Climate: The European biotech and healthcare market

19 February 2003

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Over the period from the first half of 1999 to the first half of 2002 there were 608 investments with a total value of EUR 13.67bn in biotech and healthcare businesses, says Initiative Europe's latest focus report, The Biotech & Healthcare Venture Report. The analysis suggests that deal volumes are being driven by technology-oriented venture investments, whereas deal values have been pushed up by the completion of large healthcare-related buyouts. A remarkable step change in both the volume and value of biotech and healthcare deals took place in H2 2000. The volume of deals increased by 84.6% and the value by 238.8% in comparison to figures in H1 2000.

General market overview

Deal volumes are being driven by technology-oriented (either pharmaceutical or medical equipment and devices) venture investments, whereas deal values have been pushed up by the completion of large healthcare-related buyouts. In June 2000 the Human Genome Project announced that 95% of the human genome had been mapped. Subsequently, a remarkable step change in both the volume and value of biotech and healthcare-related deals took place in H2 2000. The volume of transactions increased by 84.6% and the value by 238.8% in comparison to H1 2000. The high value of deals seen in H2 2000 was driven, in part, by the completion of some sizable deals, including the EUR 43.17m early-stage funding of Danish fully-human antibody research firm Genmab and the EUR 38m expansion funding of Spanish health-services provider Hospiten.

Levels of investment in the biotechnology and healthcare sectors have been in decline since the end of the second half of 2000. Nonetheless, as a proportion of all technology-orientated venture capital and private equity, investment in biotechnology and healthcare has increased, indicating that this sector has weathered the downturn in market activity better than other sectors. Deal values in the second half of 2000 reached a peak, driven by the completion of some sizable healthcare-related buyouts including: the EUR 54.88m buyout of French private nursing homes business of Rennaisance; the EUR 166.86m buyout of UK provider of products for microbiology laboratories Oxoid 2000/Oxoid Holdings; and the EUR 2113.03m secondary buyout of General Healthcare, a UK-based private hospital provider.

Deals by stage

Although investment in expansion-stage firms was dwarfed by the amount of funds invested in businesses undergoing a buyout, there was a considerable amount of capital - just under EUR 4bn - committed in expansion capital transactions, accounting for 29% of the total amount over the period H1 1999 to H1 2002. One explanation for the large amounts invested in expansion-stage firms is that in the year 2000 there was a significant increase in the amount of firms that attracted early-stage capital funding. Such firms returned to their investors for further funds to help finance ongoing research.

Together, the number of investments in seed-stage and start-up companies accounted for 8% of all investment but only 1.27% of the total value of investments. The tiny amount of capital invested in such firms is indicative of the high risk of such investments and also of the nature of the backers of those companies, many of which are small university-funded seed investors such as the White Rose Technology Seedcorn Fund. A similar situation can be seen in relation to early-stage investment, which accounts for 26% by volume of all biotechnology and healthcare investment, but only 5% of the amount of capital invested. Although firms that attracted an acquisition finance package accounted for just 2% of the total number of deals done over the whole period, such firms attracted an amount of capital comparable to that invested in early-stage companies: EUR 680.53m of acquisition finance and EUR 745.22m of early-stage funding, each accounting for around 5% of the total.

Deals by sector

Clearly, the most important life sciences sector is the Pharmaceuticals sector, as it accounts for 68% by volume and 43% by value of all venture capital and private equity investment. However, this sector covers a wide range of technologies including drug development, genomics research and a number other forms of life science related technologies. The Pharmaceuticals sector is characterised by a large number of early-stage and expansion capital deals, with values ranging from the very small (a few EUR 100,000 at a time) up to very large value expansion finance deals with high-tech drug manufacturers e.g. Probitas Pharma (EUR 90m). However, as noted in the previous bulletpoint, the Pharmaceuticals sector is very diverse and the pharma deal with the largest value was the EUR 568.63m buyout of Nycomed Pharma, a manufacturer of drugs and consumer products. Over the period covered by this report (H1 1999 to H1 2002), the Medical Equipment and Supplies sector has accounted for a much higher proportion by volume (18%) than it has by value (8%). This is indicative of the type of companies in the sector - usually small, early-stage, high-risk companies that attract small amounts of funding in order to further research or build prototypes.

By contrast the non-tech oriented sectors - Health Maintenance Organisations, Hospital Management & Long Term Care and Other Health Care - all show a pattern of investment that is the inverse of the Medical Equipment sector, namely small volumes and large values. This reflects the fact that the majority of deals done in this sector are large buyouts of well-established, cash-generative firms. The European consumer/environmentalist backlash against genetically modified organisms appears to have had an effect on the venture capital community - very few technology-focused agribusiness deals were concluded in the period under examination.

Deals by region

The Deutsche region rivalled the UK & Ireland, which saw the most investment over the whole period in terms of both the volume (34%) and value (58%) of all deals done, in terms of the number of deals completed over the whole period, with 32% of all biotech and healthcare dealflow accounted for by companies based in the German-speaking countries. Although the Deutsche region was second to the UK & Ireland in terms of the number of transactions completed, the amount invested was considerably less (EUR 2.1bn in Deutsche region compared to EUR 7.9bn in the UK & Ireland). The disparity between the UK & Ireland and Deutsche regions reflects the fact that there were far fewer buyouts in the Deutsche region; those that were completed usually had smaller deal values than their counterparts in the UK & Ireland.

There are several explanations for the strength of the Deutsche region in the biotechnology area, including the quality of its technical and scientific training, along with the presence of well-respected research institutes such as the Max Planck Institute. Furthermore, a number of pan-European biotechnology specialists, such as Merlin Biosciences, are active in the region, in addition to a cadre of local, well-established biotechnology specialists such as TVM Techno Venture Management, Mediport Ventures and Munich-based BioM AG.

This is an excerpt from Initiative Europe's latest 68 pages strong focus report, The Biotech & Healthcare Venture Report. This report contains information on institutionally backed private equity deals in Europe. All figures in this report are based on all deals held as of 9 October 2002 which were confirmed as having an institutional private equity investor as a lead or syndicate partner. If you wish to learn more about this or other research products produced by Initiative Europe please contact Nicholas Gordon, Senior Research Analyst at Initiative Europe Ltd, email: Nicholas.Gordon@initiative-europe.com, Tel: +44 1737 784 204.