BioWorld International Correspondent

MUNICH, Germany - At a forum here Tuesday to discuss the state of the biotechnology sector in Germany, venture capitalists and biotech executives said they were cautiously optimistic about the investment climate, but not about a re-opening of the IPO window.

"Initial public offerings from Germany will not come before 2004, if then," said David Ebsworth, chairman of Wilex AG, of Munich. "Financings are still relatively rare, and activity in mergers and acquisitions is not very visible, either.

"If we are brutally honest, we see that few companies have a portfolio today that is broad enough to truly minimize their risk," he added.

Change in the outlook can come, Ebsworth said, but sentiment is very dependent on product results. "The reason for positive evaluation in the United States is product success. We need that here to create a change in sentiment." He also cited comparative disadvantages in the German tax code, such as the structure of tax credits for research and development or tax bills that company founders can face on paper gains following a company's sale or IPO.

Edward Stuart, chief business officer of U3 Pharma AG, a Munich-based company that recently landed €13.25 million in second-round financing, said German companies must take a global outlook from their inception. "We have to realize that our competitors are all over the world," he said. "German companies are fighting for a limited number of dollars against companies from both U.S. coasts, from Japan, from Singapore, from the rest of Europe."

One key to the differences between the American market and the German market for venture funding, Stuart said, is that many more American investors have seen multiple booms and busts. "This experience is a clear advantage for the U.S.," and any company that can bring an American investor into its syndicate will also gain from that experience.

Gregor Mirow, chief financial officer of Munich-based Micromet AG, pointed out that beyond the second round of financing, biotech companies increasingly draw on revenue and investments from partnerships rather than from venture capital firms. His company's experience showed a broad range of potential forms that partnerships can take. Some include direct investments and a stake in the company; some were more closely tied to the costs of a particular project. The timing of the payments and the balance of risk that each side in a partnership takes also can be structured in a variety of ways. The German industry is becoming more sophisticated about these forms of revenue and investment, but a gap with American or British experience remains.

As Ebsworth noted, activity in mergers and acquisitions has been less than one might expect, given the number of companies in Germany and the financial straits that some of them are in. Simon Moroney, CEO of Munich-based MorphoSys AG, cited an Ernst & Young study of the German market showing two mergers and 26 bankruptcies in the course of 2002. "There's a discrepancy here," Moroney said. "Either the company leaders prefer to let the firms go bankrupt or it was impossible to organize mergers."

Moroney identified four challenges that might hinder mergers or acquisitions in Germany: valuation, management, strategy and culture. "Valuation for private companies is very difficult and often intransparent," he said. The relative youth of the sector in Germany also has posed a difficulty in setting strategies. "The right directions are not as clearly defined as in other industries," he said, and differences of direction could easily scuttle merger negotiations.

He added that cross-border mergers were particularly difficult. "Especially if both firms are international, the differences in mentality should not be underestimated," he said.

German science remains attractive to investors and a fertile field for company founders. "We keep an eye on university-based groups that could lead to companies in three to five years," said Joel Besse, a senior principal for Atlas Venture. "There's also increased interest in Germany because the correction has already taken place here. People have had to adjust their valuations in a way that may draw new investors." He added that Atlas had accepted down rounds in the United States.

Ebsworth noted that in addition to taking down rounds, investors are finding creative approaches to valuation in order to make deals work. "One approach is to consider valuation not on the day of the deal, but at a future date when the advantages of the merger have taken effect," he said.

Companies with strong management and significant potential products are finding funding in Germany. Firms that are looking for later rounds, or investors looking for exits, are having to exercise great creativity and persistence while the market looks for a clearly successful product that could lead the way to new initial public offerings.