BioWorld International Correspondent
MUNICH, Germany - "The IPO window will most likely open again in 2004," said Mark Clement, managing director for Europe with Merlin Biosciences. "It will be very selective. It will be driven by corrections in the secondary market, and it will be U.S. led."
Clement spoke to BioWorld International about coping strategies for his company's third fund, which is focusing on early and mid-stage investments in human life sciences in Europe, and how to deal with difficult market conditions across the continent. When the public markets are ready for biotechnology companies again, Clement said, "London will be leading Europe, companies with products will be prioritized, and probably 100 to 150 companies will be jockeying for position. The aim, obviously, is to be at the head of the queue."
In the meantime, investors and founders must both make adjustments.
"We have always been somewhat skeptical about stock markets," he said. "Mergers and acquisitions, along with other aspects of consolidation, will provide opportunities for companies to gain both scale and substance."
Merlin's fund had its first close in August with €93 million in investments, and the company reports that it has firm commitments in excess of €125 million. "Not all of the investments [from the fund] will be startup money," Clement said. "Later-stage companies that are less expensive are also potential targets, and early stage companies with good management are also very interesting for us."
His company sees clear advantages in the current market situation: "At present value opportunities are phenomenal. There is also a dearth of quality lead investors."
By providing fresh money during a downward swing of the market, the investors hope to reap larger returns. The company's strategy also calls for it to lead the initial investment and then to participate fully in follow-on rounds, placing between €10 million and €18 million per company Merlin invests in.
Despite changing market conditions, Clement said "the fundamentals have never really changed in what you're looking for in a company. Ultimately, you want a significant return on your investment; you pick the company that is likely to be attractive later on."
A difficult market increases the challenges for a company's management; an element he says is critical for success in any market environment.
"A company's problem is rarely with the science," said Clement. "The biggest difference is management. If we invest in a business, then the science is already there or nearly so. Management remains a major issue: business development, relationships, financing and so on all hinge on the quality of the management."
He is unsentimental about the changes that investors often make as start-up companies grow.
"Management is fundamental," he said. "We are particular at identifying the right management at the right stage of the company's development. Turnover is not a bad thing, and founders will rarely take it all the way. Merlin usually comes in after proof of principle as a company is moving into product development. We will often make it a precondition of investment that we bring in a new CEO. At this stage, experience in a growth environment is key, and this is different" from a company's earliest stages.
Merlin is focusing on productivity. "What do we think is necessary to be successful in this marketplace?" Clement asked. "Technology is sine qua non, but the question is really what can that deliver - is there a way of getting drugs smarter and faster, more productively?" He added that major pharmaceutical companies also are asking for ways of demonstrating increased productivity.
"On the discovery side, this means areas that are offering potential structures: novel chemistry in combination with computation or linking smart chemistry with chip systems. The challenge on the therapeutic side is getting products scalably and cost-effectively through the clinic."
Despite attention to fundamentals, there are two specific effects that Clement sees arising from the current market. First, hold periods for investors are longer because of the lack of IPOs. He said companies and investors need to look more at trade sales as an exit strategy. Second, many investment contracts are being written with a more noticeable defensive aspect. There are more antidilution protections for investors, and there is more protection built in to guard against downside risks. Corporate structures based on U.S. models, oriented toward the American market, are becoming the norm in new European companies.