Pushing Ahead with IPOs in Europe

European private companies and VCs are faring no better than their US counterparts when it comes to IPOs so far in 2005. But a series of bad haircuts and poor aftermarket performances hasn't scared everybody off--yet.

by Christopher Morrison

The European market for new biotech issues has—seemingly for all eternity—had a bad rap. With less-experienced management and investors the conventional wisdom suggests that the Old World's biotechs are doomed to failure or emigration to the US (or both). Sadly, more than a handful of companies have provided the data to support this thesis over the years.

But while there are certainly well-documented differences—and Europe's biotech industry is much smaller and admittedly less mature—that wisdom is increasingly too black and white and based on little more than caricature. In most respects European firms are faring no worse than those in the US, in particular when it comes to public offerings. Not that it's smooth sailing on either side of the Atlantic: biotech financing everywhere has been plagued by difficult aftermarket environments and stormy conditions that have resulted in pricings well below estimated ranges. In Europe as in the US the condition is becoming pandemic, but a handful of companies and their VC backers are willing to take it on the chin. Despite poor public valuations VC money is seen in some cases by management as expensive, and the IPO is increasingly just another financing event that opens up a company's future strategic options.

So far this year five firms have hit Europe's main markets: Ardana Bioscience Ltd. on the London Stock Exchange, Intercell AG in Vienna, Paion GMBH in Frankfurt, Arpida Ltd. on the Swiss Exchange and, most recently, Galapagos Genomics NV in Amsterdam and Brussels. [See Deal], [See Deal] [See Deal], [See Deal], [See Deal] (See Exhibit 1.) (Galapagos could be the first openly and nominally genomics-focused biotech to list anywhere since the end of 2000-01's irrational exuberance if one places Germany's Epigenomics AG in diagnostics [See Deal].)

Much like in the US though, other promising firms, including the UK's Renovo Ltd. and Switzerland's Speedel Group, have gotten cold feet and pulled their offerings, citing poor market conditions. [See Deal], [See Deal] Addressing the audience at Windhover's 12th Annual Euro-Biotech Forum in Paris, Lehman Brothers investment banker Fred Frank summed up the anxiety among private biotechs, noting "for now, it's a buyer's market." As such some firms prefer to remain private and for select European firms, VC money continues to flow freely. Most conspicuously, the UK's Oxagen Ltd. pulled in a £31.6 million ($60 million) private round led by MPM Capital in May 2005 to fund development of its preclinical respiratory and inflammatory disease projects. [See Deal]

Hanging in There

While the private markets have trundled along and even provided pleasant surprises like Oxagen, there's been precious little activity anywhere in the public markets in the second quarter this year. (Even the US markets have been quiet: in early June XenoPort Inc. became the first company to IPO on the Nasdaq in three months [See Deal].) But the sector isn't giving up entirely. The highest-profile Euro-IPO contenders this summer are Danish cancer play TopoTarget AS and ProStrakan Group Ltd., the Scotland-based specialty pharmaceutical company borne out of the merger of Aventis (now Sanofi-Aventis ) spin-out Proskelia SAS and Strakan Group Ltd. [See Deal], [See Deal], [See Deal] Italy's Gentium SPA is floating farther afield: the firm plans a June listing on the American Stock Exchange. [See Deal] And a few others, like the urology-focused Roche spin-out BioXell SPA —whose recent potential $150-million deal with Merck & Co. Inc. may provide the necessary validation investors require—and German cancer play Micromet AG are rumored to be considering their chances. [See Deal] (See Exhibit 2.)

TopoTarget should be the first Danish biotech company to hit the public market in more than four years. Trading on the Copenhagen Stock Exchange is expected to commence June 10th, and at press time the firm's COO Tim Corcoran remained sanguine about the impending listing, suggesting that the firm's late-stage pipeline and clinical validation provided by partners like the National Institutes of Health 's National Cancer Institute and CuraGen Corp. were pressing the right buttons with investors. [See Deal] "It's not a new phenomenon—the later the stage of your products, the more the market is taking notice of you," said Corcoran. "Our Savene product is quite close to the market, we're expecting it to launch in late 2006. That seems to be interesting investors quite a bit." While dexrazoxane (Savene) is a niche product (analysts suggest worldwide sales may peak around €50 million) for the treatment of accidental leakage of certain chemotherapies into healthy tissue, the company has built an expertise in histone deacetylase (HDAC) inhibition. It has built up capabilities and pipeline through acquisition—most recently by buying out G2M Cancer Drugs AG in March 2005, and prior to that acquiring Prolifix Ltd. in 2002. [See Deal], [See Deal]

In the UK, apparently the reports of the death of ProStrakan's IPO plans were greatly exaggerated. CEO Wilson Totten told IN VIVO that media speculation suggesting a tussle over valuation would scupper the deal was "misguided." It's unclear whether or not ProStrakan will climb down further from its original post-money valuation guidance of £270-290 million, which has reportedly been reduced by about 25% to a mid-point of £225 million during the course of the company's road show. At press time there was speculation that further reductions were necessary to get the deal away.

Simon Turton, PhD, VP, European healthcare at Warburg Pincus, which owns 44% of ProStrakan, intimated at the recent Euro Biotech Forum in June that while institutional support for biotech IPOs is scarce at the moment, pressure from public investors is unlikely to spoil IPOs from otherwise sustainable companies. "We see an IPO as an opportunity to continue financing a company with someone else's cheaper money," he said. While Warburg Pincus' penchant for hanging onto its holdings for "years" post-IPO suggests a commitment to the future of its portfolio companies, it also more pragmatically reflects the generally accepted maxim that IPOs are no longer exits for VCs, merely financing events.

The larger amounts raised in the US—which some attribute to the recent Sarbanes-Oxley legislation (as the cost of a public listing increases, the threshold for how much a firm needs to raise does as well)—has also contributed to the increasingly popular notion that M&A is often a better option for private biotechs than the public markets. The recent wave of private biotech M&A, which has on the whole been focused in the US, is seen by some as at least partially a direct result of the poor exit opportunities offered by public offerings there. (See "Stepping Out, Not Up: Better Returns for VCs Through M&A?" START-UP, May 2005 (Also see "Stepping Out, Not Up: Better Returns for VCs Through M&A?" - Scrip, 1 May, 2005.).) "We see the dilution [in the IPO market] and we see the risk and we think we can skirt that" by building companies for M&A, commented Frazier Healthcare Ventures' managing partner Alan Frazier at Euro Biotech. In Europe, however, most private M&A has been of the rescue variety as a few stronger biotechs such as GPC Biotech AG and MediGene AG have acquired the fledgling assets of a handful of down-and-outs. (See "German Biotech: Coalescing Around the Haves," IN VIVO, March 2005 (Also see "German Biotech: Coalescing around the Haves" - In Vivo, 1 Mar, 2005.).) Other deals—like the buy-outs done by TopoTarget and the consolidation espoused by firms like the already-public Vernalis Group PLC—are designed to create companies with the so-called critical mass necessary to attract the attention of sell-side analysts, investors and out-licensers.