European biotech flourishes as US and Asian capital pours in

Across Europe, 2018 was a record year of funding for the European biotech industry. According to Unquote Data, there were 97 private-equity-backed biotech deals worth €3.3bn last year – and the first 10 months of 2019 have already exceeded this figure with €4.1bn across 90 deals. By comparison, the industry recorded 95 deals worth €2.7bn in 2017 and 98 for €1.9bn in 2016.

Furthermore, the average deal size has been growing substantially, recording a 20% increase per annum since 2012 and reaching $165m in 2018, according to a recent report published by McKinsey & Co.

This figure is expected to increase even further in 2019, following several very large deals inked in the last few months across Europe. At the beginning of the year, Switzerland-based Arvelle Therapeutics raised $180m in a series-A round led by Life Sciences Partners, with participation from Andera Partners, NovaQuest Capital Management, BRV Capital Management and HIG BioHealth Partners. A couple of months later, a consortium of investors led by Fidelity Management & Research invested $325m in a series-B funding round for German immunotherapy expert BioNTech.

Among the largest rounds raised in 2019 was the €116m investment in Netherlands-headquartered AM Pharma, which develops treatment for sepsis-associated acute kidney injury, led by Life Sciences Partners and Andera Partners. Another large funding round in the space was the £100m funding for UK-based Achilles Therapeutics, led by US-based PE firm RA Capital Management and London-headquartered Syncona Investment Management.

"Investors now have the confidence to back British and European biotech companies in the long term" – Martin Turner, BioIndustry Association

This effervescence was not limited to the venture space: the sector has also seen some hefty buyouts this year, including EQT's acquisition of a majority stake in Spanish reproductive genetics specialist Igenomix from Charme Capital Partners; the deal gave the company an enterprise value of around €400m. Later in the year, BC Partners carved out Netherlands-based Synthon International, which specialises in the development of generic and hybrid medicines, from its parent business Synthon Holding. Still in July, Permira acquired Quotient Sciences, a UK-headquartered provider of outsourced drug development services, from GHO Capital in a £600m deal.

"This positive upscaling trend is fuelled by the increasing strength and maturity shown by the industry," says Martin Turner, head of policy at BioIndustry Association. "Investors now have the confidence to back British and European biotech companies in the long term, deploying capital for larger series-B, -C and -D rounds, and allowing an increasing number of promising startups to reach clinical trial."

Strong stimulant
Attracted by a buoyant industry with a rich pipeline, numerous US and Asian players have entered the market, investing alongside European funds. "We have seen a noticeable increase in the presence of US investors, rising from approximately 20% five years ago to around 30% in 2018, in both early- and late-stage rounds," says Jorge Santos da Silva, partner at McKinsey & Co. "In addition, a small but growing number of Chinese investors have also entered the European biotech market. These international players are attracted by high-quality assets producing cutting-edge science, as well as lower valuations, a market that is less overfished, and structural costs that are around 30% lower than in the US. There is a great opportunity to create value and they don't want to miss it."

This biotech investor base has not only expanded and diversified geographically, but also through the development of a plurality of different investment vehicles better suited for this industry. "We have seen a variety of investors coming to the market, with a mix of different structures and models," says Turner. "In addition to funds investing in a traditional VC fashion, there are also VC trusts targeting primarily follow-on rounds, and companies that invest off their balance sheets, like Syncona, which finds promising IP in a university and develops a management team around it, financing its development from a startup to an IPO and beyond."

Furthermore, generalist private equity firms have also launched biotech-dedicated funds and built their life-science platforms to exploit the opportunities offered by this attractive market. Blackstone established its own life-science division last year by acquiring Clarus and rebranded it as Blackstone Life Sciences, while Bain Capital raised $900m this year for its second fund dedicated to life sciences.

This growing interest towards biotech investments is driven by the substantial returns this sector is able to generate, especially through M&A. "Given the underdeveloped capital markets in Europe, the most significant exit opportunity for European biotech companies is through a buyout from large pharmaceutical companies," says Turner. "Benefiting from their financing and infrastructure, a biotech startup can achieve clinical trials while delivering high returns to its early investors."

Public appetite
However, IPOs can also represent a lucrative and successful strategy for a biotech company. Last year, British CAR-T cell expert Autolus raised $150m in its IPO, followed by gene therapy company Orchard Therapeutics, which surpassed investors' expectations raising $200m, while German BioNTech snagged $150m in 2019.

Looking beyond Europe can pay dividends. When pursuing an IPO, European biotech companies tend to avoid LSE and Euronext and primarily look at Nasdaq, where they are able to raise around three to four times more capital. Turner says: "European stock exchanges are still too nervous around the continued risk that comes with a company that is pre-revenue when listed and will continue to perform clinical trials and remain unprofitable for quite some time."

Looking at the coming pipeline, the sub-sectors where market experts expect to see the largest deals are primarily gene therapies, siRNA-based therapeutics, stem-cell treatments, immunotherapy and especially CAR-T, and antisense therapy for the treatment of genetic disorders and infections.

"Drug discovery services and diagnostics are the largest focus in most countries across Europe, while cell and gene therapy and immunotherapy are the fastest growing sub-sectors, absorbing around 40% of total investments," says Santos da Silva. "Furthermore, around 40% of biotech startups founded since 2012 have focused on two therapeutic areas, oncology and the central nervous system (CNS), absorbing about half of the investment over this period."

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