Commentary: These Biotechs Need Time To Ripen

A rush to the IPO market in Europe won't do the industry any good

Europe's fledgling biotech industry is showing signs of life. After a three-year financing drought, three biotechs have gone to the market with initial public offerings since March, raising nearly $300 million combined. Now as many as 50 private European biotechs are considering doing the same, according to Ernst & Young. At least half a dozen of those companies aim to tap the public markets within the next few weeks.

Sounds like a dream come true. But the companies -- and their venture-capitalist backers -- should pause, take a deep breath, and study the industry's history before setting off a biotech IPO frenzy. Thirty-nine European biotechs went public during the tech bubble of 2000, raising a combined total of nearly $4 billion. Four years later many shareholders are nursing huge losses after companies failed to deliver. Now investors want proof of real products, not just empty promises.

Only a handful of the biotech companies have top-tier management, rich pipelines, and cash in the bank. With no marketable products and no revenues, many are going public prematurely. "Rushing out of the gate too soon could damage already fragile investor confidence in European biotech," says Cathrin Petty, a director at venture-capital firm Apax Partners in London. "More advanced companies with strong management teams and deep pipelines should be the ones to lead the way."

Of course, there are some good European biotech companies out there. But the disappointing performance of the first three to get out the door may block the better companies from coming to market. Ark Therapeutics, the first biotech in Europe to do an IPO since 2001, has seen its stock price fall by 25% since its Mar. 3 offering. Shares of Switzerland's Basilea, which went public on Mar. 25, have dropped 14%. And the third one to do an IPO, Britain's Vectura Ltd., raised $36 million, $9 million less than expected, on June 25. Analysts say all three have an insufficient number of innovative late-stage products and relatively weak management.

Next up: Epigenomics, a Berlin diagnostic company that hopes to use genetic information from blood samples to identify diseases such as cancer earlier than is now possible. It aims to raise as much as $120 million in July. If Epigenomics, considered one of Germany's strongest private biotechs, fails to get out the door or raises less than hoped, the IPO dreams of biotechs waiting in the wings are likely to end.

Investors are wary for good reason. Unwilling to risk more cash, many VCs are underfunding their biotech companies. In turn, these cash-starved companies are forced to look to the capital markets for financing. "It's a vicious circle," says David Chiswell, founder of Cambridge Antibody Technology Group and current chairman of Britain's BioIndustry Assn. "Investors want biotechs with products, but underfunded companies find it almost impossible to deliver without sufficient venture financing."

Premature stock offerings often suit many venture firms just fine. Bringing a company to market not only offers an exit from a frequently loss-making investment, but also helps raise the venture capitalist's profile. Investment bankers say they're inundated with calls from biotechs desperate to list before the IPO window slams shut. And only the rare few are ready for prime time. "There's a real disconnect between what VCs think are ready to float and what investors want to buy," says a London banker. A frequently cited example is Britain's Evolutec, which is developing allergy treatments from the saliva of ticks. The company, which hopes to list in the coming weeks, only has one drug in clinical testing. Evolutec's CEO has been quoted as saying the time is right for an IPO.

One way to close that gap is for VCs to change the way they invest. Instead of drip-feeding many biotechs, a better approach might be to invest more in fewer companies. "Venture capitalists need to invest enough money so that biotechs can bridge the cycles," says William Powlett Smith, leader of Ernst & Young's Health Sciences Group in London. European biotech has massive potential. But if it is to be realized, both companies and the backers need to tackle the problems today.

By Kerry Capell

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