MUNICH, Germany - It's much more comfortable for those involved in the European biotechnology sector to look forward to an upturn in the investing climate than it is to contemplate whether there will be one.
The drivers of such a turn are clear: improved global economies, an upturn in the U.S. sector and, most importantly for the long term, some success stories.
The U.S. sector has a strong track record over the past decade of cyclicality but the trend has clearly been upward. Companies there have delivered both products and earnings. The European sector, however, with a much shorter track record, is facing its first significant downturn. In fact, since inception the overall trend has been downward.
"Is this cyclical or is this a structural downturn?" Karen Hitschke, principal at Apax Partners in Munich, asked panelists Wednesday during a session at the third annual European C21 BioInvestor Conference.
The biotechnology sector often has been viewed as moving up and down together, that "the rising tide lifts all boats." But Michael Sistenech, head of health care for DWS Investment in Frankfurt, said that wouldn't be the case the next time the tide comes in.
"It will look different than last time," he said, speaking about the European sector. "The environment has changed," with investors having a smaller appetite for risk. What they want to see, he said, is "broad-based, late-stage companies with clear timelines to profitability and sustainable businesses." And there are not many companies like that out there, he added.
Most speaking on the subject, however, predicted there would be a reasonably broad-based upturn - not this year, but perhaps next year or the one after that. What those in the sector need to do, they said, is to stop complaining about the lack of a pan-European market, inconsistent patent law, the shortage of talented executives and specialized fund managers and other disadvantages they encounter when compared to U.S. counterparts. Instead, they need compounds that work. A good drug will sell, regardless of where it is developed.
They also need "patience and stamina" to create drugs and long-term value, said Erich Platzer, an investment adviser at HPM Bioventures in Switzerland, who was optimistic about the opening of another financing window over the medium term.
In the meantime, panelists said, companies should implement survival strategies and change business models to reflect the new realities in the sector and not the sentiment that pushed the industry forward three years ago.
Hunt Henrie, managing director at Ferghana Partners in New York, said companies now have to accept lowered valuations. "It's crucial to have correlations between public and private valuations" that will help the progression of companies into public markets, he said. A company also has to be prepared to partner earlier, even if it means getting less that expected, he said.
Sam Fazeli, senior biotech research analyst at Nomura International plc, of London, pointed out that a lot of the now-successful U.S. companies developed revenues early on by selling diagnostic products or getting into other businesses while working on drug development. Another option, he said, would be to develop revenue by partnering U.S. and Japanese rights.
Another funding source used more often in the U.S. and rarely in Europe is selling some royalties, said Will Brooks, senior investment manager for life sciences at Quest Management NV in Brussels, Belgium.
However, "some companies are not viable and should die," he said.
Mergers represent another survival strategy by helping cash positions and/or broadening platforms and pipelines. Another advantage, panelists said, is that consolidation would help create medium-sized companies in a sector that has few larger-cap firms after Serono SA, of Geneva, but all too many risky small-cap firms. U.S. investors have more options up and down the value chain.
"Nobody has ever died from dilution," said Wolfgang Stoiber, managing director at JSB Partners in Munich. "The issue is survival. You have to live to fight another day."
The conference, organized by Technology Vision Group LLC, ended Wednesday.