The end of capital-intensive start-ups?

Of all Nordic early-stage and expansion deals in the biotechnology and pharmaceuticals sector over the past five years, roughly a half have been completed in Denmark (see chart). However, as the global financial crisis took hold, activity halved from 2007 to 2008. With most experts predicting little or no recovery in the coming year, dealflow in the sector could continue its trickle. One issue is the lack of financial support to new start-ups, however the challenges which funding restrictions pose for companies in the so-called "later early-stage" space are equally crucial. Many have reported cut-backs, with some shedding as much as 20-40% of staff to prepare for a tough year ahead.

French venture capital firm Seventure Partners is among the international GPs investing in the Danish biotechnology and pharmaceutical sector, having backed RNAI-based drug developer Santaris Pharma and industrial biotechnology & nutrition company Fluxome Sciences. General partner and director of Seventure's life sciences department, Isabelle de Cremoux, offers three explanations for the dramatic drop in investments in the sector. Firstly, many VCs put a disproportionate amount of effort into fundraising in 2008, leaving them with less time and resources to focus on new investments. Secondly, de Cremoux has observed a move towards less risky healthcare investments, such as healthcare services or medtech. Generally, medtech is perceived as a safer investment as the time to market is shorter and the firms often generate some sales revenues early on. Additionally, the products are more tangible and easier for both investors and market to comprehend. De Cremoux's third explanation relates to a trend observed among Danish venture capitalists that have begun to sniff around industrial biotechnology. This sector is different from pharmaceutical biotechnology, as it involves micro-organisms used as a tool for manufacturing and serves a variety of industries, not only pharmaceuticals.

Pharmaceuticals is a segment with a long investment period and the highest capital demands, and thus the one with the highest risk profile, according to de Cremoux. "But it also brings the highest multiples." These multiples, however, are harder to obtain in the current environment, and therefore, investors are more reluctant to commit capital at the moment, preferring instead to seek out less capital-intensive businesses.

De Cremoux is confident investors will return when markets stabilise again: "There is a momentum in venture investments, - a cluster of firms I would define as 'followers.' Currently, the pendulum swings towards investments with a lower risk profile and with shorter investment perspectives." Danish domestic investors could be moving in this direction too, which could further explain the dramatic drop in investments in biotech and pharma in Denmark's Medicon Valley.

However, going with the flow might not necessarily equate to following the money in the long term. "Looking at the history of market caps of listed companies in the different medical- and health-related sectors, and also looking at the ratio of their net profits on sales or on capital, one can observe that pharmaceutical & biotech companies still have the highest returns and is one of the very few sectors which can still offer net profits of 25%-30% of sales - a good argument to continue investing," de Cremoux concludes.

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• Topics
• Early-stage
• Nordics
• Healthcare
• Industrials