Managing Editor

LILLE, France - The night before the ninth annual European Biotech Crossroads conference was to officially begin here, it snowed - big, fat flakes that floated down from a black sky.

But the weather was too warm, and all those flakes turned to slush. For those making the trip to Lille from Paris or other regions of France, driving was slick.

European biotech for years has seemed similar to that Sunday night - despite some victories and notable advances, the overall sector has existed in a slushy state. There has been constant talk of what needs to be done, what steps to take, in order to catch and eventually overtake the United States as the driving force behind the world's biotech. Yet the gap between the U.S. and Europe still is widening. Numbers provide d by Ernst & Young showed that the U.S. has about 330 public biotech companies in 2004; Europe had not yet reached 100.

The problem, most say, is that biotechnology in the U.S. is started by venture capital money and grows from there via IPOs and follow-on offerings. In Europe, biotechnology has been surviving on VC money alone, and France Biotech recently pointed out that the lack of a public appetite for biotechnology in Europe "paralyzes the chain of financing for innovative companies."

It could be said that globally the public markets are lukewarm on biotech plays, although IPOs are occurring. BioWorld Snapshots show that through mid-November, there had been 31 initial public offerings worldwide this year, with 12 of those completed by European firms. The total number is on pace with 2004, which saw 37 IPOs the world over, but Europe has improved this year. In 2004, there were but five IPOs from European firms, and until Exonhit Therapeutics SA's €7.3 million (US$8.6 million) IPO on the Alternext market of the Euronext exchange in Paris just weeks ago, that country had not seen an IPO for six years.

It's rumored that France could turn out several more IPOs in the coming months, and the 12 completed in Europe this year are a sign of life. But IPO valuations, no matter the nationality, are less than inspiring.

The average amount raised in global IPOs this year is about $47 million. Focus in on just European firms and that number dips to about $44 million. It's those types of figures that led Philippe Grand, an associate with Ernst and Young in France, to comment that for investors these days, "it's hard to find money on the exit."

As night fell last Monday on the other side of the windows outside a seminar room at the Crossroads conference, Grand participated in a panel to probe investing trends in Europe. With him sat Johan Christenson, from HealthCap, of Stockholm, Sweden; Denis Lucquin, managing partner at Sofinnova, of Paris; and Hubert Birner, general partner at TVM GmbH, of Munich, Germany.

Data from Ernst & Young show that more than half of European biotech VC money is invested in second financing rounds or later. A tiny amount - about 5 percent - is invested in seed rounds, and just 30 percent of VC funding is invested in seed and first rounds combined. A similar trend exists in the U.S., but in Europe, which boasts little public funding, it weighs especially heavy on the industry.

There are major funds that invest in startups in Europe - Sofinnova, TVM and HealthCap all do - yet companies across Europe are dying of thirst.

Lack Of Soft Money' Hurting Germany

In the 1980s, Germany was known for its pharmaceutical prowess, not biotechnology. It wasn't a lack of science - German researchers had happy lives in academia or in pharma - but there was no real entrepreneurial spirit.

That changed, though, and around the time of the genomics boom, the VC population in Germany had swelled to 50 firms. Today, there are about 350 biotech companies in Germany, with 20 of them public, said TVM's Birner, and just two biotech VC firms.

What drove that VC boom around the turn of the century, and, perhaps more importantly, what happened to reduce the biotech VC family down to just two?

"Soft money," Birner said at the panel. Through grants, federal subsidies and money from biotech clusters, the risk for VCs was greatly reduced and the financial burden of biotech startups was shared. The federal subsidies in 2000 reached €750 million. With the risk diminished, VCs blossomed.

Those times are gone. Now, in order to receive grants and subsidies, biotech firms first must win VC funding - difficult to do in today's Europe. Birner said there are about 100 private biotechs in Germany, and about half of those have cash to last them beyond 2006. Of the 50 that will need funds next year, he estimated that 25 will struggle and possibly fall into bankruptcy.

France Rewards Innovation, Wants More

Figures from France Biotech show that it's dry here, too. In 2004, €70 million was raised as seed capital by biotechs, but this year, that figure has fallen to €50 million. The disparity is even worse for second rounds: €159 million raised in 2004, but a mere €27 million this year.

Other France Biotech data show there has been a 27 percent decrease in seed and first round funding this year in France, an 83 percent decrease in second rounds or higher, and a total funding drop of 52 percent. Why? Because of a "justified fear of investors" that they won't "be able to withdraw their investments during an IPO," it said.

A rejuvenated public appetite for biotechs in France would help, and perhaps Exonhit will start a trend. But France is trying to spur growth in other ways. It put in place a program that bestows on certain firms Young Innovative Enterprise status. Companies that are less than 8 years old and spend at least 15 percent of their total annual expenditure in R&D can achieve that status, which makes them exempt from social security payments for employees involved in research projects. That, on average, has saved firms 20 percent on their payroll, and results showed that in 2004, 74 percent of those companies recruited new R&D employees, 51 percent started new R&D projects and 49 percent bought R&D equipment.

France is searching for other programs, including giving tax incentives to help increase investor interest. (The typical French investor is at retirement age and risk-averse. Those that do invest usually put their money into bonds.) With proper prodding, the country hopes to get more action for publicly traded biotechs. France Biotech also is calling for significant national investment in innovative companies.

Building Pan-European VC Network

At the panel meeting, HealthCap's Christenson said that one of the most important things a firm can do is to find a syndicate of investors that will be there, round after round, until a product is on the market.

That's great advice, but it's not going to work for everyone. Across Europe, young companies are frustrated with the dearth of VC funding. When asked at the session if the problem was too few VCs in Europe or too many companies not worth investing in, Christenson gave what he called a "provocative" answer: "They are not worth investing in," he said.

Privately, though, Sofinnova's Lucquin, who also is a vice chairman of France Biotech, had a softer view. He told BioWorld Financial Watch that there "are more companies with less employees, with financing that is not optimal," but he wouldn't say the biotech landscape is over-populated. His "gut feeling" though, is that the number of biotechs in Europe "cannot go much further."

There is a VC plan for Europe, he explained, modeled after the investment hub in California that gave rise to Silicon Valley. Right now each country has at least one big fund, but "we'd like to have one or two more." Ideally, each country would have two or three strong VC firms, giving Europe about 30 or 40 that could work together to feed biotech.

It would take time, of course, but the process is under way. In five years, "we could be not that far off," Lucquin said. That would go a long way to solving the EU's problems, but would even that many VCs satisfy Europe?

"It will never be enough," Lucquin said. But with the target amount, "it could be close."