Hard Cell

How are CFOs in Europe's biotechnology sector overcoming the "investor gap" compared with U.S. competitors?

Dave Lemus, CFO of German biotechnology company Morphosys, has a vivid memory of when the company launched its IPO in 1998. After a very technical presentation to a group of investment analysts from Morphosys’ banking consortium, there was complete silence. “I was pretty sure nobody really had any clue about what was going on,” says Lemus. “That was confirmed when one of the analysts had the courage, about two minutes into the silence, to ask: ‘Is your technology a gas, a liquid or a solid?’”

Getting the message across to prospective investors is a challenge for all CFOs, but it’s a particularly difficult problem for those in the biotech sector, mainly because the science can be so complex. If analysts don’t understand the prospects for a biotechnology to become an approved and profitable treatment, how are they going to persuade investors to back it?

On top of that, European biotech companies face other disadvantages compared with their U.S. competitors when it comes to attracting investors — in Europe, the approval process of new drugs and the pricing regime are far more arduous than in the United States. While the European Medicines Agency can give Europe-wide approval for a drug in about the same 12-to-18 month time frame as the U.S. Food and Drug Administration, each decision in Europe will be scrutinised at the national level, where there is a right of rejection. What’s more, prices in Europe are also set on a country-by-country basis and must be negotiated separately.

Not only does the heavier bureaucracy add to the sector’s complexity, but it also frustrates European biotechs’ efforts to raise funds, says William Powlett Smith, head of Ernst & Young’s UK biotech practice. The upshot: the more streamlined US process gives firms there a headstart. (See “Poor Cousins” at the end of this article.)

The U.S. biotech sector, perhaps as a consequence, has matured more quickly — analysts reckon it’s around ten years ahead of Europe’s — and has a greater number of specialist investors who understand the risks and are willing to invest long term. That maturity also means there are a greater number of listed biotechs in the United Staes, which allows investors to spread their risk more widely. And it’s success stories, such as California-based biotechs Amgen and Genentech, that provide examples for investors of what the sector is capable of delivering, according to Tony Weir, chairman of the finance and tax committee at the UK’s BioIndustry Association. These companies, each with some 25 years of experience behind them, now have very substantial sales and profits — sales of $13.9 billion (€10 billion) for Amgen and $7.6 billion for Genentech in 2006, with net income of $2.9 billion and $2.1 billion, respectively.

The big fear now in this competitive, talent-driven industry is whether the European sector is heading into a vicious downward spiral, not helped by a knowledge drain to more successful companies in other parts of the world. Last month Schering-Plough, the U.S.-based pharmaceutical company bought Organon Biosciences, the biotech arm of Akzo Nobel, a Dutch pharma, for €11 billion.


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