Targacept: European venture in the US

It managed to go solo by raising US$30.4m, at the time the fourth largest biotech fundraising. It was led by EuclidSR Partners, with investment from fellow US VCs Burrill & Company and Longleaf Venture Fund (now known as Academy Venture Fund), as well as the UK’s Advent Venture Partners (through Advent Private Equity Fund II) and a host of French venture firms: Auriga Ventures, CDC Innovation, Genavent (the fund set up by Aventis and Société Générale Asset Management) and SGAM Biotechnology Fund. Targacept raised a further US$60m in it second round, led by Nomura Phase4 Ventures of the UK, with eight new investors, all US, and with all of the first round funders returning. It held a third and final round in December 2004, raising US$33m in a round led again by Phase4 Ventures.

The number of European venture capital firms here is unusual: six in total, two from the UK and four from France. The reasons once again underline the importance of personal contacts and global thinking.

Patrick Lee, general partner in the life sciences team at Advent Venture Partners, knew of the company when he worked for Rhone Poulenc Group in Paris, which is now Aventis. Targacept and Aventis entered into a collaborative agreement concerning the discovery, development and commercialization of certain compounds. When they span out they contacted various VCs and, says Lee, demonstrated a very in-depth understanding of the kind of brain receptors associated with cogitative diseases. They found, intriguingly, there were some benefits to smoking. More specifically they found nicotine reduced the risk of disorders such as Alzheimer’s or Parkinson’s. What Targacept was trying to do was find out how to reproduce these effects without the negative effects associated with nicotine. Lee said they produced a lot of very convincing scientific data and that although Advent Venture Partners is based in London; the location of Targacept wasn’t a problem.

“We have always invested globally, especially in life sciences in the US,” says Lee. “The life sciences industry is a very global industry and so we have always taken a worldwide perspective. However, as we are London-based, we are quite specific about the US deals we invest in, in areas that the life sciences team has knowledge of. What we would not do is jump in because we think the exit markets are better at the moment, or because there appear to be better investment opportunities in the US rather than Europe. We take a more selective and developed approach.”

Aventis is also the connection with the four French investors. Genavent is a joint fund between Aventis itself and Société Générale Asset Management, hence its reason for investing, and also SGAM Biotechnology Fund investing separately. Venture being an industry all about connections, they naturally told other people about the opportunity, enticing Auriga Ventures and CDC Innovation.

The Targacept IPO was not a success. It was initially due to list in the first half of 2005, but decided against it due to difficult market conditions in the life science industry. The reasons mentioned at the time included the poor offerings of other biotech floats, and weak post-IPO share performance. Its decision to launch on NASDAQ this time around shows conditions have not improved much.

The IPO raised US$45m. The company had originally planned to raise US$75m, but a cautious response from investors saw the company sell its five million shares at just US$9 each, well below its indicative price range of US$11 and US$13. At the time of writing the share price was trading for around the US$7.50 mark.

NASDAQ is not a very welcoming market at the moment, with some observers even claiming the IPO market is closed. In particular, biotech and life science companies are finding it difficult to both raise the desired amount and sustain share price. “It went public at a difficult time in a difficult week” says Lee. “But the company has made a lot of progress. It has already achieved a big collaboration deal with [UK pharma company], AstraZeneca, and has just announced a successful phase II clinical trial. It was on this basis that the company was able to go public.”

Lee puts the tepid response from the markets to the IPO down to a shift in both investor composition and sentiment. “Most public investors are looking at every IPO on a deal by deal basis, not on a momentum basis, and they have now become a relatively concentrated group of buyers, and so are able to smartly use their buy-side leverage. They are the ones people look to, to start the charges into a particular company and so they are setting the prices at a level where they can make money in the future.”