There is no doubt in investors' minds that compared to big pharma, whose growth is said to be hampered by expiring patents and limited new drug pipelines, biotechnology is a winning choice, set for double digit growth in the coming years.
The most popular kind of investment in this market is a so-called integrated biotechnology company, one that owns its own drug discovery platform, as well as being ready, willing, and able to discover new drugs.
It is not enough that a company develop a unique way to analyze and research the characteristics and nature of biological molecules, as many venture funded startups do, they must also be able to use those platforms to create their own drug targets.
A platform provides a launching pad for specialization in particular diseases and of research that leads to drug discoveries. "You need a horizontal R&D basis on which you can build," says Francesco De Rubertis, Partner, Index Ventures in Geneva, referring to the platform advantage.
Ideally investors want integrated biotechnology firms, ones that not only perfect research methods for drug discovery, but also develop and market the drugs too. "There's always a need for good drugs especially those that satisfy medical needs with a good pharma/economic balance," says Barbara Zink, who manages the private equity investments of Lombard Odier's SFr1.4 billion Immunology fund.
Zink was speaking at a panel gathered to discuss venture capital investing in biotechnology in Europe, part of a series of well-attended panels at an investors' conference called BioEquity in Zurich this month.
The problem is that there are not a lot of examples of companies, even the VCs have a hard time coming up with role model firms that have transformed from platform to drug discovery businesses, although this is not preventing firms from trying, such as Swiss startup, The Genetics Company.
The talk of products versus platforms reflects a questioning of the payback potential of a recent investment trend that saw European biotechnology investors put a lot of money into so-called platform companies, startups and spinoffs who develop a sophisticated set of research and analysis tools that are sold or licensed to drug discovery companies and big pharma.
Some investors at the conference say they feel that firms that have only a platform as their main product run the risk of their products becoming a "commodity" item in the coming months.
Value versus growth
US venture money, according to Steve Elms, of the Perseus-Soros BioPharmaceutical Fund, is going to later stage firms with a new drug or set of drugs in the pipeline, preferably in the third phase clinical trials.
Elms says these firms are highly under-valued at the moment because of the economic downturn, so shares are cheap, equivalent to early stage prices. "Late stage investments offer the kind of upside potential you have with an early stage deal with a much shorter pay back timeframe," says Elms.
Investors are buying such shares now hoping that another crop of investors down the road will pay more for the same shares because the company will then have a brand new, proven drug on the market.
The best possible outcome of such an investment, in the mind of Elms and one or two others on the same panel, is for the firm to create a blockbuster drug, one that brings in revenues of greater than $500 million to $1 billion during the peak of its seven year sales cycle.
Such an investment as Elms describes relies is a "value investment" scenario where investors bet on the spread between the fair value and the discounted value.
Not all investors are as opportunistic. Another strategy prevalent in Europe is the growth strategy. "Typically in the venture capital scene, there are growth investors or value investors," says De Rubertis.
"A growth investor pays a fair price for equity in a young company because you recognize that there is a great market opportunity potential for growing income and you believe the assets are going to increase in value over time," says De Rubertis who has guided the investment in a range of growing biotechnology firms, such as BioXell, 7TM, Genmab, Cellzome, Structural GenonmiX and Ingenium.
"When you invest in undervalued, late-stage deals, there is a timer on the investment -- you are hoping that the company can do an IPO within a few months to raise new capital," explains De Rubertis.
But the way the public markets are these days, investors do not know if it will be three months or three years before a floatation can take place, which makes the late stage, product-oriented company a risky proposition.
by Valerie Thompson