Plenty of places in the world are messed up, but Europe has been near the top of the list lately. If all the horrible scenarios play out, this will be the year the euro collapses, the European Union fractures, and some economically advanced countries could go bust.
Yet while the world financial system holds its breath, a few American venture capitalists have suddenly started looking at Europe like it’s the new land of biotech opportunity. Check the headlines from the past few weeks:
—Domain Associates, a top life sciences venture firm in Princeton, NJ and San Diego, struck a deal with Rusnano, a Moscow-based nanotechnology firm owned by the government of the Russian Federation, to invest as much as $760 million in biotech companies in both the U.S. and Russia. Rusnano and Domain said they will work together to transfer technology into Russia, and build up biotech development and manufacturing capabilities.
—Sofinnova Ventures, which raised a new $440 million biotech-only venture fund last year, said last week that it plans to open an office to look for investments in Ireland. That move came after Enterprise Ireland and the National Pensions Reserve Fund put $37.5 million into the latest Sofinnova fund.
—And today, Versant Ventures, a $1.6 billion Silicon Valley-based life sciences fund, is announcing that it’s opening a new office in Basel, Switzerland, where it will look to make new seed and early stage biotech investments. Versant has brought in Guido Magni, Roche’s former global head of medical sciences, to work out of the new office with part-time colleagues Tom Woiwode and Brad Bolzon.
There’s nothing new about various European governments or economic development agencies attempting to build up their biotech clusters. Even while the industry has become increasingly networked around the world, and some tremendous innovations have come out of Europe, the U.S. has dominated biotech since the beginning in the 1970s. Last year, U.S. biotech companies raised about four times as much venture capital as companies in Europe, according to Ernst & Young’s Beyond Borders report. Public biotech companies in the U.S. generated about $61.6 billion in revenue last year, about four times the revenue of their counterparts across the Atlantic.
What is happening is that the U.S. venture business is in crisis, and the firms who are left standing are being forced to be more creative than ever to stay viable. The IPO market is in the doldrums, meaning that biotech VCs can really only realistically turn to a shrinking pool of Big Pharma acquirers to deliver the necessary returns. The National Venture Capital Association, in a survey of members last fall, found that four out of every 10 biotech funds have curtailed life sciences investing in the past three years, and the same number expect that to continue the next three years. The Wall Street Journal took a close look at the struggles of biotech VC just last Friday.
When I spoke last week to Bolzon, a managing director with Versant, I had a simple question to start about his firm’s latest move: “Why Europe?” He says there are terrific scientific ideas there, a pool of Big Pharma-trained executives ready for entrepreneurial opportunities, and very few VCs looking to elbow their way into these deals. He says a lot of U.S. firms miss out on the best ideas in Europe, because they don’t have “feet on the ground” that enable them to build effective networks.
“Most of the VC community has some kind of geographic strategy, whether it’s a West Coast strategy, a Boston strategy, or an ex-US strategy,” Bolzon says. “But when I was at Roche (as head of business development) we were successful because we cherry-picked the best opportunities worldwide, regardless of where they came from. You can’t ignore Europe. The science has never been this strong, and there’s less venture capital available. It’s a great opportunity.”
I can think of a few reasons why it’s not such a great opportunity. For starters, most countries on the continent are broke. Even when Europeans thought they were flush, the countries of Europe imposed price controls that limit the size of their markets for new medicines. There’s nothing in Europe quite like the U.S. National Institutes of Health—which is the bedrock of U.S. biotech strength through its $30 billion annual investment in basic biomedical research. And then there’s the cultural component. Biotech is the ultimate boom or bust industry, like gold mining in the mid-1800s, so it self-selects for some of the most entrepreneurial, adventurous scientists and businesspeople around. Many of those people may be born and educated in Europe or Asia, but they are still culturally drawn to the U.S.
As Bruce Carter, the British-born former CEO of ZymoGenetics once memorably said, “Europeans always want to focus on the 100 reasons why something won’t work. Americans are willing to look at the one reason why it will work.”
When I spoke to him last week, Bolzon sure sounded like a classic biotech optimist. He says he and new venture partner Magni are well-positioned to find the best science, and match up those nuggets of intellectual property with talented entrepreneurs in Europe, based on their years of experience working together in Basel at Roche.
Relationships are the key, Bolzon says. Investors will go to Europe for the same reasons they go to Boston or San Francisco—to find executives they are confident enough to bet on.
Despite all that’s said and written about China as an emerging biotech power, Bolzon says Versant doesn’t see the kind of opportunity there. Part of this is because Bolzon and Magni are personally better networked in Europe, but Bolzon says China doesn’t yet have the pool of seasoned biotech executives that are found in the U.S. and Europe.
“You have to have a world-class team to make these companies work,” Bolzon says. “I haven’t yet seen the emergence—and I could be wrong—of an entrepreneurial network in Asia that we can build companies like Amira Pharmaceuticals, Inception Sciences, and Okarios. As early stage investors, the hallmark of our strategy is to find world-class entrepreneurs, proven drug hunters like Peppi Prasit at Amira, and Steve Kaldor at Syrrx and now Quanticel. When you look to Europe and you can get a guy like [Okairos’] Riccardo Cortese as CEO, it takes execution risk out.”
I’m willing to concede that since I don’t write about European biotech, there could be all kinds of fascinating projects and people going on there that never cross my radar. Obviously, some of the world’s biggest pharma companies-Roche, Novartis, GlaxoSmithKline—are Europe-based firms that are truly multi-national, with major operations in the U.S. as well. Many biotech companies have roots firmly planted in both the U.S. and Europe—Alkermes, Elan Pharmaceuticals, and Shire are just a few that pop to mind. Just recently, one of these trans-continental biotechs, Micromet, hit gold with a $1.16 billion acquisition by Amgen.
No question, biotech is a global industry and the trend toward outsourcing that relies heavily on low-cost vendors in China, India, and Eastern Europe is likely to continue. But when you’re talking about where the intellectual property really comes from, and the networks of entrepreneurs and investors that it takes to start companies that create real drugs or devices, there are only a small handful of clusters in the U.S. that really do it well.
While I don’t think the U.S. can take its leadership for granted, I wouldn’t count on any place in Europe becoming the next Boston or San Francisco anytime soon. Europe has its opportunities, and a few VCs will surely find a way to capture them. But it’s hard to imagine a real movement toward one of the riskiest industries on the planet, right when people there will probably be licking their financial wounds for decades.
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