BioWorld International Correspondent

MUNICH, Germany - Is this the worst bear market he's ever seen in biotechnology?

"Yes, undoubtedly," said Frederick Frank, vice chairman and managing director with Lehman Brothers Inc. in New York, who just joined Global Life Science Ventures, headquartered in Munich, as an adviser in its expert group. In the course of more than 30 years with Lehman Brothers, Frank's work with the biotechnology sector includes the 1990 merger of Genentech Inc. and Hoffmann-La Roche Ltd., as well as the 1993 financial cooperation between Human Genome Sciences Inc. and SmithKline Beecham plc.

Europe has particular challenges, Frank told BioWorld International. "The European biotech marketplace was quite a bit later in formation than in the United States, and a number of mistakes U.S. companies made early on were unfortunately replicated in Europe," he said. One difference between the current travails of American and European companies, Frank said, is that in the United States, the precipitous increase in stock prices "had to do with excesses of institutional investors, but in Europe there was broad retail interest."

"This is similar to what happened in 1981 in the U.S. with Genentech. It was what I would call an investment of passion.' People had their first exposure to the whole sector, and what they heard about was incredible, so they invested. They learned that they could fund these firms and make money." With the fall in markets, however, "retail investors have been disabused of the passion."

The difficulty for European companies, he said, is that "capital markets are still thin and dispersed, not as resilient as U.S. markets." Frank pointed to the relatively smaller amount of dedicated biotechnology funds available in Europe than in the U.S. For companies that are dedicated investors, a problem is that "fund managers are loath to put money into new companies without an exit strategy involved. And that in turn is not happening in Europe because of developments in the capital markets. Thus, very few funds are in positive territory."

Global Life Science Ventures (GLSV) is a venture partnership that advises and manages more that €200 million, focusing on early stage groups that come from universities, scientific institutions or industry. The company has offices in Germany, Switzerland and the United Kingdom, and its managers have chosen to emphasize the group's European perspectives, approaching the American market as co-investors.

Hans-Peter Wiese, a partner with GLSV, told BioWorld International that the bear market "certainly has not made life easier for our portfolio companies. Most if not all will have to face markdowns because of the facts of life on the stock markets."

The key question, from his investor's perspective, "is whether they have been able to come up with sizable achievements or not."

Frank agrees on the way out of the difficult market. "It's good science," he said. "Science that leads to good clinical trial results. Earlier in the sector's history in the U.S., if a particular company had a bad clinical outcome, that would affect the whole sector. In the U.S. now, that is a single-company event; the market has become more heterogeneous. Europe is still homogeneous in this sense. The way that companies will be able to attract capital and prosper is to move products through clinical trials with good data."

Wiese added that the fundamentals for the sector's health are unchanged. Particularly in Europe, "you have aging populations, unmet medical needs and problems of the pharmaceutical industry that the biotechnology industry can help with."

In the meantime, GLSV faces a difficult climate. In the late 1990s, Wiese said, "we were positively surprised by the development of Easdaq and the Neuer Markt. These days we are negatively surprised that these markets have not survived. We are back to the days of 1996, where there are no IPOs in Europe and conditions are still very difficult in the U.S. For those investors who are staying in the sector it is more difficult to build syndicates, it takes longer, you need more money, and you need more stamina to achieve an exit."

GLSV is still investing its second fund, mostly in new companies. "These days," Wiese said, "you have to reckon with having to follow on an initial investment for several rounds. If we make, say, an initial investment of €3 million, we expect to commit an addition €7 million to €10 million over the next few rounds.

"We are also trying to finance companies' cash reach beyond the two-year rule of thumb," Wiese said. "We are helping to build syndicates that are even bigger than the ones we built in the past."

Wiese remained upbeat about prospects. "We have several companies which are ready for an IPO and would have gone public already, but these days they will have to raise another private round and wait for the window to open again," he said.