Is this the bear market of a lifetime? It's certainly the worst Kate Bingham has seen in the twelve years she has spent in the life science investment business. Bingham and her team at Schroder Venture Life Sciences (SVLS) are currently in fundraising mode, so they have plenty of first hand knowledge of how the market is feeling at the moment. It's not a great time to be asking investors for money, although SVLS' new fund, International Life Sciences Fund III, is making progress. $300m has been secured already, a final closing is scheduled for April with $400m the fund's target.
But it's a painstaking process. Investors are holding on to their capital, doing more due diligence and taking much more time to make investment decisions. Many GPs are waiting, often in vain, for distributions from their previous venture investments to come back. Public sector valuations are way down and may yet have further to fall. Most practitioners agree that exit by IPO won't be an option until at least 2004, provided the general economy will have managed a recovery by then. And after the stampede into biotech and life science funds of the past 24 months, investors have begun to worry that too much money has come into the sector. “It's miserable out there,” says Bingham. Sitting in her Covent Garden office, she delivers this assessment matter-of-factly, without drama, but in a way that makes clear she is serious: she wouldn't be saying it if the mood in the market wasn't just that: miserable.
She thinks investors do have it wrong though about that wall of biotech money that is supposed to be rising to dizzying heights. She allows that some big funds have been raised recently, so naturally some institutions already have all the exposure to the segment they want, which has an impact on fundraising. But is oversupply of capital really an issue? “I don't think so. It's true that at the peak of the [technology market], a lot of outsiders started to think of biotech as the next silver bullet. But I don't see too much money coming into the industry now. If there was, we'd be seeing price inflation and more competition for deals. But we're seeing price deflation, and it's very difficult to get deals funded. More people are spending more time with portfolio companies, recognising they are going to have to fund those companies for longer than they previously thought.”
More money, better businesses
It's not only because portfolio companies are suffering and exits are far away that venture capitalists are putting more capital into biotech businesses that they think are worth supporting through the downturn. Even before the market collapsed, the capital requirements of biotech companies were getting markedly bigger. As a reference point, and according to data compiled by JP Morgan, life sciences companies undergoing an IPO between 1991 and 1992 on average raised $34m. Between October 1999 and November 2000, the last time life science companies were able to tap the public markets, an average flotation generated $73m in cash.
That more capital is flowing into these businesses at an earlier stage of development is part of a long-term trend that according to practitioners is standing the biotech sector in good stead. Bigger cash cushions allow companies to hold out longer and spend more time honing marketable technology and product before approaching potential partners in the pharmaceuticals sector, putting them into better bargaining positions to negotiate collaboration agreements or indeed sell themselves. From the point of view of the venture capital providers, longer holding periods mean that exits can be planned better, because the companies will have more comprehensive data to evidence the quality of their drugs and technology platforms. “In the early 1990s you could take a business public even if you didn't have a lot of clinical data,” says Bingham. “Today this is no longer possible.”
An example of a SVLS portfolio company that has benefited from a sizeable capital injection prior to reaching out to the pharmaceuticals industry is EyeTech, a developer of drugs aimed at age-related macular degeneration (AMD). AMD is an ophthalmic condition characterised by progressive destruction and dysfunction of the central retina (the macula). Set up in March 2000, EyeTech received $35m in a second-round financing from SVLS before raising $108m in a third round led by JP Morgan Partners in 2001. By December 2002, EyeTech had made sufficient progress to strike a development and marketing deal with Pfizer, the world's largest pharmaceutical company, which gave the company a non-refundable $100m in cash up front and set out terms of collaboration between the two companies worth another $600m, subject to milestones. Pfizer also agreed to pick up future drug development cost involving a crucial phase 3 clinical trial involving 1,200 patients of EyeTech's flagship drug, and to co-promote EyeTech's products in the US market where success is critical.
In R&D, you don't really get the scale economies you get in sales or distribution. Once you get to something like 300 scientists, you start losing something
Bingham, who joined Schroder Ventures in London in 1991 having worked for Vertex Pharmaceuticals, a biotech company based in Cambridge, Massachusetts, is struck by the size of the licensing deals that are available to well-capitalised life sciences companies in today's market.
“The number of licensing deals is going down, but their average value is going up. The headline figures are unheard of. When I was at Vertex in 1990, one day we all got into the café for a special company meeting, and our CEO said, 'we're here to celebrate a very important event. We have now signed the largest biotech strategic alliance with a pharmaceutical company that has ever been signed.‘ It was a $30m headline deal, which ultimately failed, but it was very significant at the time. Today deals are approaching a billion.”
In 2001, biotech companies entered into collaboration agreements with pharmaceuticals groups that, according to market research, were worth an unprecedented $5bn.
As Bingham points out, this macro trend is possible because the pharmaceuticals sector has come to recognise the potential that lies in working with growing biotechnology businesses and their investors as early on as possible. “The pharmaceutical companies are showing a lot more interest in what venture capitalists are doing in life science. Good drugs are becoming more expensive to make, and I think there is a gradual shift to them saying, ‘we can't do everything in-house’. So naturally they want to talk to us more, and we certainly welcome their attention.”
The big pharma groups are facing a number of challenges. Overall growth has been disappointing, and new momentum is unlikely to come from M&A activity in an industry where there isn't much left to do in terms of consolidation.
At the same time, several blockbuster drugs will be coming off patent over the next two years, and corporate product pipelines will have to be replenished. As Bingham notes, average cost per drug is increasing, while R&D productivity on the whole is going down, according to data published by Goldman Sachs.
Says Bingham: “The hole that is opening up is pretty serious, and there is an argument that says that the low-hanging fruit have all been picked. Pharma companies need to boost productivity, which is their major source of growth, but it's very hard to stimulate productivity just by getting bigger. In R&D, you don't really get the scale economies you get in sales or distribution. Once you get to something like 300 scientists, you start losing something. That's how we come in, providing the pharma industry with new technology and products.”
Getting Europe up to speed
Bingham is clearly excited by the prospects that these developments hold out for her industry, both in the US and Europe. Part of her ambition is to help European life science realise its potential as a potent industry able to compete with its US counterpart on more or less equal footing. To her, this is not just a commercial vision. Schroder Ventures, which has been investing in life science since the 1980s and raised its first dedicated biotech fund in 1994, has offices in London, Boston and San Francisco and a significant presence in the US. Bingham and her London-based colleagues “get out there pretty routinely.” And she says that from a financial point of view, “it wouldn't matter if Europe ended up as just a feeder to US biotechnology. You could still make a multiple on your money by developing European discovery boutiques.”
But that is not really the point. For Bingham, what matters more is that given its scientific potential, Europe should be expected to do better than that. “We haven't built a large European biotech company yet, not by international standards. This has to be done. It would be a shame if Europe couldn't exploit the science it has. The science is good. There is no shortage of novelty and ideas. What there is a shortage of is flagship companies and good management to make them happen.”
Building a biotech investment business that would be equally active in both Europe and the US has been central to much of what Bingham has been trying to do ever since becoming the central figure in SVLS' London office in the mid-1990s. When Henry Simon and Peter McPartland, two pivotal figures at the group's UK operation, decided to take more of a backseat, Bingham took over, determined to grow the European side of the business. In 1998, prior to raising the group's second dedicated fund, she persuaded Tom Daniel to join her, a Briton working for US venture group Domain Associates, and bring him back to the UK as the London team's second general partner (another four are based in the US). “Kate was talking about creating a balanced US-European biotech venture capital group, something that hadn't been done before,” Daniel recalls. “Europe had its centres of excellence on the scientific front, but in terms of early stage life science investment it was still wide open. To me it seemed a great opportunity.”
Another colleague says that building up the European side of Schroder Ventures' biotech business has given Bingham immense satisfaction, as much in fact as getting involved in the dealmaking and in helping portfolio companies develop. “Kate thrives on being at the cutting edge of science and gets herself deeply immersed in every aspect of the transaction process,” that same colleague says.
Daniel says part of Bingham's strength as a deal-maker is an “exceptionally thorough” approach to due diligence combined with a good nose for a deal. Also, “Kate understands well what we're doing, which is actively building businesses with the companies we invest in. And she's a great leader. This is a risky business, and whenever a portfolio company runs into problems, she really has the guts to lead the situation.” Competitors cite Bingham's deep grasp of technology and her dealstructuring skills as reasons why she is regarded as a good partner in syndicated transactions.
These traits, combined with a striking amount of energy and passion about the business, are what Bingham relies on whilst working through the downturn. She expects negative sentiment to inform the agenda for some time. “I'm not sure the market has bottomed out yet. We thought it had, but there are still a lot of companies that trade below cash. We spend a lot of time thinking about how much money our companies have and when they will have to go fundraise, how much cash we need to preserve, what kind of reserves, provisions and follow-ons are needed.”
When things are going badly, the fact that companies are better capitalised can turn into a disadvantage. “It takes them longer to get to a point where it might become clear that the business model isn't going to work.” In 2002 SVLS had to let one company go out of a portfolio of 45, for reasons that according to Bingham were specific to the company and less to do with underlying economic fundamentals.
Everyone is hugely, hugely cautious
Bingham also says some biotech markets are suffering more than others. Continental Europe for instance is still in the middle of a particularly bumpy ride. “Germany is getting hammered. The soft money is drying up, some venture capitalists are pulling out, and an awful lot of companies are fundraising. Many won't survive.” France is facing less of a bloodbath, partly because it never had the kind of explosion that of start-ups that Germany experienced in the late 1990s.
But while different geographies are experiencing varying degrees of pain, the core theme is the same everywhere. As Bingham puts it, “everyone is hugely, hugely cautious.”
Venture capitalists focused on biotechnology are trying to keep as much of their powder dry as possible and resume investing only when the markets pick up and trading conditions for portfolio companies begin to improve. When that happens, expect Kate Bingham and her team at SVLS to be there.
Kate Bingham was a Baker Scholar studying for an MBA at Harvard Business School when Damon Buffini, now managing partner of London buyout firm Permira, spotted her name and history in Harvard's telephone directory. Buffini called cold to see whether she might be interested in a job. She was, and joined Schroder Ventures' life science investment team in 1991. A biochemistry graduate from Oxford University, Bingham worked for Vertex Pharmaceuticals, a biotechnology company in Cambridge, Massachusetts, and Monitor Company, a strategy consulting firm. Bingham sits on the board of several Schroder Ventures Life Sciences portfolio companies. She lives with her family in London where she beats the traffic by travelling to work on her bicycle, an example which colleagues claim has inspired them to do the same.
Schroder Ventures Life Sciences (SVLS)
SVLS was established in 1993 to formalise Schroder Ventures' already ongoing biotechnology investment effort, whose origins date back to the 1980s. Based in London, Boston and San Francisco, SVLS raised a debut $100m early stage biotechnology fund, International Life Sciences Fund (ILSF) in 1994, followed by ILSF II in 1999 with $310m in commitments, which is fully committed.
The firm is currently raising SILSF III, which it expects to close in April at $400m. $300m in commitments has been secured already. SVLS also advises International Biotechology Trust plc, a publicly quoted investment trust listed on the London Stock Exchange.
SVLS currently has 23 investment professionals, six of whom are general partners.