech

companies are then freed up and can put their talent

and experience to use in new ventures.

There are, however, downsides to such an

ecosystem. “In the Netherlands we will end up with

many small biotech companies. In this way we

are not going to build new Crucells here,” is how

one interviewee puts it. From a national economic

perspective, this means a lack of sufficiently mature

companies that generate taxable income, exports

and self-supporting business for the long run.

For the sector itself, the risk associated with this

development is that in the longer term, and in the

absence of Big Pharma that has R&D and business

development activities here, there will be a lack of

people who have first-hand experience in building an

(independent) biotech company, taking a company

public or bringing new products to the market.

“You must have occasional success stories! Only

then can you attract the people and the capital you

need to sustain a vibrant, growing biotech sector,”

stresses one interviewee, again echoing several

others.

31

Life Sciences O



“We are the eyes on the ground for Big Pharma, for biotech companies

we are the window on the world.” Venture capital investor

Sharing your intellectual property: some things to consider

For many biotech companies the IP portfolio is their most valuable asset. When joining forces with Big

Pharma, it is essential to make clear and practical arrangements with regard to access to each other’s

intellectual property. Note that further improvements to the licensed technology resulting from joint research

and development efforts could give rise to additional intellectual property rights (and discussions as to who

owns these!).

From practical experience, here are a few things to keep in mind when negotiating licensing deals:

• A clear understanding in respect of the ownership of the intellectual property is key. In many jurisdictions

co-ownership of intellectual property may result from a mutual co-operation. Such co-ownership could

in itself give rise to considerable difficulties, e.g. when a sale or licence of the relevant IP is contemplated.

The end result may be a deadlock.

• Royalty calculations and milestone payment criteria should be as clear as possible; independent survey

mechanisms should be seriously considered.

• Under which circumstances can either party terminate the licence or co-operation? Should this always

be all or nothing? A compromise could consist of the loss of exclusivity or the loss of a right to extend the

licence to other fields of use, if certain performance requirements are not met.

• The choice of law and the relevant forum for dispute settlement can have far-reaching consequences.

Perhaps the Netherlands biotech sector will become

a large-scale incubator or “feeder” for Big Pharma,

rather than an environment in which national

champions can develop. The ambition of the ‘Top

Sector Life Sciences & Health’ to develop successful

new and cost-efficient therapies may still be realized,

but the products will no longer be owned by Dutch

companies at the time they enter the market.

The contribution from biotech to the business

ambition of the ‘Top Sector Life Sciences & Health’

(see Introduction) may therefore be hard to achieve in

such an environment.

33

Life Sciences O



4. Exit strategy.

The last stage in the entrepreneurial life cycle of a

biotech company is the exit phase, in which the

VCs and/or management seek to liquidate their

investment and the company in its present, investor-

driven form has served its function. Historically, two

types of exit were typical for biotech companies,

an IPO or a sale of the company or its prize assets.

Clearly, an IPO in today’s market is very difficult and

is far from certain to produce the desired return.

Furthermore, the closely-knit ecosystem of which

biotech companies are currently part is geared

towards matching them with the right strategic

partner at the right time and price. For these reasons,

the preferred exit route has shifted from an IPO to a

sale to a Big Pharma or similar company.

While the exit is the final step in the company’s

development, it may and usually does occur before

a new drug or medical technology produced by the

company has entered the market.

34

Sale to Big Pharma as a much preferred exit routeGiven the ever-closer relationships between

biotech companies and Big Pharma that have been

described in previous chapters, it should not come

as a surprise that a trade sale to a specific, identified

pharmaceutical company, in a bilateral process, is

seen as the preferred exit route for most Netherlands

biotech companies (see Figure 5).

As previously discussed, the key players in the

biotech ecosystem increasingly, and at an earlier

point in time, explore each other’s interests and try

to identify potential partners. This makes it easier to

choose the right partner at the time of the exit.

But a trade sale to a specific identified buyer was

not the only type of sale chosen by respondents as

the preferred exit scenario. They also chose, in some

cases as a second preference, a controlled auction

with multiple potential buyers, a sale with contingent

value rights and even a dual-track scenario in which

an IPO and trade sale are pursued simultaneously,

the IPO often serving as a base case. In the dual-

track scenario, the trade sale may be pursued

publicly or in secret, sometimes even without the

knowledge of the company’s officers and advisers

working on the IPO.

■ First preference ■ Second preference

Weighted scores

Trade sale to big pharma in a bilateral process with

an identified preferred buyer

Dual-track exit scenario where IPO and trade sale are pursued

simultaneously

IPO with exit and loss of control for existing investors

Technical IPO (investors make new investment, retain control,

create liquidity and expand future financing and exit opportunities)

IPO with existing investors retaining majority control

Winding up / dissolution of company with sale of assets

to interested parties

Strategic alliances (milestone payments) with or capital

investments by big pharma

Sale in controlled auction process with various identified

potential buyers

Sale with cash consideration and contingent value rights

(milestones dependent deferred purchase price)

0 18016014012010080604020

38120

36 36

39 12

263

1412

103

6 6

3

2

4

Figure 5. Which exit strategies would current shareholders of, and investors in, Dutch biotech companies prefer in 2012?

35

Life Sciences O



The end of the line for managementWhile management may be retained for a while after

a takeover to ensure a smooth transition or to deal

with regulators in finishing an approval process, a

takeover usually brings a swift end to management’s

involvement with their former enterprise. If they are

not laid off in order to cut costs, they usually leave of

their own volition as they find it difficult to cope with

the culture, hierarchy and decision-making process

typical of big corporations. Financial considerations

In each case, a decision will have to be taken as to what constitutes the best exit procedure for investors

at the relevant time. This will be determined by, among other things, the company’s ‘hotness’ and the field

of potential buyers, the need to realize the exit within a particular period, and the extent to which an IPO

would be a realistic option, for instance if a dual-track scenario is pursued.

It goes without saying that creating some competitive pressure usually enhances the seller’s bargaining

position, even if a clear preferred buyer has been identified (e.g. the strategic partner in an alliance or

equity investment). As we have seen in Chapter 3, when entering into such an alliance or investment a

biotech company should be careful to avoid giving so many rights to the strategic partner as to result in an

outsourcing of the decision on the exit procedure and the company’s destiny. Of course the company may

deliberately choose to do this in a particular situation and for the right price.

The form of the trade sale will ultimately depend on the company’s assets. A company with only a single

product will obviously be acquired in its entirety by a sale of 100% of the shares. However, if a company

has a broader portfolio, the relevant product may be separated into a new company, through a legal

demerger or asset sale. The shares in the new company are then sold to complete the transaction. Partially

for fiscal reasons, this is another regularly used transaction structure.

Percentage of respondents

Yes

No

Don’t know

0% 10% 20% 30% 40% 50% 60% 70% 80%

75

10

15

Figure 6. Do you consider an IPO to be a realistic option for Dutch biotech companies in 2012?

aside, they can easily afford to leave. “Management

that have completed a successful takeover don’t

have to worry about their future careers. Their skills

and experience are in such high demand that, if they

want, they can start the very next day at another

biotech company.”

“An IPO? Can’t get it done!”The IPO scores remarkably low as a preferred exit

route for biotechs (see Figure 6). This is despite

36

the fact that several interviewees confirm that

management regularly (but sometimes privately)

harbour such ambitions, as this would allow to them

to keep their jobs, remain involved with the company

they have helped build up from the ground, and bask

in the glory associated with an IPO. Perhaps this

low score is because the nature of IPOs in biotech

has changed: “Takeovers and IPOs are not mutually

exclusive. IPOs are currently financing events, not

exit events anymore,” says the CEO of a biotech

company. Perhaps this low score is also prompted

by the idea among the majority of respondents that,

currently, an IPO is not even a realistic option in the

first place. No less than 75% think an IPO in 2012

is not worth considering for Netherlands biotech

companies. The main reason for this is undoubtedly

the ongoing general crisis in the financial markets,

but there are other reasons as well. These are

discussed below.

In our interviews, the reason cited first and

foremost is the current market sentiment, the

Ziggo IPO and the announced IPO of Douwe

Egberts notwithstanding. “You need to have market

momentum in order to get generalist investors, who

usually provide the bulk of the money in a successful

IPO, to participate in higher-risk investments,” says

a banker. So unless a biotech company “resembles

a cookie factory in its product, sales and financial

outlook “, entrance to the public markets is barred.

“An IPO for a classic product-development, mid-

stage biotech company today? Just can’t get it

done!” declares a partner of a venture capital fund.

Several factors, apart from the high-risk profile of

biotech companies, make an IPO even more difficult

for them than for other high-tech companies:

• The past decade has seen many biotech stocks

whose price went down after their initial listing.

This has made investors wary of participating in

new IPOs in the sector.

• Valuation of the IPO may be too high, for instance

if the last financing round was relatively high.

Investment banks hungry to get a key role in

the IPO process may also be too optimistic on

valuation in the pitching phase, reducing their

valuation when they get more information after

having secured their role.

• The often highly technical nature of biotech

products requires a buy side that is able to

appreciate their potential and risks. In a book-

building process, a number of specialized investors

must usually be on board first before the bigger,

general investors follow. Such a base of specialist

biotech investors is lacking in Europe, according

to some interviewees: “On the buy side, there

is frightfully little knowledge of the sector”, says

one. In the US, there are many specialist biotech

fund managers, but they hardly ever deliver the

goods: “Management are easily persuaded by

their bankers to embark on a road show to the US,

but I have never seen US investors take part in a

European IPO.”

• Again in contrast to the US, the market in Europe

for biotech stocks is not very deep. This creates

the very real risk of ending up in a vicious circle of

reduced coverage from analysts, lower liquidity,

funds that want to divest and lower stock prices.

To prevent this, biotech companies that can’t

report their earnings every quarter need to use

their shares actively or, as a banker we interviewed

advises his listed biotech clients: “In the absence of

cash flow, you need a news flow.”

37

Life Sciences O



“IPOs are currently financing

events, not exit events anymore.”

CEO of biotech company

38 10) See also: https://europeanequities.nyx.com/en/listings/ipo-showcase

• Biotechs with a low share price – after the

overhang is gone – can be subject to a lowball offer

and risk being acquired at a price far below their

real value and potential. It is therefore advisable

in most cases to create adequate protective

measures that improve management’s bargaining

position and ensure that control over the company

can be retained.

But what if?Seen from a different angle, 10% of the respondents,

more than a handful, do not rule out the occurrence

of biotech IPOs this year. Some investors even hint

that one or two of their portfolio companies might be

actual candidates. And more than one interviewee

mentioned that in the first quarter of 2012 alone,

four biotech and medtech companies have pulled

off an IPO on NYSE Euronext in Paris10. As we have

seen in Chapter 3, some companies are better

placed than others to remain a stand-alone entity

for a longer period of time. Accordingly, it is worth

looking at the criteria for a successful biotech IPO if

general economic and market conditions cease to be

forbidding:

• Credibility of management. “Institutional investors

have been burnt by companies that experienced

failures in a very late stage of product development.

An experienced management team that has been

successful before in bringing products to the

market, selling their company or doing an IPO, is of

crucial importance to provide credibility.”

• An upward-trending cash flow from products

already put on the market or from licensing deals.

This provides a solid base for valuation and greatly

reduces a company’s risk profile.

• A very solid execution strategy for the one or

two years following the IPO. Once listed, biotech

companies are very vulnerable to bad news

regarding development or regulatory issues.

• A partnership or alliance with Big Pharma.

These certainly help, by providing validation. If the

partners also acquire an equity stake, that is

even more helpful: “If a strategic partner were to

participate in an IPO, that would significantly reduce

the due diligence risk for institutional investors.” On

the other hand, a partnership or alliance with Big

Pharma is not considered necessary: “An IPO for

biotech companies is led by specialized investors

who would understand in detail your reasons for

having or not having partnerships.” However, as

we have seen in Chapter 3 biotech companies

structuring deals with Big Pharma are generally

well-advised to retain control of their destiny.

This is even more important in a public, listed

environment where a potential takeover premium

is an important attraction for investors and the

VC’s influence and position is not as strong as in

a private environment. Termination provisions and

adequate provisions on, for instance, the drag-

along or buyback of Big Pharma’s equity stake are

therefore key.

39

Life Sciences O



The technical IPO or even a hybrid alternative: a publicly listed company under the continued

control of VC investors.

• Technical IPO. While for many companies an IPO may not be an exit option in the current environment,

it may be a means of financing that is preferable to a new VC financing round. In this context, a technical

IPO refers to a secondary listing of shares held by the VCs and management. This will normally be

coupled with a new financing round by the existing VCs and perhaps the addition of one or more new

investors through newly issued listed shares. Obviously, a technical IPO does not give the existing VCs

a real cash exit immediately (although based on their funds’ terms they may be able to treat the listed

shares as liquid and therefore as an exit). VCs may also lose their special investor’s rights and majority

board representation after the IPO. The benefits of a technical IPO are that it gives the company a

listing through which it can attract new capital markets financing, also in the future if and when the

circumstances are right. The benefits for management could be to postpone the decision on the

company’s destiny and keep alive the possibility of a stand-alone future with the potential to develop

into a more robust company.

• VC-controlled listed company. As a more innovative structure which builds on the technical listing

referred to above, VCs may retain more control and influence after the IPO than usual. Investors, life

sciences specialty investors, general institutional investors or even public investors, may be interested in

the opportunity to invest in listed shares in a VC-driven biotech company. By doing this they can piggy-

back on the experience, resources and talent of VCs and management which are normally out of reach.

Accordingly, a tailor-made governance model with continued VC control of the board and veto and

other rights based on a shareholders’ / investment agreement, or a relationship agreement, could even

be imagined. To the extent those arrangements deviate from the typical listed company’s governance

contemplated by the Dutch Corporate Governance Code they would of course have to be adequately

explained. The controlling VCs would in principle also have to comply with the mandatory offer rules,

but they may be able to benefit from the exception from those rules which applies to an existing group

of controlling shareholders in an IPO. Such a structure was to some extent the approach taken in the

Ziggo IPO, as shown in inter alia a shareholders’ agreement between the pre-IPO owners of Ziggo.

In that agreement, concert arrangements on governance, sell downs (after lock-up periods and subject

to certain orderly market arrangements as set out in co-investor agreements and a shareholders’

agreement) and tag-along rights were put in place for after the IPO.

40

Conclusions.The Netherlands biotech sector is well-positioned as

a successful incubator of innovative companies that

will attract partnerships with Big Pharma and may

eventually be taken over by Big Pharma.

Several strengths contribute to this favourable

position, although some threats can be identified

as well.

• High-quality science. Overall the quality of

scientific and clinical research is considered high,

with world-class excellence in certain fields, e.g.

fundamental cancer research.

• Valorisation. ‘NIB’? Although the situation is

improving, there is room for significant further

improvement with regard to the ‘valorisation’ of

research, i.e. the generation of economic and

societal value out of that research:

- fragmentation and a perceived lack of priority

within universities; financing of academic

research and the European academic ‘culture’

are both insufficiently geared towards turning

science into business;

- a perceived lack of government coordination;

such coordination could take the form of

setting up and funding an organization like

the Flemish Institute for Biotechnology (VIB).

The VIB is seen by many in the Netherlands

biotech sector as a ‘best practice’ in both the

promotion of excellent fundamental research

and its ‘valorisation’. A Dutch equivalent of

the VIB could ensure the creation of a clear

structure for researchers, universities and

government and become a self-supporting

professional facilitator of successful new Dutch

biotech companies.

• Government has good intentions, but smarter,

long-term commitments are required. The

government seems to have good intentions for

the biotech sector and supports it with some

useful instruments such as ‘innovation credits’

and smarter co-investing with professional VCs.

41

Life Sciences O



However, the government could become more

effective by making a longer-term commitment to

the industry, for instance through the creation of an

‘NIB’. The entire sector has a long-term investment

horizon; short-term policies can easily lead to

mismatches.

• Capital scarcity for VCs. In the Netherlands

there is a relatively large base of venture capital

investors in both the seed and growth stages.

Currently, however, they face a very unfavourable

climate for raising new capital. This may result

in a consolidation or even cause some of them

to retreat from the market, potentially posing a

significant threat to the country’s biotech sector.

Government co-investments in the seed and

growth phases and participation by family offices

and charities can only go so far to compensate for

this reduction of available funds.

• Closely-knit ecosystem biotechs, VCs and Big

Pharma. VCs are perceived to be an important

driving force behind the forging of ever-closer

relationships between Dutch biotechs and Big

Pharma; a true ecosystem is developing.

- At an increasingly early stage of the life cycle of

biotechs, they are groomed for a partnership

with or acquisition by Big Pharma. According

to 60% of the respondents to our survey this

is the predominant strategic goal of biotech

companies. Given the increasing costs and

complexity involved in the development of new

drugs, most industry professionals no longer

consider it a realistic option to do this as an

independent company funded only by VC

investors.

- A contributing factor is that IPOs are not

considered to be a realistic exit route for

most biotech companies either now or in the

foreseeable future. This is due mainly to the

market climate, but also to a lack of specialized

institutional investors.

- Big Pharma is increasingly outsourcing R&D

activities (usually via a corporate VC arm) to

early-stage biotech companies, in an attempt

to boost overall productivity in this area.

• The Netherlands as ‘feeder’ nation? The current

trend is for biotech companies to be taken over by

or otherwise become part of Big Pharma, often at

or near the stage of the phase II clinical trials. The

Netherlands may well become a breeding ground

for valuable new medicines, medical devices and

technology which at some point in the biotech

company’s life cycle are passed on to Big Pharma.

Subsequently, the biotech’s management and

researchers become available for new start-ups.

• Creation of Dutch champions? Particularly in view

of the funding situation, it is considered unlikely

that a large, independent and profitable biotech

company will develop in the Netherlands. In the

current scenario, the creation of a new Dutch

champion such as Crucell is likely to be the

exception than the rule.

42

Methodology.In January and February of this year, NautaDutilh

and Niaba held an online survey in which nearly

500 scientists, entrepreneurs, managers, investors,

bankers, advisers, government officials and

other professionals involved in the Netherlands

life sciences/biotech sector were invited to

participate. Of those invited, 88 completed the

survey. In addition, we conducted over 20 in-depth

interviews with key players from all disciplines.

These interviews allowed us to further explore the

strengths, weaknesses and trends identified in the

survey, provided us with further insights (e.g. into the

strategic goals of key industry players) and enabled

us to identify important success factors. Although

we have quoted freely from these interviews,

NautaDutilh is solely responsible for the contents of

this publication.

We would like to thank everyone whose input

contributed to the production of this publication,

especially the following individuals who generously

shared their views with us:

ABN Amro:

Maurice Laudy (Executive Director Corporate Finance

& Capital Markets, Head of Healthcare) and Frederik

Gorter de Vries (Senior Associate Corporate Finance

& Capital Markets)

Aescap Venture:

René Beukema (Partner) and Patrick Krol

(General Partner)

AM-Pharma:

Erik van den Berg (CEO)

arGEN-X :

Hans de Haard (Chief Scientific Officer)

Audion Therapeutics:

Rolf Jan Rutten (Founder and Managing Director)

BMEYE:

Rob de Ree (CEO) and Frank Wittgen (CFO)

Cryo-Save:

Arnoud van Tulder (CEO)

DNage:

Rein Strijker (CEO)

Forbion Capital Partners:

Bart Bergstein (Managing Partner and Chairman)

43

Life Sciences O



Galapagos NV:

Onno van de Stolpe (CEO)

GenDX:

Wietse Mulder (Managing Director) and Maarten

Penning (Business Development Manager)

The Hubrecht Institute:

Hans Clevers (Director)

i-optics:

Jeroen Cammeraat (CEO)

Kempen & Co:

Oscar Izeboud (Managing Director Corporate

Finance, Head of Life Sciences) and Ivo Piest

(Executive Director Corporate Finance)

Life Science Partners:

René Kuijten (General Partner) and John de Koning

(Partner)

Merck Serono:

Roel Bulthuis (Head of Merck Serono Ventures)

The Ministry of Health, Welfare and Sport:

Hugo Hurts (Director Pharmaceutical Affairs and

Medical Technology) and Frank Flier (Senior Adviser)

The Netherlands Biotech Industry Association

(Niaba):

Jan Wisse (Managing Director)

Pharming Group NV:

Sijmen de Vries (CEO)

ProFibrix:

Jan Öhrström (CEO) and Jaap Koopman

(Chief Scientific Officer)

Pwc:

Arwin van der Linden (Partner)

Thuja Capital:

Harrold van Barlingen (Managing Partner)

to-BBB:

Willem van Weperen (CEO)

Others:

Ronald Brus (former CEO of Crucell and life sciences

entrepreneur)

44

About NautaDutilh.

NautaDutilh and our life sciences / biotech expertiseCreative solutions from the lab to the market, from

start-up to exit. NautaDutilh is the legal partner of

choice for life sciences companies. We assist in

every phase of the company’s life cycle, from start-

up to initial public offering and beyond. Behind the

scenes, in transactions, before the regulators or in

court if necessary.

From financing, patent and regulatory issues, to

partnerships, IPOs and exit strategies, we provide

direct and pragmatic advice, venturing off the beaten

path, always in search of better solutions.

The FirmNautaDutilh is one of the leading independent law

firms in the Benelux. We are also among the largest

law firms in Europe, with over 400 lawyers, civil law

notaries and tax advisers in offices in Amsterdam,

Brussels, London, Luxembourg, New York and

Rotterdam. NautaDutilh caters for the international

business community in areas such as corporate,

capital markets and finance law. Other focus areas

include tax, intellectual property, competition,

employment, commercial property and insurance.

For pan-European or global matters, we team up

with top-tier foreign firms from our (non-exclusive)

worldwide network, selected to provide the required

expertise for the matter at hand.

45

Life Sciences O



About Niaba.

The Netherlands Biotech Industry AssociationFor over twenty years, the Netherlands Biotech

Industry Association (Niaba) has brought together

more than seventy of its home country’s biggest and

finest biotech-related companies and organizations.

Its members operate in fields such as human

and animal health, food, feed, agriculture and the

environment.

Niaba counts large, globally operating companies

such as DSM, MSD, Syngenta and Dupont among

its members. However, the association also involves

small- and medium-sized biotech companies like

Prosensa, Pharming and KeyGene, as well as

research institutions and other associations operating

in adjacent fields.

46

Key contacts.

47

Life Sciences O



The Netherlands

John Allen

Partner

Amsterdam

T: +31 20 71 71 869

M: +31 62 02 10 606

E: [email protected]

John Allen specializes in intellectual property law

(in particular patent litigation, licensing and advice).

John argued the first case before the European

Court of Justice on the scope of protection of a

patent covering DNA sequences and molecules

(Case C-428/08, Monsanto vs Cefetra). He has also

litigated a number of pan-European patent disputes

in the life sciences sector. John frequently assists in

licensing and spin-out disputes.

The Netherlands

Christiaan de Brauw

Partner, Head of Life Sciences Team

Amsterdam

T: +31 20 71 71 698

M: +31 65 36 80 786


Christiaan de Brauw specializes in mergers and

acquisitions and corporate law. He focuses in

particular on public M&A work and on M&A/

corporate, corporate governance and capital

markets advice and transactions for life sciences

clients. Christiaan is a member of the American

Bar Association and a fellow of the American Bar

Foundation, in addition to publishing and teaching

regularly on M&A-related topics.

48

The Netherlands

Bas van Hunnik

Amsterdam

T: +31 20 71 71 708

M: +31 65 31 06 615


Bas van Hunnik specializes in corporate law

and advises clients in a variety of transactions,

in particular in mergers and acquisitions (both

national and cross-border), controlled auctions and

private equity. He is regularly involved in investment

transactions in the biotech industry and has advised

several biotech start-ups on various corporate

aspects. Bas was also part of the team advising

Johnson & Johnson in its acquisition of Crucell.

Before specializing in corporate law, Bas practised

in several areas of intellectual property law.

The Netherlands

Paul van Dongen

Amsterdam

T: +31 20 71 71 589

M: +31 65 13 03 274


Paul van Dongen specializes in patent law and life

science regulatory law. He holds a Master of Science

degree in Life Science & Technology.

49

Life Sciences O



The Netherlands

Bart van Kempen

Amsterdam

T: +31 20 71 71 868

M: +31 32 21 40 218


Bart van Kempen specializes in corporate law

and advises clients in a variety of transactions,

in particular in mergers and acquisitions (both

national and cross-border), controlled auctions and

private equity. He is regularly involved in investment

transactions in the biotech industry and has advised

several biotech start-ups on various corporate

aspects. Before specializing in mergers and

acquisitions, Bart was a member of the commercial

litigation team.

Belgium

Florence Verhoestraete

Partner

Brussels

T: +32 25 66 84 52

M: +32 479 52 01 30


Florence Verhoestraete specializes in intellectual

property law with a particular focus on patents,

trademarks and unfair competition. Her clients work

mainly in the food, consumer goods and life-sciences

sectors. She advises on and litigates in relation to

intellectual property, contractual and regulatory

issues.

50

Luxembourg

Vincent Wellens

Luxembourg

T: +352 26 12 29 34

M: +352 621 15 61 78


Vincent Wellens heads our Luxembourg IP/ICT

& competition practice. His recent work for life

sciences clients includes representing a major US

life sciences player in an ICDR arbitration on the

spin-off of a Belgian university and representing a

major pharmaceutical group before the Luxembourg

regulatory authority with respect to the marketing

authorisation for the generic version of one of its

products. He also lectures on R&D contracts at the

Luxembourg School of Commerce.

Luxembourg

Margaretha Wilkenhuysen

Partner

Luxembourg

T: +352 26 12 29 32

M: +352 691 12 29 32


Margaretha Wilkenhuysen is a partner in our

Luxembourg corporate practice. She specializes

in cross-border corporate transactions, with a

particular focus on mergers and acquisitions, joint

ventures and international corporate restructurings.

Margaretha also has extensive experience in

corporate finance. Her clients include major

international corporations and she has represented

both domestic and international clients in a variety of

high-end transactions. Margaretha has been involved

in transactions for several life sciences clients, such

as Johnson & Johnson and Pfizer.

51

Life Sciences O



Disclaimer.This publication contains general information on

current and upcoming legal and market issues and

trends. It is not intended to be comprehensive or to

provide legal, tax or commercial advice.

Copyright: NautaDutilh N.V.

Date: 9 May 2012

Author: Jeroen Kerkhof

Support: Pier Beerda

52

Room for notes.

53

Life Sciences O



life sciences outlook 2012 dutch biotech companies: from start-up

Documents