Bioe News

Published online: 12 August 2005, doi:10.1038/bioent876

Looking at US versus European exit opportunities

*Stacy Lawrence is a freelancer in San Francisco, California

Data suggest that investor exits are dwindling in the US. For now, prospects are rosier in Europe. But, mixed messages are everywhere.

Steve Harmston, head of international research for Dow Jones VentureOne, says the IPO and M&A momentum is in Europe. VentureOne

Many in the biotech field assume that exit opportunities for biotech investors and entrepreneurs are in greater supply in the US than in Europe. A closer look at the data on initial public offerings (IPOs) and trade sale exits through mergers and acquisitions (M&A), however, suggests a more complex reality. Indeed, it appears that the momentum—if not necessarily the scale—might be shifting to Europe. Therefore, it would seem that biotech investors and entrepreneurs who are trying to engineer an exit exclusively in America might be unwisely narrowing their options.

"In the US, the IPO window is all but shut," asserts Mike McCully, a senior analyst at the biotech industry consulting firm Recombinant Capital. "There are only a few, funky companies that are getting out in the US right now. The last big IPO was in February"¹.

The data show that the proceeds and volume for biotech IPOs in the US actually peaked in the second quarter of 2004 (see Supplementary Tables 1 & 2). In the second quarter of this year, Santa Clara, California-based XenoPort was the only US biotech that managed to float an IPO. Thus far in the third quarter, there has been one IPO, this one for Woodridge, Illinois-based Advanced Life Sciences, a company focusing on infectious diseases.

"IPOs in the US declined considerably this quarter, but in Europe a small but significant IPO window remains open," wrote head of international research at Dow Jones VentureOne Steve Harmston in his firm's analysis of the most recent venture-backed IPOs.

		"Second quarter European biotech IPO volume was the strongest it's been in a decade"

Indeed, second-quarter European biotech IPO volume was the strongest it's been since 2000. All told, in the first half of 2005, European IPO proceeds actually topped those in the US, reaching nearly $500 million, debunking yet another myth about relative exit opportunities across the Atlantic. In fact, the average value of biotech IPOs in Europe is rising. This year the average proceeds hit $40 million, more than twice what they were just two years ago. By comparison, biotech proceeds in the US have remained level at around $60 million.

Exit opportunities in Europe might be expanding, but conventional wisdom says there is still a cloud of doubt hanging over countries like Germany, Europe's largest economy, not least because of the disparity between valuations and proceeds². Harmston, however, writes that there are equalizing factors. He makes the argument that the regulatory environment has changed so significantly in the two regions that taking early-stage biotech companies public has actually become somewhat easier in Europe.

"In the US, Sarbannes-Oxley has depressed the new issue market," Harmston has concluded. "Government regulation of biotechnology in Europe is lighter in a number of countries than [in] the US. The net effect of this is that early-stage European biotechnology firms have become a form of outsourcing of R&D for larger biotech corporations who can then acquire the technology via M&A."

There are plenty of European biotech experts who might disagree with these assertions, particularly the one dealing with the impact of the relative regulatory burdens biotech CEOs must endure in Europe compared to the US. Still, there is also some evidence that capital markets in Europe like the London Stock Exchange, although still not viewed as sufficiently liquid or robust as, say, the NASDAQ in the US, have evolved beyond conventional wisdom.

"Europe is seeing the maturing of AIM and new markets such as Alternext which point to the increase in IPO activity having some legs," Harmston writes. AIM is the Alternative Investment Market, a decade-old market run by the London Stock Exchange that raised about $4 billion for startup companies last year. Alternext is an exchange that opened this year and is designed specifically for small- and mid-sized companies.

		"For the last several quarters European biotech M&A activity has far outstripped that in the US."

The data also indicate that M&A activity in Europe has exceeded expectations, too (see Supplementary Table 3). For the last several quarters European biotech M&A activity has far outstripped that in the US. During the first half of this year, for example, there were 13 trade sale exits of $100 million or greater for venture-backed European biotechs compared to only five for those based in the US, according to data from Dow Jones VentureOne.

Then again, US deals tend to be far larger on average than those in Europe. During the first half of this year, excluding anomalies like Pfizer's $527 million acquisition of the two-year-old US startup, Angiosyn, the median healthcare M&A deal was worth $158 million in the US and only about $25 million in Europe³.

There are a lot of mixed messages in all of these data. But, they do raise the question: is the conventional wisdom about relative biotech exit opportunities in Europe compared to the US in need of a revision? Probably not in chapter and verse, but if data on third and fourth quarter exits in Europe continue to reveal signs of momentum, the biotech sages might be forced to acknowledge the obvious.

References

1. Mack, G.S. Investors and the precautionary principle. Bioentrepreneur 16 June 2005, 10.1038/bioent866.

2. Sheridan, C. German biotech sector inches forward despite long odds. Bioentrepreneur 12 May 2005, 10.1038/bioent863.

3. Mack, G.S. Early-stage exits: sometimes, less is more. Bioentrepreneur 02 June 2005, 10.1038/bioent865.