By James Etheridge

Special To BioWorld Financial Watch

The successful public debuts of French biotechnology companies Cerep SA in February and Transgene SA in March should not be taken as a sign that everything's coming up roses in the French biotechnology industry's garden. Although investors gave a warm welcome to both companies' initial public offerings (IPOs), it's still not easy for French biotechs to get financial backing. To the contrary: Young companies face the constant problem of having to finance research and development programs in a hostile environment, according to Pascal Brandys, the president and CEO of one of the earliest French public biotech firms, Genset SA, of Paris.

Despite his own company's stunningly successful IPO in June 1996 -- whereby the genomics research-based company raised $99.4 million in an international offering that achieved simultaneous listing of the securities on Nasdaq and the Nouveau Marche -- Brandys believes that France's potential to develop a top-flight biotech industry is being held back by a fiscal and legal environment that discourages the creation of new businesses and makes it difficult for young, research-based firms to thrive. Brandys' larger perspective comes from his position as the newly elected president of France Biotech, the country's biotechnology industry association, which was formed in September 1997.

France Biotech's Agenda

Shortly after its founding, France Biotech urged the government to take action on six fronts to help relaunch and develop France's faltering biotechnology sector. These included the following:

* A change in the status of public sector research staff so they can acquire equity interests in biotech companies and have a direct interest in the application of their research.

* The abolition of social security charges on stock options.

* The creation of public support or guarantee funds to finance firms themselves rather than just the research programs conducted by those firms.

* The refunding of R&D tax credits the year after they are earned instead of three years later.

* The creation by the big public research establishments (e.g., Centre National de Recherché Scientifique [CNRS] and Institut National de la Sante et de la Recherché Medicale [INSERM]) of funds to provide seed money to the biotech industry and the granting of licenses on realistic terms to enable patented discoveries to be exploited commercially.

* Cross-disciplinary training programs, especially between science and technology colleges and commercial and managerial colleges, to bring scientists/researchers into contact with entrepreneurs/managers.

Some items on the France Biotech wish-list might soon see the light of day. A recent report by the government-appointed Technology and Innovation Commission, set up to suggest ways of improving France's performance in the industrial application and commercial exploitation of scientific and technological research, recommended that a public fund be created to provide seed money for biotech start-ups. The commission named biotechnology as one of two sectors, along with information technology, that are failing to exploit their full potential.

The commission proposed that the biotech seed fund be given FFr100-FFr150 million ($16.4 million-$24.6 million), of which FFr50 million would be provided by the state deposit agency, Caisse des Depots et Consignations (CDC), with the remainder to come from the government budget. CDC plays a key role in channeling public funds into industry and already has an active venture capital subsidiary, CDC Innovation, that has holdings in a number of biotech companies. The fund essentially would be managed by financiers, but public research establishments would also be involved in evaluating the firms and projects to be backed.

The commission's report pointed out that France led the world in terms of publicly funded research and development but performed poorly in the area of applied research. That was due to an unbridged gulf between public research and the market economy, which impeded the transfer of technology from one to the other. The report thus made a number of recommendations for facilitating and encouraging public sector researchers to move into private industry and for encouraging the creation of innovative enterprises.

France Biotech's President Brandys approves of the general drift of the commission's recommendations, but thinks they are too limited in the all-important area of tax treatment. They do not take up France Biotech's call for R&D tax credits to be refunded after one year instead of three, nor do they advocate an end to the taxation of stock options. But he is happy with the idea of the seed fund, and thinks that FFr150 million could make a significant contribution if it is well managed. Brandys also maintains that public sector establishments should be independently audited to assess their contribution to the general economy instead of being judged solely on the basis of their output of scientific publications. He wants their technology transfer performance to be evaluated, both in terms of the licenses they grant for the exploitation of their discoveries and of their contribution to the creation of research-based enterprises.

The IPO Class

The successful IPOs of companies like Genset, Transgene and Cerep provide an example -- and a goal -- for the many smaller, still private French biotech firms.

Cerep was first out of the gate in 1998, raising FFr67.5 million ($11.1 million) from the sale of 300,000 shares at FFr 225 each on the Nouveau Marche in February. The drug discovery company had canceled its offering just before Christmas because of unfavorable market conditions, but then took advantage of a sudden resurgence of interest in January and took the offering to completion. At its original issue price, the company was capitalized at about FFr 425 million. Until very recently, Cerep's share price had remained fairly stable since its IPO, hovering around FFr255 through mid-April. Since April 22, however, it has picked up considerably; it closed April 27 at FFr290.

According to Cerep's managing director, Alain Maiore, there are three reasons behind the recent surge in the company's stock. First, its IPO in February took place in a relatively unfavorable stock market climate, and since then the share price has undergone a technical correction. Second, a new French law about to be passed will oblige pension funds and other institutions to invest a minimum percentage of their funds in innovative enterprises, which has benefited biotech companies in general. And third, the stock price was apparently rising in anticipation of Cerep's earnings report, which the company released April 29. Pre-tax earnings rose almost 70 percent to $0.8 million in 1997, a much better result than predicted. Last December, the company said that it expected to be reporting 1997 losses of about $0.23 million.

Strasbourg-based Transgene's IPO was the latest triumph. In a dual issue on the Nouveau Marche in Paris and Nasdaq in New York, the gene therapy company raised just over FFr400 million ($65.8 million), including overallotments. The strong demand for the shares enabled the firm to raise the number issued and to pitch the offer price slightly above the announced range at FFr266.48 per ordinary share ($14.50 per American Depositary Share, or ADS).

Moreover, the share price moved quickly up to the FFr330 mark, although it fell back to less than FFr290 in the third week of April, following the underwriters' decision to exercise their over-allotment option in full. But that still left the company capitalized at around FFr1.6 billion ($264 million). Before its IPO, Transgene was living off the proceeds of a $48 million private share placement arranged in 1994, of which it had some $20 million-$25 million left at the end of 1997, sufficient to finance the company's R&D for another year or 18 months.

Transgene was following in the footsteps of industry leader Genset, Europe's top genomics research company, which has been listed on the Nouveau Marche and Nasdaq since June 1996. Genset's IPO grossed $99.4 million at an issue price of FFr249 per share. In early April, its share price stood at FFr590 ($97.00), having risen by over 50 percent since the end of January 1998. The company is capitalized at around $700 million (FFr4,243 million), making it top dog on the Nouveau Marche. On April 27, it closed at FFr562.

Companies like Genset and Transgene have reached the point where they enjoy financial viability and managerial autonomy, but most French biotech firms have to organize regular funding rounds to finance their ongoing R&D programs. They rely on a small number of private investors and venture capitalists to tide them over until they either have a product to market or can raise funds on the stock market. The fact that companies like Genset and Transgene report hefty annual losses does not make their shares any less attractive, since investors are apparently prepared to take a long-term view. Genset is expected to move into profit in 1999, three years after going public, but for Transgene it is likely to be 2004 before it is in the black.

Alliances Are The Key

For many biotech companies, the prerequisite for launching an IPO is to have entered into one or more alliances with big pharmaceutical companies. These collaborations give the biotech firms credibility and effectively validate their technologies.

Genset launched its IPO after finalizing a research collaboration agreement with French company Synthelabo SA, located in Paris suburb Bagneux, in May 1996 covering the discovery of genes associated with prostate cancer. That was followed a few months later by an agreement with Johnson & Johnson subsidiary Janssen Pharmaceutica NV, located in Beerse, Belgium, focused on discovering the genes associated with schizophrenia. In 1997, Genset formed alliances with Abbott Park, Ill.-based Abbott Laboratories -- for the joint development of pharmacogenomics services -- and with American Home Products Corp.'s subsidiary Genetics Institute Inc., of Cambridge, Mass., giving the U.S. biotech company access to Genset's portfolio of 2,000 secreted protein genes.

For its part, Transgene launched its IPO a month after signing an alliance with Schering-Plough Corp., of Madison, N.J. The pharmaceutical company paid $8 million up-front for exclusive rights to Transgene's adenoviral systems for delivering the p53 tumor-suppressor gene and is to stump up a further $1.25 million in R&D funding during the first 15 months of the collaboration. Taking account of options to license Transgene technology for the delivery of five other genes, which Schering-Plough can exercise at any time during the five-year term of the agreement, the deal could finally be worth as much as $88 million.

As mentioned previously, Cerep's IPO had been postponed in December because of unfavorable market conditions, but it was three times over-subscribed when it did go ahead, possibly because the brokers reduced the price and the number of shares offered to ensure its success. While that robbed Cerep of a few million francs, it certainly did not displease Sanofi SA, the French pharmaceutical company (and subsidiary of Elf Aquitaine), with which Cerep had signed a four-year collaboration agreement on Dec. 1, 1997. That agreement provided for Paris-based Sanofi to acquire a 5.3 percent equity stake in Cerep at the issue price, for which it paid FFr22.6 million ($3.7 million). Cerep is to identify and develop active compounds in four therapeutic target areas selected by Sanofi, which could then obtain exclusive licenses to drugs resulting from this research.

Private Companies' Partners

Another small and highly specialized biotech company, Thallia Pharmaceuticals SA, is also basking in the light of more widespread recognition thanks to collaborative agreements it signed in January with Pharmacia & Upjohn Inc. and Glaxo Wellcome plc, both headquartered in London. Thallia, which is based near Lyons, has developed a process for extracting pharmaceutical compounds and functional foods from microalgae; it is in the process of building a photosynthesis facility to provide the biomass it needs for producing active compounds of therapeutic value.

While the agreement with Pharmacia & Upjohn covers applications in the field of animal health only, the deal with Glaxo provides for Thallia to supply the British pharmaceutical company with extracts of microalgae, which Glaxo will then screen for new chemical entities with therapeutic potential.

Thallia owns or has access to the largest collection of microalgae in the world and also possesses a number of patents relating to the production and use of microalgae. As well as providing the pharmaceutical industry with microalgae extracts for drug discovery purposes, the company is engaged in the pilot production of metabolites from microalgae for functional food applications, for which it is considering marketing options. Thallia's chairman and CEO, Alain Gilbert, says the company's long-term strategy is to move up the added value ladder towards doing its own screening and product development.

The company's two new partners will provide it with R&D funding, although the financial terms of the agreements were not revealed. Thallia's existing shareholders stumped up an additional FFr15 million at the end of 1997, bringing to FFr56 million ($9.3 million) the total cash raised by the company since its inception in 1992. Gilbert is hoping that existing shareholders will put up another FFr15 million in the near future and that he will be able to raise a further FFr40 million later in the year from other investors.

Thallia's present shareholders consist mainly of seven venture capital companies, five of them French. The newcomers are likely to be companies that Thallia does business with, such as American marketing companies interested in the food supplements it is developing. Gilbert says he is in contact with half a dozen companies in the U.S. and expects to conclude two or three major marketing agreements within the next few months. That would put Thallia in a good position to launch an IPO.

Paris-based Immuno-Designed Molecules (IDM), however, won't be using an R&D collaboration with a big pharmaceutical company as its passport to the stock market. IDM is developing ex vivo cell therapies for cancer; because these products fall into the category of biomedical devices rather than medicines, IDM is looking for corporate alliances that cover the co-development and/or distribution of its products. It is developing cell therapy kits that use macrophage activated killer (MAK) cells to boost the capacity of the patient's immune system to recognize and destroy cancer cells. The process involves removing cells from patients' circulating blood monocytes, culturing them in a laboratory until they mature into macrophages and then reinjecting them as MAKs into the patient.

IDM, which is currently conducting clinical trials of its cell therapy kits, is looking for partners that will help it speed up the conduct of clinical trials on humans and thus shorten the time for getting its products to market. Because these products are medical devices, they are subject to European Union CE-marking requirements, which are very different from those that apply in the U.S. Thus, the company is seeking European partners. IDM's chairman and CEO, Yves Fouron, says he expects to conclude at least one co-development agreement and one product-oriented agreement before the end of this year.

Meanwhile, IDM is due to finalize another private offering by the end of June 1998, which Fouron hopes will raise $15 million-$20 million. Its last fund-raising exercise dates back to the beginning of 1997, when it obtained FFr37 million ($7.2 million) from four French and international venture capitalists. The operation underway will bring in British and other financial investors and is viewed by Fouron as the last stage before launching an IPO early in 1999. *

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