Last year an estimated USD81 billion was raised last year in the US biotechnology space (from IPOs, secondary offerings and venture capital): the third largest year in history. Cities such as Boston and San Francisco have, for decades, been at the forefront of biotech developments, putting the US biotech marketplace 20 years ahead of Europe’s in terms of size and level of investment activity.
Europe’s biotech sector, while still in a stage of progression with regards to market capitalisations (which are an order of magnitude or more smaller than their US counterparts), has grown tremendously, however, and presents a huge opportunity for early stage PE managers to seek out companies to internationalise.
Speaking with Private Equity Wire, Antoine Papiernik, Managing Partner and President, Sofinnova Partners, a French private equity group that specialises in early stage investing in life sciences projects spanning biopharmaceutical, medical devices and industrial biotechnology, says
that Europe’s biotech sector has undergone a huge evolution over the last 20 years. There is now a critical mass of companies, with at least 20 ‘unicorn’ companies with a market cap of USD1 billion or more that are now listed on NASDAQ.
“The sector has really gone from scratch when there was no biotech industry to speak of in Europe 20 to 25 years ago, to one where there are now hundreds of established companies that are now competing on the world stage,” says Papiernik.
“We are very happy about where we are today compared to 20 years ago but when we compare ourselves to the US, and even the up-and-coming Chinese market, we still have a lot to do to compete on the world stage going forward. Right now, the size of the funding rounds in the US is at least an order of magnitude greater than Europe. But I would say the quality of companies is comparable. That creates opportunities to look for companies in Europe, diamonds in the rough, and build them up to a position where, with good quality management, good quality financing, they could list on the NASDAQ and become global players.”
Funding for European biotech firms was on track to reach USD8 billion in 2018, surpassing USD6.85 billion raised in 2017. This is partly down to increased US investment, with Heathcareweekly.com reporting that Argenx, a Dutch clinical-stage biotechnology company, raised USD300.6 million in a US public share offering.
This is starting to make Europe’s biotech space more competitive for doing deals, especially as valuation multiples are lower than those in the US. Papiernik says that in the US there a lot of dollars chasing deals in the VC space and valuations have gone up a lot. “The size of the funding rounds has gone up dramatically,” he says. “In Europe’s early stage space, the valuation tension is not yet there. We see it coming, partly because we see US and Chinese who are suffering from high valuations, coming here thinking that Europe is cheaper and on the other side of the valuation spectrum.
“They want to work with managers like us and understand, Europe-wide, what the opportunities are. They don’t want to take the geographical risk, preferring to work with specialist PE managers who understand the local lay of the land. Valuations are increasing in Europe, but not at the same rate as they are in the US and China.”
That Europe is still behind the curve applies only to the level of private investment. In terms of the quality of academic and research institutions, and the quality of biotech companies themselves, they are on par with their US counterparts. But to succeed in Europe, and seek out the next potential unicorn, PE managers need to have well developed networks to help deal with the idiosyncrasies of local markets (in terms of public policies, funding programmes etc.).
For non-European managers, this remains a daunting task. Sofinnova, and many others like it, have, over the years, built extensive networks of partners to help source deals. Sofinnova has multiple entrenched relationships with people in Europe’s leading academic institutions including the Max Planck Institute in Germany, the Pasteur Institute and the Institut Curie in France.
“The barriers to entry are slightly higher in Europe, not least because of the different languages. You have to put more work in, here in Europe, but once you have established relationships I would argue that that gives you an advantage over other non-European GPs.
“I believe we are particularly well equipped in Europe, in terms of the quality of healthcare and biopharmaceutical companies. It is about extracting value to make billion dollar companies, which is the ultimate goal. All LPs are interested in performance at the end of the day and how we are creating value in these companies. The principal product/technology is something you have to bank on,” asserts Papiernik.
In his view, it is not the quality of research or products, but more of a management issue: teams are less experienced than in the US. That creates a key focal point for PE managers like Sofinnova, when investing in early-stage companies. After all, if the product being developed is world-class, it stands to reason that the management teams running those companies should be as well. They need to understand how to take their businesses from the domestic market to the wider, international stage.
The bulk of the capital that Sofinnova invests goes into early-stage companies although it did create a large stage fund in 2018 named the Crossover Fund; a fund that invests in companies that are at a critical stage and need to understand how to transition from being a Europe-based company to a global company.
“Inventiva is one of the investments we hold in the Crossover Fund,” explains Papiernik. “It is a Dijon-based company, which is well known for one thing (mustard) but not pharmaceuticals. A company like this needs to be seen as a world-class company, potentially listed on NASDAQ and so on, but a number of things need to happen.
“It has a number of clinical products, a great management team which has focused on product development but now it needs to show that to the rest of the world. One leading program it has, NASH, tackles liver disease. What we are trying to do is help them get the right board members, the right advisors, to help access the US market and go from being a Dijon company to being a world-class company that might attract the biggest global investors in public biotech.”
Delinia (acquired by Celgene Corporation), Omthera Pharmaceuticals and GlycoVaxyn are three examples of exits made by Sofinnova in recent years.
Looking ahead for the rest of 2019, Papiernik believes there is still a buyer’s advantage in Europe.
“The work we have to put in is to ensure that when it comes to selling, we are not still at a European discount but are selling at a premium (to sponsors) in the US. That’s the theory.”
