BioWorld International Correspondent

LONDON - What does the initial public offering of a drug delivery company in Watertown, Mass., mean for the prospects of capital markets reopening to biotechnology in Europe?

Well, one swallow does not make a summer, but speakers from the professional investment community at the 11th BioPartnering Europe conference held in London last week agreed that what happens in the U.S. has a direct influence on what happens in Europe. With Acusphere Inc.'s IPO and several other biotech IPOs having been filed, the financing situation seems to be picking up in the U.S., and surely it will be Europe's turn before long.

The U.S. is the engine of biotechnology, and so to assess Europe's prospects, you have to look at how U.S. companies are faring, Sam Fazeli, senior biotechnology research analyst at Nomura International plc, told a session. In the year to date, the Nasdaq Biotech Index has outperformed other markets with a 67 percent rise. "This is quite a jump, but where does it go next?," he asked. "I think the current economic cycle is sufficiently powered to keep going for another six months."

The evidence is that the improvement in macroeconomic conditions is tempting investors out of the defensive stocks they retreated to after the Internet stock bust and into higher-risk ones. That is prompted by surging liquidity due to interest rate cuts and looser monetary controls.

It also is supported by sector-specific factors including good earnings trends from U.S. biotechs, a friendlier FDA, and some near-term benefits from the Medicare bill.

"But the most important factor has been fantastic clinical data, especially for Avastin, [Genentech Inc.'s anti-angiogenesis cancer drug] as everyone thought the product was dead," said Fazeli.

Fazeli noted that most of the money raised this year in the U.S. has been through convertible debt - a total of $6 billion at the end of July. "Since then there have been more equity issues, so the market appetite for equity is quite high," he said. And not withstanding the fact that Acusphere is trading below its flotation price, Fazeli said, "The capital markets are open if you have a good story."

Meanwhile, in the UK, Fazeli said some quoted companies, including Alizyme plc and Medical Marketing International, have done "fantastically well" in the past six months. However, he added, "The biotechnology [stocks] are up 19 percent, but that is not better than the general market, so why buy biotech stocks?"

Europe and the UK might try to follow the U.S. lead in the first half of 2004, providing companies are ready, Fazeli said. But he cautioned that sentiment in the UK is going to be strongly influenced by the Phase III results from Antisoma plc of London for R1549, its ovarian cancer treatment. "If [R1549] works, in the first half [of 2004] the market will open for lots of follow-ons. If not, the chances of a UK float are nonexistent; fund managers won't buy in that case," Fazeli said.

Stuart Henderson, a partner at Deloitte & Touch LLP, agreed that the climate has improved at the macroeconomic level but said there are still difficulties ahead.

"Venture capital funds remain defensive; they are looking after the portfolio companies to get them to survive to exit," he said. "There have been no Series A rounds, or genuine aggressive seed funding in 2003."

Will Brooks, senior investment manager, Quest Management NV, suggested the plight of VCs could be an IPO driver. "The VCs are really hurting; they need exits and so will be pushed, even if screaming and shouting, and saying we're not ready - if there are flops it will be really bad," Brooks said.

Henderson pointed out the central role that the pharmaceutical companies have played in keeping the biotech sector going during the capital-funding drought. In the past 12 months, between 80 percent and 90 percent of funding has come from pharma deals.

"The types of deals being done recognize the mutual interdependency between pharma and biotech. There is no such thing as a standard deal any more," Henderson said.

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