Biotechnology: still a VC niche

Year 2000 was the best ever for European biotech, according to Ernst & Young’s European life sciences report, with fundraising, valuations, revenues, employment and the number of companies all reaching record levels. The pattern looks set to continue throughout 2001 with the completion of the human genome mapping marking a change of direction in the pharma landscape, heightening the attractions of the European life sciences market.

An international business

The global element of this multi trillion dollar market makes it an ideal hunting ground for VCs. US firms investing in Europe, such as MPM Capital, which targets healthcare deals in both continents, see Europe as becoming a major powerhouse in the biotech market. VCs invested more money in European biotech in 2000 than the previous five years combined.

European biotech companies attracted euro1.2 billion of investment, during 2000, according to Ernst & Young. This represents around 26% of the global biotech VC take a figure that has remained fairly constant for the past five years. A significant shift was also noted in the size of VC financings during 2000. There were 18 reported VC investments of euro20 million or more, showing that VCs are increasingly prepared to provide larger amounts to accelerate the development of biotech companies.

Increasing investor interest in this sector has been sparked by a rapid growth in startups and a growing number of consolidations and spinoffs. According to Gerard Tardy, partner at private equity deal originator and investor, Sitka, the healthcare space presents a wealth of opportunity. Tardy describes this market as a defensive sector, resilient in uncertain market conditions. He adds that changes in lifestyle and age profiles are adding to the value of the sector, using as an example the remaining life expectancy for a 50 year old male in the UK that has improved by almost three years from 1984 to 1998. The rapid pace of technological innovation is also boosting this market with the NHS and pharmaceutical companies spending around GBP500 million and GBP2.5 billion, respectively, each year on R&D.

Mercury Private Equity, which has an investment team dedicated specifically to this sector, is looking at the following hot spots for investments: niche players manufacturing medical devices; therapeutics; medical devices and diagnostics; healthcare services including nursing homes, dentistry, alternative medicine, specialist hospitals and medical centres; companies offering new technological solutions and opportunities as major pharmaceutical companies consolidate and divest non core divisions.

A specialised team is crucial for operating in this field. When tackling a healthcare deal, Patrick Lee of technology VC firm Advent Venture Partners looks at companies where his healthcare team would add value, providing extensive industry experience as well as capital. Lee, who has a well established commercial and transactions track record in healthcare, pharmaceuticals and medical products works on the team with Jerry Benjamin, who has a background in chemical engineering and biotechnology, and Shahzad Malik, who’s grounding is in science and clinical medicine.

Lee says it is an exciting time of structural change in the sector and following the mapping of the human genome it was inevitable healthcare would hot up. Looking at the issue from an economic perspective, he says: “The postgenomic era is related to a focus on how to use this genomic information to find therapeutic products, and how to do R&D in a quicker and more cost effective way.” An interesting area for development, says Lee, is proteomics. “The whole study of proteins is a big area. For example, looking at the breast cancer gene to develop a diagnostic tool to find people with that defect and monitor them more carefully to prevent the cancer developing.”

The internationalisation of this sector marks a turnaround for the European biotech market, says Robert Zegelaar of Atlas, which has raised $950 million for its latest fund. Atlas, as an international player with offices in Europe and the US, increasingly sees that the quality of companies emanating from Europe is better than those coming from the US. There has been a delay in the commercialisation of products in Europe, but this is changing, according to Zegelaar. He says: “This is the first signal of the industry in Europe having arrived at a stage where its advanced technology is becoming commercialised at the same rate as in the US.”

For example, in the case of proteomics, there are companies in Europe that are commercialising at the same rate as the US. This is proof that biotech has become a truly international industry and is also reflecting the same of the venture capital industry. “The only way you can compare deals and advance in this industry is if you are international. It is essential to be focused across both Europe and the US,” said Zegelaar. To excel in this market, he continues, you have to build a team of professionals on an international level covering deals that are emerging worldwide.

With $2.5 billion under management and with the new fund in its early stages, Atlas is in the process of expanding its team, particularly in the life sciences sector where the firm is looking to recruit associates and analysts to help with investments across Europe.

Funds aplenty

It is difficult to specify exactly how much money is dedicated to this sector due to the number of mega generalist funds that have been launched over the past year, such as Apax’s A4 billion fund, which closed at the start of this year. There are relatively few specialist funds, which means there is a gap in the market. At the moment, established players such as Abingworth Management, Merlin, MVM, Schroders Life Science Ventures (last year appointed investment adviser for the Board of International Biotechnology Trust), Sitka and TVM ruling the roost in Europe, but there is growing interest from generalist funds, which are concentrating on this sector. “There is still room for more players in this space,” says Zegelaar of Atlas. “There are only a handful of professional specialist players in early stage and the VCs players in this field all know each other. It is a very close community.”

Throughout 2000, VCs continued to raise large sums of money, but investor focus is thought to have shifted from pure drug discovery towards ehealth, comprising the life sciences and IT interface. Hot technology areas have been identified as antiinfectives/ antivirals; vaccines; proteomics; “smart” genomics; gene therapy and tissue regeneration.

Funds raised last year include an offering from Merlin, which announced the final closing of its Merlin Biosciences fund last August at euro247 million. The fund is focusing on investments in therapeutics, diagnostics and medical devices companies across Europe. Since achieving its final close the fund has invested in 13 companies, including most recently GBP3.8 million in Vectura Limited, a European pulmonery drug delivery company; euro7.7 million in Graffinity Pharmaceutical Design and GBP2 million in Intercytex Limited, a UKbased regenerative medicine company.

German/US venture capital firm Techno Venture Management (TVM), which focuses on high growth life sciences and information and communications technology life science companies has recently announced a first closing at euro70 million of TVM V Life Sciences Ventures. This is unusual in that it consists of two industry specific fund entities TMV V Life Science Ventures and TVM V Information Technology. As previously, the fund will focus on the creation of transatlantic businesses. TVM’s two specialist industry teams will pool synergies to tackle biological convergence opportunities.

UKbased MVM, a specialist life science venture capital firm is currently fundraising for its second investment vehicle in the sector, which like its first fund, has a target of GBP40 million. MVM International Life Sciences Fund II will invest in early stage and greenfield life sciences companies globally. David Brister of MVM is relatively relaxed about the current fundraising environment. “There is a lot of money about with these mega funds”, he says. “A scarce resource at the moment is good quality opportunities for those funds to put money into.”

He adds that it is extremely hard work investing in the true VC space in the life sciences sector. These companies have a long life cycle from the initial investment and you are expected to commit for at least five years. This is the reason there are not so many early stage players with funds dedicated exclusively to this sector and the reason many of the larger funds won’t do traditional early stage, but are more likely to go in for second or third round financing. For this reason, he considers MVM’s portfolio companies to be in a good position at the moment with plenty of large funds around that are looking to coinvest in biotech companies that have already received first round funding.

MVM managed funds have exclusive rights to technology developed by the Medical Research Council (MRC), providing the company with unique, high quality deal flow. The firm raised its first fund, which is about two thirds invested, in April 1998 and has been involved in the creation and financing of life science companies in the UK, Europe and the US. Brister says of investments in the US: “You have to have exposure to the US if you want to be a credible investor it is the most sophisticated market.”

Successful exits achieved by MVM this year include two US companies: New Chemical Entities Inc, a drug discovery company was sold to Albany Molecular Research (AMRI), just a year after MVM had invested in it. AMRI acquired NCE for $22.4 million and assumed approximately $600,000 in outstanding debt. NCE will be renamed the Bothell Research Center. And, Third Wave Technologies, which develops and provides DNA and RNA analysis technologies for use in genome research, pharmacogenomics and clinical diagnosis, IPO’d on Nasdaq in March.


The lifecycle of a biotech company from idea to commercial products can take from five to seven years, making for a long wait when it comes to effecting a realisation.

Patrick Lee says the idea of investing in early stage companies is to help demonstrate that the product is viable and then when the product is more fully developed, the company will go on to receive further funding from later stage VC or mezzanine funds. The market for these companies is healthy because players know the demand for pharmaceutical products is still there.

As for exit opportunities, he said: “Up until recently you could take a company public with good corporate partnership and good visibility and as long as it proved that, it didn’t have to show profit. That general notion is still correct, but investors are more cautious in the current climate.”

In this sector, there are potentially high valuations in trade sales and public markets. Last year there were around 140 acquisitions ranging in size from GBP2 million to GBP1.7 billion, according to Sitka. Tardy of Sitka is positive when talking about exit opportunities in this field: “In healthcare, young companies can develop very rapidly from an academic point of view, with the help of spinouts and acquisitions. In this respect, transactions are exited very rapidly through alliances.” Figures from Ernst & Young support this with the number of reported alliances taking a huge leap in 2000, up by almost 55% on the previous year. This is an indication of how many companies are already looking to expand their networks and to codevelop, cooperate and partner their technology.

While recognising the effects of an economic downturn, VCs investing in this sector retain a thirst for a challenge and a strong appetite for buying businesses. Deal activity and pricing is likely to be restricted by a tougher debt market, but the period ahead represents a good opportunity to buy businesses at slightly more realistic prices, against a more challenging economic environment.

Glenn Crocker, senior consultant at International Life Sciences Practices says of the outlook of the industry: “The boundaries between companies within the biotech industry and in and around the pharmaceutical business will become increasingly blurred. This will result in a raft of extended enterprises which are key to the development of an industry likely to be one of the most important in the 21st century.”