European biotech has matured significantly over the last 25 years, with a stronger foundation than before to help cope with current uncertainty in the financial markets, according to a panel of investment experts speaking recently at BIO-Europe 2022 in Leipzig, Germany. This evolution is further strengthened by a growing willingness to invest in European biotech, largely thanks to its highly acclaimed success. The maturation of financial tools to mitigate risk combined with greater access to capital can be expected to stabilize support for innovation and the development of the new medicines despite a challenging macro environment, the experts said.
Leading a panel discussion about 25 years of economic cycles in biotech, Olivier Litzka, Partner in the Life Sciences team at private equity firm Andera Partners, explained that with a focus on truly innovative approaches to medical treatment, biotech growth has a good outlook in 2023.
“The cycles of the past several years show that even when public markets go down, VC money is there and overall growing,“ he said. “If biotech companies with really innovative technology or product candidates focus on the essential and include business development in their strategy, the mid-term outlook is pretty good.”
Andera recently closed its sixth, and largest, BioDiscovery Fund at €456 million. The BioDiscovery fund family has raised over 1.1 billion euros in the last two decades, with investments going into over 80 European and North American therapeutics and medical technology companies.
Becoming an Established Industry
Over the last 25 years, the industry has seen a significant amount of growth. The success of Gilead’s Harvoni in chronic HCV, approved in the U.S. in 2014, began the current run, Litzka said, and despite a few ups and downs, the trajectory has remained consistent. “Being able to manage a global health crisis has helped the biotech industry gain recognition and, as a consequence, also tracked quite some capital into the industry,” he noted.
The value creation from anti-virals like Harvoni, vaccines like Comirnaty, biologics, cell therapies and other innovative medicines has inspired investors, said Ulrica Slåne Bjerke, founder and CIO or Arctic Aurora Life Science.
“In 2020, we saw an extremely high appetite for biotech stocks and many new investors entering the biotech field because they realized that biotech can produce drugs and it can also save the world,” she said.
Getting here was not easy. In the first decade of the 21st century, the life sciences struggled to gain traction with institutional investors, and it seemed life science companies were a mismatch for the popular closed end fund investment model, said Uli Grabenwarter, Deputy Director, Equity Investments & Guarantees, European Investment Fund (EIF).
“The venture capital industry has understood painfully but clearly that this mismatch needs to be managed,” he said. “I think the adjustment of investment strategies that happened between 2005 and 2010, roughly, in order to respond to investor requirements to provide visibility on value creation and liquidity provides a better sense of risk management.”
The diversification of portfolios is also important and has allowed for outcomes that are less binary than they as they used to be—meaning that “you could either get it all or nothing.” This change in approach has paid off, he said.
Holger Reithinger, Partner at Forbion, a leading European life sciences venture capital firm agreed. “I think we can say that we have delivered what we believe LPs are looking for: a venture firm to provide a kind of a consistency of financial performance and that we deliver on our promises,” he said.
“It’s always important to have a stable, diverse, highly skilled team in place with a long-term perspective on what will happen in the next fund cycles,” he added.
Comparison with Previous Downturns
There are some important differences with previous down cycles of 2001, 2008 and 2015 and the crisis we are in now, said John Haurum, Advisor and Non-executive Director at several European biotech companies. “The crash of 2001 is more similar to what we are seeing right now because there was a global crisis compounded by 9/11 in the U.S. when everything shut down,” he said.
What is happening now is serious in the sense that we have the same appreciation of equity that existed in 2019 and 2020 which is now being reset, he explained. “But at the same time, we have a huge series of global events—Covid-19, the war in Ukraine and high interest rates—everything that works against the market bottoming out,” he said.
However, there are ways to manage this, and the sector now has plenty of know-how. “When you are preparing for your future always work on counter strategies,” Haurum said. “So even if you are working towards a financing, make sure you are doing everything you can to have optionality by tracking your business development activities. When working on a financing it’s important to also work extremely diligently on your business development activities so that you have an ability to walk away from financing terms or just optimise your ability to walk away from unfavorable terms.”
The Path Forward
Enthusiasm for further growth at Munich-based life science and deeptech VC MIG Capital is fuelled largely by retail investors from outside the biotech industry, said Matthias Kromayer, Managing Partner of the firm. These investors are looking at companies like BioNTech and Moderna and realizing that not only can biotechnology make huge promises, but it can deliver on them and save millions of lives. “On a retail investor level this is a major breakthrough,” he said.
Ulrica Slåne Bjerke pointed out that while some investors may opt to sit on their wallets and wait, others see prime conditions for digging in and researching clinical data. “It is an opportunity, of course, because we can see those diamonds in the rough that we can invest in,” she said.
With more public trust in the disruptive potential of the industry and support from governments around the world which are helping fill in the gap in funding, such as Germany’s Agency for Breakthrough Innovations, with non-dilutive leverage for VC investments, growth is secure.
Under these conditions, a focus on real innovation is critical for success. “We must look for good science,” said Litzka. “It’s about the medicines of tomorrow, hard work, constant progress…not trying to be good surfers on ‘waves’. Our industry needs continuity and focus, and a fundamental conviction that the drugs of tomorrow are being developed right now, independent from either hype or a perceived downturn.”
The current trend in technology convergence points to the need for different paths, new skill sets and disruptive approaches, said Kromayer. With a mature business environment now in place, the key to the future of the industry lies in the convergence of technologies such as automation, AI and robotics in the life sciences.