BioWorld International Correspondent

MUNICH, Germany - Biotechnology investors alternated between commiseration and encouragement at the European Venture Capital and Private Equity Forum held here last week. The good-news, bad-news view of the sector covered several key aspects of private financing.

Overall venture investment was down again in 2002, and the drop from the levels of 1999 and 2000 has been precipitous. As part of the overall 10- and 15-year trends, however, 2002 was exactly in line with expectations of steady growth. The likelihood that more than five European biotechnology companies will go public in 2003 is extremely low. However, any company that does overcome today's high obstacles to an IPO is likely to be more mature and more stable than the companies that emerged into overheated markets before the technology markets collapsed.

While exit strategies have become more difficult for private equity investors, the investments they make now also are benefiting from downward pressure on company valuations. Investors with liquidity are privately very pleased about the opportunities to buy low.

"There is a roughly $100 billion overhang for the venture capital industry as a whole," said Tim Draper, managing director of the investment firm Draper Fisher Jurveston. Because of the overhang, consolidation in the industry is likely to continue, unrealistic expectations by companies seeking funding may persist, and the industry will not likely see strong returns for another year or two.

For the biotechnology industry in particular, Ansbert Gaedicke, founding general partner of the venture firm MPM Capital, said that the ascendancy of product companies will continue throughout 2003. He added that "platform companies are evolving into product companies, and this naturally makes them hungrier for capital."

He said of the current expectations among venture investors: "On the platform side, the things that are not attractive include fee-for-service or subscription models, anything ending in omics,' masses of unvalidated targets and big infrastructure investments in platforms. Things that are hot' include new therapeutic modalities used against known targets, best-in-class' chemistry, and high-content screening. On the product side, major markets are increasingly accessible to well-funded [biotech] companies. Hot' areas include metabolic diseases, the central nervous system and antivirals."

Taking a look at the long term, Gaedicke said that "memory, disease resistance or prevention, regenerative medicine, psychiatric diseases and the link with nanotechnology" were all good fields for potential future successes.

Michael Wrede, CEO of the private equity company Future Capital AG, said that although his company concentrates on classical biotechnology investments, it also is looking for the bridge to nanotechnology. He anticipates a certain degree of convergence between biological production techniques and devices on the nanometer scale. "There is a bridge between biology, informatics, nanotechnology and physics. Particularly because biology is information - a gene is on or off, a protein is produced or not produced. So we are looking at where these areas come together."

In the meantime, Wrede expects investor consortia to play a stronger role, as venture capital firms work together to share risk. The importance of "name" lead investors is also likely to increase over the course of the year, particularly for international transactions in which an investor may have limited resources present in the country where the investment is made.

For companies looking to enter the public markets, conference participants held out little optimism. Frances Bornstein, a vice president of the Swiss Exchange, was careful to play down expectations for companies wanting to go public in 2003. Denise Pollard-Knight, head of health care private equity for Nomura International in Switzerland, added that even public companies were having tremendous difficulties. One pharmaceutical company, which she declined to name, had canceled its research and development presentations to analysts for the next two years because the pipeline was not sufficient to warrant presenting.

Pollard-Knight said that the sustainability of the pipeline was an important item that Nomura examined when looking at public or potentially public companies. "More important, however, is a research engine that throws out backup compounds," she said. "Furthermore, we really look for management that has experience with problems because we have seen many companies have problems with their lead compounds."

Sabine Kaiser, investment director with 3i Deutschland, said the state of the pipeline is not directly related to the decision of whether or not a company should go public. "We look at a technological basis that is unique and can continue to generate more potential compounds."

None of the venture capitalists interviewed said that they had stopped, or even slowed, their efforts to find good companies. All were confident of eventual strong returns on their investments. But almost none expected those returns to come in 2003.