Sarah Houlton

The biotech industry in Europe has never produced an Amgen-size company. "I turn round to investors and say, 'That's your fault!'" says Sam Fazelli, analyst at Piper Jaffray. "If [the science] is working, why don't you let it happen?"

Part of the problem is that biotechs are now being set up for a trade sale at the outset, with the exit route for the early-stage funders and venture capitalists being envisaged as selling the company to Big Pharma, rather than the more traditional route of an IPO and floating on the stock market. While some companies will always fail, those whose technology succeeds (or looks like it's going to) are swallowed up and vanish from the market, leaving no stand-alone companies to build up the biotech sector in its own right.

Glyn Edwards, chief executive of London-listed company Antisoma, believes that this makes it more difficult for companies to gain funding in the future. "There aren't big enough investors," he claims. "And the only way we will get them is for a flagship company to be a success in the public markets. If all the successful ones are acquired, it may make a nice return but, ultimately, the industry will disappear."

He adds that there is a select group of well-funded small companies for which the outlook should be good—as long as they have enough cash to tide them over until the IPO window reopens. "But where is the net cohort of big private companies?" he says. "There are some, but investment has dropped off."

Bruno Montanari, principal in the life sciences group at investor Atlas Ventures, believes that there are fewer and fewer funds of sufficient size to finance companies through those difficult first few years. "It's important to have a deep-pocketed venture capitalist to sustain the company through to the next IPO window," he says. But he adds that a "quick and dirty" trade sale isn't what he is always looking for. "If I can wait a year or two more, I may get two, three, four times more than by selling it quickly."

The key issue in Europe is that the funding situation is different than in the United States. In the United States, much of the funding comes from specialist healthcare funds; in Europe, there is a fairly diverse shareholder base and the funding comes more from generalist mid-cap investors who are less well acquainted with the vagaries of the pharma business. "These can't possibly have the same level of expertise as the US funds have," Antisoma's Edwards claims.

There is now a sign that private-equity investors are beginning to move down the value chain, notably the specialist PE fund Celtic Pharma, which was set up in 2005 and is now in active acquisition mode. "It's just a drop in the ocean," says Edwards. "But it shows that there are people out there who think there are some seriously underrated companies. There are some companies that can be sustainable. They don't necessarily have to sell their own products, but they will have to have some form of revenue stream, such as a copromotion deal. And if we have more companies, we would have a virtuous circle where investors begin to see the potential returns again, and more money will come into the sector."

Sarah Houlton is Pharmaceutical Executive's global correspondent. She can be reached at sarah@owlmedia.co.uk