Deal flow

The biotech industry is facing one of the most testing periods in its history. A survey carried out by the BioIndustry Association in March this year found that 78% of biotech companies had found fund raising more difficult over the last year, with 47% of those looking for money unable to secure the full amount, and 37% unable to source any funding at all.

One of the main issues is the long development periods for new drugs and treatments and the high risks attached. Many investors who were prepared to back the industry a few years ago are now disillusioned, following a number of failures at late stage trials. According to data from research group Lipper Feri, biotech funds across Europe saw their assets under management shrink from €12.2bn in 2001 to €3.2bn earlier this year.

Figures published by business consultants Ernst & Young also make sobering reading. According to the firm, the amount of capital raised by companies in the US and Europe fell by 46% in 2008 to US$16bn, while money raised through IPO slumped by 95% to US$116m.

Investment opportunities

But it is not this bleak everywhere. In March this year ProTip, a French maker of medical prostheses, secured an additional €1m from business angels and biotech entrepreneurs, allowing the company to move closer to the completion of its latest product, an artificial larynx.

Around the same time, Atlas Venture and SR One, the corporate venture fund of GlaxoSmithKline, co-led a €14.1m Series B round investment in Austrian biotech company ProtAffin. The Graz-based company specialises in developing anti-inflammatory biopharmaceutical products. It uses engineered versions of human proteins in therapies for a range of diseases including rheumatoid arthritis, Crohn’s disease and even cancer.

As part of the investment, existing backers Aescap Venture, Entrepreneurs Fund and Z-Cube also committed to the new round. ProtAffin had previously held a two-stage Series A round, beginning in May 2007 when Aescap and Z-Cube invested €2.65m. The Entrepreneurs Fund BV invested €1.35m in January 2008, bringing the total amount of venture capital raised by the business after the latest round to €18.1m.

In Switzerland, a consortium of investors also found a company worthy of funding in the form of NovImmune, which raised a substantial US$55m, allowing it to regain control of its lead compounds from Merck’s biotech division MerckSerono. The company – a specialist in developing drugs to treat autoimmune disease – had already raised CHF58m via a private financing round in 2006 from the Novartis Venture Fund, Lombard Odier Darier Hentsch, Pictet and Venture Associates.

As evidence of a strong European business angel network, Sibessor and Investessor backed the €365,000 second round funding of biological processes provider, PrimaDiag. The funding was co-ordinated by PrimaDiag and follows the €96,000 first round funding at the end of 2008. Located on a biotech park near Paris, PrimaDiag develops tools to automate biological processes for diagnostics and research. The funding is being used to develop new applications for its proprietary robotic platform and to bring its products to market by the end of this year.

Staying with the French market, in Q3 of the year Paris-based VC Auriga Partners led a €3.2m funding round to support the development of Cytoo, which specialises in developing and making technology for cell analysis. Less than a year old, Cytoo originally sourced seed investment from CEA Investissement, the investment arm of the government-backed technological research organisation CEA, Rhône-Alpes-Creation, a regional French seed investor, and Expansinvest, an early stage specialist.

The money raised will be used to expand the business overseas, build the team and further its R&D capabilities.

In the specialist area of cardio therapy, German stalwart investor Wellington Partners teamed up with Switzerland’s Vinci Capital to lead a €15m funding round for Symetis, a Lausanne-based biotech company specialising in heart valve replacement therapy. As part of the investment, Banexi Venture Partners joined the syndicate, which included previous backers Truffle Capital, Novartis Venture Fund, Aravis Venture, BiomedInvest.

Symetis has developed a self-positioning valve called Acurate, which has completed its pre-clinical trials and is poised to begin human trials in the second half of the year. The company was founded in 2001 as spin-off from the University of Zurich. It was backed by seed capital from Gaia Technologies, and closed an €8m series A round in 2004, before raising almost €5m last year, resulting in a total VC investment of €26m.

Around halfway through the year, UK antibiotics developer Novacta secured £13.1m from Celtic Pharma in a round of financing that saw the biotech investor take a majority holding. Novacta has developed naturally derived products known as ‘lantibiotics’ as potential drugs, which have anti-infective properties but which have been underused due to a lack of research, something Novacta has tackled through its own technology programme. Founded in 2003, Novacta boasts a host of corporate and institutional shareholders including The Wellcome Trust; Oxford Technology; Dutch seed investor Esperante; UK early stage VC Westgate Hall; and GEIF Ventures.

Exits

Furthermore, the industry has rewarded those dedicated investors that have stood by the industry during the most difficult of times.

In early October, Sofinnova sold French biotech company Fovea Pharmaceuticals, a company focused on ocular diseases, to pharmaceutical giant Sanofi-Aventis in a €370m deal. The transaction also provided exits for Abingworth, the Wellcome Trust, GIMV, Forbion Capital Partners and Crédit Agricole Private Equity. Previously the company had raised €20.5m in a series A round led by Sofinnova, before raising a further €30m series B round in December 2007.

The last exit in the biotech market saw UK investor NVM Private Equity divest itself of its investment in Pivotal Laboratories, selling the company to US pharmaceutical group ACM. The deal generated returns of 2.2x and an IRR of 27%. Pivotal, specialising in analytical services for pharmaceutical and biotech companies involved in human testing, was originally acquired by NVM in 2005.

In spite of the pressures on the biotech industry, there remains a core of quality investment opportunities and a steady stream of exits that preserves investor appetite.