VC only game in European biotech

Over nine out of every ten euros invested in European biotechnology companies in 2002 came from venture capitalists, often injecting more capital into later stage portfolio companies.

Ernst & Young’s tenth annual survey of the European biotech sector reveals an industry which in 2002 saw both revenues and employee numbers fall. After ten consecutive years of rapid growth, Europe’s biotechnology sector stalled in 2002.


But venture capital led investment in the sector. Over nine out of every ten euros invested in biotechnology companies last year came from venture capitalists.


The amount of investment in biotech companies has fallen from E6.7bn in 2000 to just E1.2bn euro in 2002. Despite the slump, venture capital investment remained strong, at E1.1bn, the third highest year on record for life science related venture investment.


Biotech companies received 26 per cent of all European venture capital investment in 2002, the joint highest proportion along with the software sector.


Part of what kept venture capitalists on their toes and ready to invest was the near total absence of viable exit routes. The IPO market remained closed, with were only three life science IPOs in 2002, compared to nearly 40 in 2000. M&A activity was also subdued, dropping to just 29 deals in 2002, the lowest level since 1998.


“Venture capitalists are being forced to continue to fund their later stage portfolio companies at a point when the public markets would otherwise have taken over, resulting in a dramatic reduction in the amount of funding being received by start-up companies,” says Paul Fivez, partner at Ernst&Young Biotech Belgium. In 2000, 70 per cent of total funding went to start-ups, compared with only 35 per cent in 2002.


Across the sector as a whole, revenues fell by two per cent to E12.9bn and employee numbers fell by six per cent to 82,100. But the number of profitable biotech companies has been increasing and the average loss per public company has halved over the past four years to E7m, excluding Elan’s swing from a E300m profit to a E2.4bn loss in 2002.


Despite the current difficulties, report author Glenn Crocker is optimistic about the biotech industry in Europe. “The size of the industry is roughly equivalent to that of the US around 1994/95, a time when the sector was going through another of its down cycles. Since then, the US industry has grown more than three-fold. This is the potential future that awaits the European industry when the current storm subsides.”