The amount of venture capital awarded to biotech companies in Europe jumped 56% to €309 ($379) million in the second quarter of 2004 (2Q04), whereas investment in US biotech startups dropped 35% to $942 million1. Although this definitely is a welcome boost to European bioentrepreneurs, the trend is not a signal that investment into the continent's biotech startups is going to catch up with US levels anytime soon.

The numbers don't lie—European biotech is still playing catch up

This rapid increase in European biotech venture capital (VC) investment was driven by a handful of large investments, most going to early-stage companies in Germany, Switzerland, Britain and Belgium (see Table 1). Switzerland saw the largest increase in biotech VC investment, raising more than €61 ($75) million in 2Q04. Geneva-based Addex Pharmaceuticals led the charge, pulling in €33 ($39) million in May, in what it claims is the largest series B funding ever awarded to a European biotech company.

Table 1 Largest early-round investments in private European biotechs in 2Q04
Full size table

According to Tim Dyer, CFO of Addex, some of this optimism stems from the thawing of the Swiss and UK markets for biotechnology initial public offerings (IPOs), five of which have been completed in these two markets since last December2. Because of an abundance of local investors, Dyer argues, "Switzerland is one of the best places to IPO." Another of the country's strengths, according to Dyer, is the proximity to large successful biotechnology companies like Actelion and Serono that offer a wealth of scientific talent for new ventures3.

One of the most active investors during 2Q04 was the German VC firm Techno Ventures Management (TVM), which led or participated in the investment rounds for Addex, Jerini and Evotec. According to TVM partner Alexandra Goll, these three companies have strong management teams and have reached a critical mass based on "their drug discovery efforts, potential for collaborative deals and prospects for their clinical pipeline." For example, Addex has a compound for smoking cessation set to begin a phase 2 clinical trial in the US this year, and Goll says the company's pipeline of preclinical CNS drugs is very promising. She sees these large early rounds are intended to position the best biotech firms for a possible IPO around 2006, when she believes that the European public capital markets may be stronger.

Goll sees the European funding climate as still challenging for private biotech firms that need cash. Indeed, a recent Ernst & Young report4 suggests that the European biotech sector is 10 years behind the US in development, and Europe's 1,700 private biotech firms are very small and need to consolidate before they can truly compete with the 1,100 private US biotech firms.

The need to consolidate in Europe is reflected in the lower average size of VC investments compared with US firms. Although the average amount of European first or second round VC investments in biotech nearly doubled in 2Q04 compared with 2Q03 to €14.6 ($17.9) million for 13 firms, 26 US firms raised an average of $20.3 million in first or second rounds in 2Q04. The numbers don't lie—European biotech is still playing catch up.

Web links

BioCentury Publications

http://www.biocentury.com

Techno Venture Management

http://www.tvmvc.com/

Ernst & Young

http://www.ey.com/