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Europe Biotechs Chase U.S. as Investors Embrace IPOs

Corrected

As GW Pharmaceuticals Plc headed toward final-stage testing of a cannabis-based treatment for epilepsy last year, it faced the inevitable question: Should it remain independent or team up with a larger company to develop and market the product?

Chief Executive Officer Justin Gover chose to go it alone, funded by a listing on Nasdaq. The British company’s shares have almost doubled since January, giving it a market value of $2.6 billion -- and enough capital to finish developing the drug and sell it via an in-house team.

The decision was “a statement of ambition,” he said. “Our investors actively encouraged us to ensure that we would be able to deliver on that ambition for the company as an independent one.”

Investors chastened by losses decades ago at companies such as British Biotech Plc and Renovo Group Plc have long shown little patience with biotech startups in Europe, preferring to cash out by accepting takeover offers from the industry’s giants.

Lately, though, they’ve gotten more willing to wait for blockbuster drugs that might supercharge profits and breed giants. As many as 10 initial public offerings by European biotech companies are expected by early next year, according to RBC Capital Markets. That would bring the total to about 40 in two years, up from just 11 in 2012-2013, according to data compiled by Bloomberg.

Window Opening

“For a long time, the window in Europe has been completely shut for biotech IPOs,” said Onno van de Stolpe, CEO of Galapagos NV, a Belgian developer of an arthritis treatment that in May raised $317 million in a Nasdaq listing. “It finally opened about a half year ago.”

With biotech shares surging -- the Nasdaq Biotechnology Index has almost tripled since 2013, beating the Standard & Poor’s 500 Index’s 50 percent gain -- European investors see a greater chance of a payout. And they can’t help but notice the success of such American companies as Gilead Sciences Inc., Amgen Inc., and Celgene Corp., which have gone from startup to valuations exceeding $100 billion since the 1980s.

“Gone are the days where you provide a small amount of capital to take a business from A to B purely with the objective of selling it,” says Russ Cummings, CEO of Imperial Innovations Plc, a biotech incubator in London.

Spurning Suitors

Like GW Pharma, DBV Technologies SA of France has spurned suitors interested in its product that’s closest to market, a skin patch aimed at treating peanut allergies. Its shares have jumped 77 percent this year.

“Europe is at a stage where you’re starting to see a mid-cap universe emerging,” said Paul Tomasic, head of European healthcare investment banking at RBC in London.

Tomasic worked on listings in June by Abivax SA, a French maker of a drug aimed at treating hepatitis B, and Biotie Therapies Oyj, a Finnish company that’s working on a treatment for Parkinson’s Disease. IPOs on the way include Paris-based GenSight Biologics SA, a developer of gene therapies for eye diseases, and Vienna’s Nabriva Therapeutics AG, which is testing new antibiotics.

While several European companies have sold shares in the U.S., the trend is toward local listings, Tomasic said. That’s because U.S. underwriters charge 7 percent of gross proceeds raised, about double the fee in Europe, according to Graham Defries, a partner in London at Dechert LLP, which advises healthcare companies.

Legal Risks

American regulators are also more stringent, requiring quarterly financial reports, compared with less detailed statements in Europe, Defries said. And there’s the added risk of class-action suits from law firms sniffing for companies failing to disclose material information, he said.

Europe has a growing corps of biotech cheerleaders such as fund manager Neil Woodford’s Patient Capital Trust Plc in London and Malin Corp., a start-up incubator in Dublin. But the region has fewer financial backers with the depth of knowledge of U.S. investors, many of whom have PhDs in science and fully understand the risks and rewards of biotech, said Catherine Moukheibir, head of finance at France’s Innate Pharma SA.

“The U.S. market isn’t replaceable as the primary source of funds,” said Moukheibir, whose company is developing drugs that fight cancer by triggering a response from the patient’s immune system. About 40 percent of investors in Innate’s Paris listing are in the U.S., she said.

Buyouts aren’t entirely off the table, either. There have been 15 acquisitions of European health-care companies announced this year, according to data compiled by Bloomberg, versus 23 in 2014.

Still, to grow as big as the U.S. biotech giants, European startups need the kind of sustained investor support that is only now beginning to emerge, said Geoffrey Hsu, a biotech portfolio manager at Orbimed Advisors LLC in New York.

“Drug development is a very long process,” Hsu said. “Having that capital base to draw from on a regular basis is key to survival and success.”