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Why have only a few European biotechs made it through the IPO window?

By Steve Dickman, CEO, CBT Advisors

Posted to Boston Biotech Watch and to the Partnering360 blog

If the recent falloff in biotech IPOs continues, then many European biotechs would seem to have missed the longest, widest IPO window in the history of the industry. Why did a few European biotechs manage to go public (on NASDAQ, Euronext and the London Stock Exchange) in this window when most others did not succeed or even try?

In recent advisory work for about a dozen companies at various stages of the IPO process, five of which went public, and at a panel discussion organized by your correspondent and the EBD Group on the topic of European biotechs having US IPOs at last month’s BioPharm America conference, I identified three major trends contributing to the paucity of European IPOs:

  • Lack of access to EU capital for EU companies;
  • Absence of interest from (US) crossover investors in EU companies (maybe because they were not asked to invest); and
  • The conservative attitude of European IPO investors.

Sorting out the reasons for this phenomenon is important because of the long-term implications for the biotech industry in Europe. I’ll circle back to that larger question after looking at the data on some representative European IPOs and examining the reasons more European biotechs have not made it to an IPO during this window.

In Table 1 below I put together a sampling of eight European biotech and life sciences companies that pulled off IPOs in 2013 and 2014, their locations, their IPO dates and the amount of capital they raised.

Performance of some IPOs by European biotechs.

Table 1: Performance of some IPOs by European biotechs. Bold: CBT Advisors clients

Some observations:

  • Companies came from several European countries.
  • They went public on several stock exchanges.
  • Some of them raised a considerable amount of money (though typically less if they went public in Europe).
  • Most of these are therapeutics companies (similar to the US IPO crop).
  • With one dramatic exception, the stocks have traded down.

By comparison, according to data from an industry insider we know, this group of European companies have raised about the same on average as US biotechs that have gone public on NASDAQ in 2013/14 – $68.5 million for these six vs. $64 million to $70 million in the comparable crop of US-based biotechs. The trading down tells me that, while investor interest was just as strong initially for the European biotechs as for their US counterparts, the European companies either did not have the news flow or (my hypothesis) they lacked the “true believers” in their stories that would have been required to keep prices up in the months after their IPO.

Venture investors like panelist Rafaèle Tordjman, a general partner with Paris-based VC fund Sofinnova Partners, recalled that there have always been such challenges for European companies. “Our portfolio company Movetis went public on Euronext at the same time [in 2009] and at the same stage as Ironwood Pharmaceuticals but the valuation was three times less!” To be fair, she continued in an email, Movetis, later acquired by Shire, owned only European rights to its gastroenterology product whereas Ironwood owned worldwide rights. But the valuation gap still seemed disproportionate.

What is striking is the number of US companies that have gone public on NASDAQ: About 70, by my count, versus just six European companies. According to OECD, in 2013 there were 2,954 “dedicated” biotechnology companies in the United States and 2,654 in Europe. “Dedicated” firms are those that devote at least 75% of their production of goods and services, or R&D, to biotechnology. Even if these numbers were off by a large amount based on different definitions or stages of biotechs, and even taking into account the superb performance of the US stock market across the board as compared with the market in recession-prone Europe, it would still seem that a number of envious European biotechs are looking across the pond and wondering why their star has not yet risen. Here are my three answers:

Lack of capital from local investors

Despite the huge increase in investment interest in biotech in the United States from both specialist biotech investors as well as generalists, the sector has not gained wide enough appeal yet among either category of European investors to provide sustained support for a European biotech industry on either US or European exchanges. On top of that, what has happened lately is a wave of specialist support for US biotechs, which have been able to go public without much generalist backing at all.

In part, the lack of support in Europe for European biotechs is in part a function of scarcity, said Philip Astley-Sparke, a Venture Partner at the top-tier Dutch VC fund Forbion. He also happens to be President, US, of UniQure, one of the successful US IPO candidates. “Historically, LSE biotech listings did not get done unless generalists were involved to a large degree. In the States, no generalists are required.  These UK generalists are unlikely to be diversifying into US biotech. Hence, a few UK biotech IPOs may get done and then a single disappointment sends the generalists running for cover. This makes the market less stable. By contrast, a few blow ups on NASDAQ is just noise.”

In any event, the total amounts raised by biotechs in both IPOs and follow-ons combined have turned up in Europe but they still lag US deals by a wide margin (Figure 1).

Biotech deal volumes (cumulative) 2004-2014: Europe lags

Figure 1: Europe lags in volume. Data courtesy Dealogic. Figure courtesy FT.

Some reasons vary country by country. Germany, in particular, has lain fallow for many years in the aftermath of the dot-com boom. German tech stocks have come roaring back but there has not been a single biotech IPO on the Frankfurt exchange. Only one Germany biotech company, Affimed Therapeutics, an antibody therapeutics company in Heidelberg, had a NASDAQ IPO in 2013-14. It raised $56 million.

In other European countries such as the Netherlands and Great Britain, there are quite a few high-quality biotech companies so windows might someday reopen. There are signs of a thaw in Switzerland, where both institutional and retail investors were burned by disappointing clinical results from companies like Addex and Cytos. On September 23, the day after the panel discussion took place, Zurich-area biotech Molecular Partners announced that it was filing for a blockbuster $134 million IPO by the end of the year on the Swiss exchange SIX.

But none of the European biotechs I know would be likely to choose an EU over a US IPO if current conditions prevail. If the wave of IPOs that hit NASDAQ were to later reach Europe’s shores after it hit NASDAQ, this would be about the time for it to happen, but, with the exception of that one big-ticket Swiss IPO attempt, there is little sign of a biotech boom on Euronext or other exchanges.

In fact, on October 21, just before this post went to press, Molecular Partners pulled its IPO due to “market conditions.” “Whenever Wall Street starts coughing, Europe gets pneumonia,” was how one European biotech industry insider characterized that reversal.

Missing crossover investors

For those who have not encountered them, crossover investors, mostly US-based, have been driving the surge in biotech investment for some time now. This is a big change from the 1990s and early 2000s, when many pre-IPO investors, including venture capitalists, were eager to “flip” their shares immediately post-IPO. That period ended abruptly in around 2003-2004. What has happened lately is really the opposite. Savvy crossover funds jam-packed with PhDs and MDs are getting in just before the IPO with the goal of getting a bite of the company at a better valuation than they would get at the IPO. The same investors then typically buy in the IPO, then hold for clinical data. That is, the US crossover investors are not investing in the biotech as a non-public entity in order to turn it into a public entity that is now liquid and “flippable” but rather to turn it into a public entity in which they can share in and reap the rewards for good data (once their lockups have come off and they are allowed to sell shares).

It’s not that Europe has none of these deep-pocketed, risk-loving investors. Some have played quite strongly in the recent boom – some funds in Switzerland, Polar Capital in London and Omega Funds in London come to mind. But the diversity of the crossover investing sector, including mutual funds and some VC-like funds as well as traditional long-only hedge funds, and the sheer number of funds in the United States dominate the industry. Indeed, Omega has begun to invest more frequently out of its Boston office and considers itself more of a global investor. At least twenty US funds, some of them able to deploy many hundreds of millions of dollars in capital, have been extraordinarily active over the past two to three years.

There is no law preventing European management teams from pitching the same crossover investors that their US counterparts are pitching. But the logistical challenges are apparent. Ultimately, said Astley-Sparke, “a European company coming to the US has to be here a year in advance, doing non-deal road show work, getting in front of the crossover investors and preferably doing a crossover round. That [crossover round], in my experience, is almost a pre-requisite for being taken public by one of the larger banks.” Tordjman concurred that for Sofinnova’s portfolio company ProQR, a Netherlands-based therapeutics company focused on cystic fibrosis, the crossover round was very helpful.

Panelist Dan Grau, the President of UK-based Heptares Therapeutics, a highly regarded, still-private drug discovery and development company with management located in both London and Boston, concurred. “The pathway of doing a crossover financing to lead you to an IPO is clearly the preferred pathway,” he said. The caveat for companies, said Tordjman, is that in order to access all that capital in the United States, sometime companies have to make sacrifices in their valuation. “It’s an equilibrium,” she said. Lining up the preferences of existing investor against the valuation wishes of new investors requires careful thought and planning.

It will be a while before such a fund group can emerge in Europe. Some of the US-based crossover investors are part of decades-old fund families (e.g. Fidelity). Others among the seven thousand hedge funds in the United States are the specialists focusing specifically on pre-IPO biotech. It will almost certainly require a pretty large crop of European biotech IPOs that turn into long-term success stories for an investor pool like this to be replicated in Europe, if it ever is.

“What are you selling, the promise or the actuality?”

The final factor that is holding Europe back is more of a cultural one. US and European investors think they are buying different things and value companies accordingly. European investors want to see more data; US investors are more interested in the “sex and violence,” as Astley-Sparke put it in an email, that accompany earlier-stage companies. Grau summed it up nicely on the panel: “For US investors, there is a greater appetite for something that has potential and promise but may not have shown its data, may not have become actual yet. One doesn’t see exactly the same kind of fever on the European side, which sometimes be a bit more conservative in looking for the evidence in hand, especially for therapeutics, that you have crossed a risk threshold. So that is a potential dividing line. The reception we have as a Phase 1 stage clinical company with a substantial preclinical pipeline on Wall Street, whether we are talking to the buy side or the bankers, is very intense. They see the prospect of a very interesting data flow coming soon.”

US investors do occasionally invest in EU companies such as Innate Pharma and GenFit, both in France, says Otello Stampacchia, a Partner with Omega Funds. “Typically,” he says, “these investors need to see a clear value proposition (e.g. when there is more attractive pricing of assets in European companies) as well as a presence in a very topical space – immuno-oncology for Innate, NASH for GenFit.

What hangs in the balance for the European biotech industry is more than just the return rates for some biotech VCs or the valuations of a few biotech companies, as important as those aspects absolutely are for the readers of this blog. IPOs these days are financing events rather than exit opportunities. This is consistent with the “buy-and-hold” approach that most crossover investors are taking now with most therapeutics company shares they own. But then what is the endgame? For many companies developing exciting new therapeutics, that will be acquisition by existing biotech players. Biogen Idec found its high-flying dimethyl fumarate product Tecfidera in a European biotech. Amgen snapped up Micromet and BioVex, both of which moved part of their operations to the United States prior to acquisition. Amgen kept a research facility open in Munich but the companies otherwise were lost as sources for new ideas, entrepreneurs and capital in Europe. Other such examples are bound to follow.

As I see it, what is at stake is Europe’s ability to build IPOable companies and fund them beyond the first good dataset. What makes a place a good biotech hub is well-known to us in the biotech nexus of Boston: Durable, lasting sustainable companies generating products, revenues, returns, innovation, ecosystems and spinouts. If the companies are all getting acquired – nipped in the bud, so to speak – such an ecosystem does not arise. If Europe wants to have a sustainable biotech industry, it doesn’t want all the companies acquired, at least not before there is enough value in the company and its team that it can create spinoffs and get them funded. On the other hand, if I’m a VC shareholder, I want and need them to get acquired.

Panelist Sinclair Dunlop, the Founder and Managing Partner of Epidarex Capital, an Edinburgh-based VC fund, agreed that this is a challenge, but that the interests are actually aligned right now in favor of acquisition. “[As an investor], you have to make money. You’ve GOT to be able to deliver competitive financial returns to financial institutions that back the cluster in those locations. Only then have you got a shot at recycling capital and ultimately growing it. One thing we lack in certain parts of Europe is the generation of entrepreneurs who have made their mint and who are now back to recycle their cash. You don’t have that yet in enough parts of Europe.”

Meantime, Tordjman reported that DBV Technologies, a Paris-area Sofinnova portfolio company making protective immunotherapies against peanut allergies – largely a US market – had announced an hour before the panel began that it was taking the next logical step after it pulled off a successful 2012 Euronext IPO and, in September, 2014, obtained excellent Phase 2b data: it filed an F-1 with the SEC to go public (again) and have a dual listing on NASDAQ.

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Can the Amgen Takeout of Micromet Juice German Biotech? Can Anything?

By Steve Dickman, CEO, CBT Advisors

Now that Germany has had its first billion-dollar biotech exit, it seems it would be about time for the beleaguered German biotech sector to enjoy a welcome jolt of juice. Amgen plans to lay out $1.16 billion in cash to acquire Micromet (NASDAQ: MITI) in a deal announced on January 26.

Generally, big exits create new opportunities. As a wishful example, consider the impact of the upcoming monster $10 billion IPO of Facebook, which will likely spark financially secure engineers to start new companies and multimillionaire founders to start new venture funds.

So is it time to celebrate in Germany? Not exactly. But there may be some good news for German biotech if we dig deep enough. I believe that the Micromet acquisition and other recent successes could serve as a valuable proof-of-concept for biotech products and technologies “made in Germany.” There are plenty of seedlings growing up from German universities and spinning out of existing companies. This is a good time to focus on them.

Tough trickle-down

Amgen’s big-ticket acquisition will likely not translate directly into a rash of new startups. The techniques used in inventing Micromet’s products – bispecific antibodies for systemic treatment of cancer and other severe diseases – are not easily transferred. Amgen has said that it intends to retain virtually all two hundred employees located at the Munich site. Some itchy would-be founders may eventually leave but the short-term impact will be limited.

More difficult for the German biotech scene, Micromet has not been a purely or even mostly German company for a long time. Its January, 2006, reverse merger with the failed California biotech CancerVax gave it a NASDAQ ticker symbol and a U.S. headquarters. The company raised $328 million in total of which $264 million came in PIPEs and follow-ons following the CancerVax merger. There was also approximately $60 million cash on hand at CancerVax when the companies merged.

Despite its impressive size, the Micromet exit is surprisingly no more than “a mediocre hurrah” for local VCs, one Germany-based VC investor told me. “VCs here have mixed feelings about this deal since … very few investors [who made initial investments into the company] were able to make money.”

Dollars slipping away

Why not? Clinical trials were going to be expensive. Likely acquirers were far away. Some funds faced restrictions on cross-border or public investing. Others simply did not have the money to push a company so far towards clinical proof-of-concept. The lack of local capital threatened to leave the company unable to prove the value in its innovative products. Hence, many of the gains were made by investors in public shares such as crossover funds and hedge funds.

Before I unveil my modest proposal for how to help the next crop of projects and companies in Germany, let’s look at where we are, how we got here and then I’ll return to where we can go next.

Bye-bye bubble

The world’s biotech boom of the late 1990s and early 2000s proved to be too much of a bubble for many German companies and investors. Some early companies were not built for sustainability and after some 2000-era fairy-tale financings on Frankfurt’s Neuer Markt, public biotech investors in Germany were badly burned. They have largely not returned.

The situation is not much better for venture capital funds. Otello Stampacchia, managing partner at Omega Funds, one of the institutional investors with the longest-term stake in Micromet, said that the VC shortage afflicting Europe is “particularly bad in Germany. Compared to what has happened, say, in the UK, there has been a colossal shrinkage.”

What is left in Munich, Berlin, Stuttgart, Heidelberg and other fertile biotech regions is both promising and problematic: truly world-class science; experienced entrepreneurs and employees; over eight hundred companies; and a severe lack of both venture and growth capital. Hence, in Micromet’s case, the truly creative solution of a reverse merger in 2006 and the successive financings in 2006, 2008, 2009 and 2010.

MITIgating factors

The company’s big exit, albeit on a leukemia product not yet been approved by FDA, is a beacon of light for German startups. I asked eight venture and public investors in Germany about the acquisition’s impact and the response was one of optimism tempered with caution. “The general message is positive, namely, that German biotech is capable of turning cutting-edge basic research into a full-blown company,” said one financial VC in Munich.

The capital shortage that Micromet encountered in Germany is emblematic of issues faced everywhere by therapeutics startups: the more innovative you are, the tougher it is. It takes more time than a VC fund lifetime of ten years for such technologies to reach Phase 3 or commercial status or achieve a big exit. A typical timeline is fifteen years. (Micromet was founded in 1996.)

Micromet rings the bell

Micromet rings the bell

Now that Micromet has proven the case for innovative biotech products nurtured in Germany, the burning question for investors, one of them told me, is “whether deals like the Micromet M&A creates more international VC activity in Germany.” With IPO markets shuttered and little in the way of growth capital, I suspect that the answer is likely “not anytime soon.”

But even if traditional VC does not return in significant amounts to Germany, some of the near-ripe fruit there is worth watching. Those companies include two that had the honor of presenting at the 2012 JP Morgan Healthcare Conference: NOXXON, based in Berlin, which is carrying out multiple clinical trials in a variety of high-value indications for its exciting spiegelmer technology; and Probiodrug, based in Halle, which is pursuing a unique and highly interesting approach to treating Alzheimer’s disease by attacking the underlying disease biology in a novel way. A third company, Curetis in Stuttgart, announced in November that Roche Venture Fund had made an investment alongside a Netherlands-based financial VC fund, Forbion. Curetis’ technology can rapidly identify pathogens causing hospital-acquired or severe community-acquired infections like pneumonia by bringing highly multiplexed PCR reactions into the hospital lab.

Those are just the most advanced companies. There are many more behind them and their technologies and approaches have much to offer. (Affimed in Heidelberg and Synimmune in Tübingen are just two examples in the bispecific antibody space.) Consider the technology areas in which German companies have thrived: they are mostly intricate (like Micromet’s bispecific antibody technology or Curetis’ 50-analyte PCR); they are more likely to be enabling technologies than therapeutic products (one local expert estimated that only fifteen or twenty of those eight hundred companies are working on therapeutic products that they themselves intend to develop); these enabling technologies cost $10 million to $50 million (or more) to develop; and, once mature, they will turn out to be highly valuable to big industrial companies in pharmaceuticals and related sectors like diagnostics. Stellar examples, aside from Micromet, are easy to spot:

MorphoSys: inventor of an antibody generation technology, this venture-backed startup nearly succumbed in the early 2000s to the same shortage of capital that forced Micromet out of Germany, then “went public on a hope and a prayer,” according to one investor. “Now it’s a real company,” he said, with a recent market cap of $420 million.

Direvo: an enzyme engineering business for protein therapeutics sold in 2009 for $230 million to Bayer Schering; the original technology was spun out into the “new Direvo” and is now in innovative use for industrial enzyme development; like the original Direvo, it is based in Cologne.

Jerini: a therapeutics company in Berlin acquired by Shire in 2008 for € 328 million ($521 million).

Brahms: a molecular diagnostics company acquired by Thermo Fisher in 2009 for $479 million.

MTM Laboratories: a molecular diagnostics company in Darmstadt acquired by Roche in 2011 for up to € 190 million ($269 million).

No one doubts Germany’s ability to generate attractive up-and-coming academic projects and small companies.  As one investor put it, “the start-up scene is healthy and ‘well-seeded’ by various grant systems like GO-Bio and government-affiliated institutions such as High-Tech Gründerfonds.”* The bottleneck is capital.

Pharma to the rescue?

Last time I checked, the pharmaceutical industry was shutting down internal research and scouring the world for innovation. Some pharma CEOs are saying that pharma should not invest in internal R&D at all any more. By contrast, pharmaceutical companies are beefing up their corporate VC activities. I count no fewer than twelve VC funds affiliated with pharmaceutical companies, some of which have roots in Germany (Boehringer Ingelheim) or German-speaking Europe (Novartis) and some of these have a strong interest in clinical diagnostics (Roche).

All these funds need look no further than Germany. What a fit! On top of the fertile environment for technologies, labor is relatively cheap. As I learned as a venture capitalist in a Germany-based fund, the cost of a laboratory worker in Germany is roughly half of the cost in the United States and the quality of their work is as high if not higher.

And the managers needed to bring technology platforms to proof of concept are present in larger numbers than at any time in the country’s history. They have worked by the dozens in German companies that have had solid exits – starting with Micromet and extending to Brahms, MTM Laboratories, Direvo, Jerini and MorphoSys – and strong sales – Evotec, Miltenyi and Qiagen in addition to the local pharmaceutical industry (Bayer Schering, the former Sanofi Aventis, and Boehringer Ingelheim).

The growth capital bottleneck should present no major obstacle to corporate venture investors who are both investing more and also increasingly working side-by-side in companies such as Aileron Therapeutics and Celladon Corporation, US-based companies that have attracted four corporate VCs each.

If pharma is the investor then the exit could well be integration into one or another pharma company’s own research efforts. Investing with the aim of achieving technical proof of concept in therapeutics or early commercial validation in the case of non-therapeutic platforms would alleviate the need for fifteen years of funding. The “harvest” could come much earlier. But who knows? Once investors see that their efforts are being rewarded, they might choose to let the companies carry on independently, issuing technology dividends and financial dividends alike.

What’s missing is a catalytic action on the part of those VCs, especially corporate VCs, already active in Germany together with the German government. A government co-investment growth fund of € 200 million or € 300 million, actively managed and investing in each deal alongside a minimum of two corporate or financial VCs, could make a huge difference. The seedlings are beginning to grow. Time to water them.

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Disclosure: Steve Dickman or CBT Advisors have worked recently with Curetis, Direvo and Probiodrug and previously with Evotec, Jerini, MorphoSys and NOXXON.

*GO-Bio has financed thirty-four projects in four rounds, leading to fifteen companies. High-Tech Gründerfonds, also based in Berlin, which finances high-tech startups including those in medical technology- and healthcare-related fields, has been active since 2005 and recently began investing a second fund of € 288.5 million.

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