European Biotech's Funding Crisis

Europe's biotechnology industry, already lagging well behind the US, faces an unprecedented funding squeeze that may drive some companies to the wall. With no realistic chance of raising money in the public markets, biotech companies face the prospect of having to sell further stakes at knock-down prices to venture capitalists or seeking a rich buyer in Big Pharma to acquire the whole business.

"It's like the Titanic and everybody's jumping overboard – companies are really struggling," says Chris Evans, founder of British medical sciences investment house Excalibur.

The flight from risk in the wake of the credit crisis has left many biotechs high and dry, although the tap is not closed completely. In early October, two Swiss biotechs – Nitec and Telormedix – raised a combined CHF45m ($40m) in private equity rounds, while British medical technology firm Orteq secured a modest £8m ($14m).

The scant funds being made available are focused increasingly on later-stage, lower-risk projects, with speciality pharma and medtech now the sectors most likely to win support.

"It's currently not easy to open doors and to get commitment for capital – only the best are able to get that at the moment," says Ludwig Felber, who heads the life sciences division at investment bank Viscardi in Munich.

Passing on pain

With venture capital funds having a harder time attracting new money, the pain is being passed down the line, according to Rainer Strohmenger, a Munich-based partner at venture capital firm Wellington Partners.

"Companies in need of capital are feeling (the difficult market environment)," he says. "Companies certainly don't have to fear that the money tap will be closed on them. Investors, however, are taking their time and are looking very closely at businesses. That could eventually be some firms' undoing."

Any hopes for an exit through an initial public offering, meanwhile, are simply pie in the sky, with the venture capital-backed IPO market currently at a 30-year low, according to a study released this week by PricewaterhouseCoopers.

One option is to merge with a stronger partner – a route chosen this month by Britain's Protherics, which agreed to be bought by BTG. "It's consolidate or die," says Evans. "Unfortunately, I don't think there's a financing market whatsoever for biotech in the UK."

He is more upbeat about continental Europe and is betting on less risky areas such as diagnostics, medical devices and speciality pharma companies, like York Pharma which recently secured funding of £14.4m.

Venture funding for the biotech sector in Europe plunged last year by 21% to €1.2bn ($1.67bn) and was down 22% to €452m in the first half of 2008, according to Ernst & Young.

Julia Schueler, who focuses on biotech firms at Ernst & Young, expects the trend to continue. "I could imagine that we will eventually see a slump in venture capital because of the overall financial crisis," she says. "If not this year, then next."

Buyer's market?

One ray of light is potential acquisition interest from large pharmaceutical companies looking to refill their depleted new drug pipelines in the biotech sector.

"This is clearly acquisition time for strategic buyers," says TVM finance chief Bernd Seibel. "Pharmaceutical companies' pipelines are very much under pressure,"

Some investors in listed European biotech companies have already benefited, with recent deals including the sale of Britain's Acambis to Sanofi-Aventis and Germany's Jerini to Shire at premiums of 64% and 71% respectively to the prevailing share price.

But the latest financial market meltdown is shifting the power balance back to cash-rich drug giants, whose executives now talk of bargain-hunting in a stressed biotech sector.