Biotech start-ups face tough future

The future for early stage biotech in Europe is not bright, with fund raising likely to prove increasingly difficult, according to a new report by Ernst & Young.

The 2005 Global Biotechnology Report, Beyond Borders, says that the sector is likely to see more consolidation and a small handful of flotations, but the tougher regulatory environment, the existence of 25 different national drug pricing bodies, and the continuing problem of parallel trade all pose a threat to the industry, and the ever decreasing size of funding rounds is making it particularly difficult for young biotech companies.

The report’s review of 2004 is more positive. William Powlett Smith, leader of Ernst & Young’s UK Biotech Team, said: “In 2004, the European biotech sector showed some recovery from years of market storms, falling investor interest, and product disappointments, and showed that it is now better placed to move forward. The European biotech sector has gained momentum and the financial performance improved in comparison with 2003. In particular, public companies performed well as a result of success with product approvals.”

Total revenue for European biotech companies remained steady at €11bn, with public company revenues falling 5% to €6.2bn (excluding revenue of Celltech, which was acquired by UCB during 2004). Market capitalisation increased by 21% gaining €5.5bn in value, and the net loss for public companies was €392m, 19% less than in 2003. In fact, funding in 2004 for biotechnology companies reached a total of €2.8n, making 2004 the second best funding year ever.

There were nine IPOs raising a total of €300m for European companies. Mergers and acquisitions increased from 39 in 2003 to 42 in 2004. M&As involving US and European companies increased from 9 in 2003 to 19 in 2004, a 3% decrease in research and development (R&D) expenses, (excluding UCB’s acquisition of Celltech) and a 7% fall in employees, (excluding UCB’s acquisition of Celltech).

Powlett Smith said: “”The outlook for the European sector is mixed. In 2005 we will see more consolidation, a few IPOs and difficulty raising capital in the early-stage segment. On the other hand, more companies than ever have products in Phase III, which is critical to success. Focussing on strengths in science, global networking and building on management experience are essential going forward. However, it is crucial for the sector’s success that Europe’s structural imperfections and regulatory challenges should not be allowed to obstruct the industry’s recovery and its tremendous potential.”