BioWorld International Correspondent

PARIS - The fall in investment in the European biotechnology industry over the past three years and the risk-averse attitude of the continent's venture capitalists were high on the agenda of the 8th European Biotechnology Crossroads conference in Marseille, held Oct. 27-29.

Richard White, a biotechnology consultant based in Poitiers, said a total of $27.1 billion of private equity and venture capital was invested in biotechnology in Europe in 2003, 16 percent less than in 2002. Two-thirds consisted of buyouts, which were worth $18.1 billion, 9 percent down from the year before, while investment in business expansion accounted for 21 percent, or $5.7 billion, 29 percent less than in 2002.

Biotechnology had been affected by the burst of the "e-bubble," he said, adding that he saw no improvement in the investment climate of 2004.

White pointed out that venture capital is by far the largest source of funding for European firms, representing 32 percent of the total in 2003, with other equity sources accounting for 14 percent, management for 13 percent, public markets for 13 percent and government funding for 8 percent. He nevertheless maintained that "venture capitalists are taking less and less risk. They put in very little at the start-up and early development stage, but invest more heavily later on. Owners have to lose control to get the necessary funding."

Vincent Genet, of the Paris-based firm Alcimed, confirmed that the investment climate in the biotechnology sector in France is poor. Venture capitalists were less enthusiastic and some initial public offerings have failed. Venture capital is the "gold standard" for the industry and "could help firms go fast and far," he said, but only 20 percent of French firms can actually obtain venture capital - others need to find other sources of revenue through products or services for the short term.

David Needham, a nonexecutive director of Avlar BioVentures Ltd., of Cambridge, UK, was even more gloomy.

"The whole of the life science sector is on life support," he said. It's a case of "how can we keep the heart beating." Asked to explain how investors decide whether to invest in a third-round financing, he said the round has to be aimed at more than survival. "It must be based on a realistic exit strategy. An IPO is a possibility, but it certainly doesn't mean exit. One should plan for an M&A exit."

The problem?

"There are too few winners and too many failures in Europe," Needham said, and, as a result, investors are becoming more wary. They now realize that it "takes a very long time for a biotechnology company to develop into a viable business," and that investors "don't have to go in early but can make money by going in later."

In the French biotechnology sector there has not been a successful IPO since NicOx in 1999. Several companies have launched abortive IPOs, including Meristem Therapeutics in 2001 and Immuno-Designed Molecules SA (IDM) earlier this year. IDM's CEO, Jean-Loup Romet-Lemonne, said at the conference that, having failed on the Euronext in Paris, IDM would go for a Nasdaq listing. At the moment, he said, 31 percent of the company's capital was held by venture capitalists.

IDM has been shifting part of its operations to the U.S., and Romet-Lemonne explained why a European biotechnology company should set up shop in the U.S. He gave a host of reasons, including the abundance of equity capital and other funding available. That is not the primary concern for IDM, though, which has managed to raise substantial funding in Europe and expects revenue from its collaboration with Sanofi-Aventis Group.

Bernard Daugeras, of the Paris-based venture capital firm Auriga Partners, said some biotech start-ups were in too much of a hurry, since their research was too upstream and not scientifically proved, or they had an overly narrow technological platform based on weak intellectual property. Moreover, he said, they often underestimated their seed funding needs and said at least €1 million to €5 million was required.

He said early stage investors have to be "highly selective" and confident of "earning a return on investment, a substantial capital gain, within a reasonable time." The risks have to be shared. At Auriga, he went on, "we like doing first funding rounds and then stay on board," acknowledging that subsequent funding have to be found elsewhere and that exiting can be difficult. The problem in France, he said, was that "there are too many projects and they are not properly funded over time."

He also criticized French authorities, saying "public financing of biotechnology is insufficient" and that the sector was "not a high priority for the French government."

Earlier, the French research minister, François d'Aubert, might have disappointed some delegates by not showing greater commitment to the biotechnology industry. He observed that "developing a new biotechnology drug is no more risky than developing new computer software." But he did announce the creation of a new National Research Agency for January 2005, which would have a budget of €350 million to allocate to scientific and industrial research, in general, and would participate in major life sciences and agronomics research programs.