UK: European Life Science Companies Selling Out To Large US Pharmas?

Sarika Patel
National Head of Technology
Grant Thornton

The easiest exit for European life science companies has been to sell out to large US pharmas. But could solutions such as greater collaboration or more public/private financing enable Europe to grow its own world-beating corporations?

Europe – and in particular the UK – has one of the most exciting and vibrant research populations in the world of life sciences. Fresh ideas from university laboratories have produced a host of successful spin-out biotech groups, significant drugs and the occasional blockbuster. The industry has developed from a few fledgling companies into a genuine pipeline of treatments for some of the world's largest pharmaceutical companies.

Yet, while the European life sciences industry is no flash in the pan, being more than a couple of decades old and having seen its share of boom and bust cycles, it has yet to develop a world-beating company with a pipeline of its own along the lines of US corporations such as Genentech or Genzyme. At a certain stage in a successful life science company's development, a sell out to one of the large corporations is almost inevitable. Two recent deals prove the point: AstraZeneca's purchase of Arrow Therapeutics for $150 million and Genzyme's proposed purchase of Bioenvision. "A key reason for this is that the appetite is not there from the venture capitalists and public market to fund the development of drugs all the way through to market," explains Neil McInnes, Corporate Finance Senior Manager at Grant Thornton. "Often the easier option is to flip it to a big pharma group when development gets to phase two or phase three. Testing on animals and humans has a high cost in terms of both finance and time, with treatments in Europe requiring regulatory approval from the European Medicine Agency (EMEA) as well as individual country regulators, such as the UK's National Institute for Health and Clinical Excellence (NICE). Combined with the cost of marketing new drugs and the overall risk associated with getting to that stage, investors often look for exit routes before reaching the market. At the same time, big pharma are actively on the look out for novel products to fill their development pipelines, which can often lead to a deal being done."

European investors do not have the experience of their US counterparts in funding drug development and find it difficult to handle the long lead times before cash flows back to them. "There are two big issues – investors' appetite for risk and management's experience of developing drugs beyond the early stage of research," argues Ken Powell, head of Arrow Therapeutics. "The US industry is very good at spotting opportunities and spending heavily to get the drug to market. It is hard to envisage the sort of investment from Europe that could create a business like Genzyme or Genentech."

The lack of experience also manifests itself in another issue in Europe – a relative lack of steadfastness. "All projects hit problems in development at some stage and need more money," continues Ken. "There can be a sense of panic if you hit a delay in a European company. The extra investment is not forthcoming from European investors unless they have the reassurance of a US investor alongside."

As a result, the sell-out option has become well established in Europe. The big pharmaceutical companies see this as a key element of their development pipeline – AstraZeneca, for instance, has funds explicitly for buying out new treatments, technologies and companies from the life sciences sector. So, what's the solution?

1. More Sophisticated Financing

Many experts argue that the US has more innovative techniques available for financing life sciences companies. For example, it is possible to combine public and private financing, thanks to the fact that investors can share preemption rights – the rights of existing shareholders to subscribe for new stock ahead of other investors. Hedge funds are also active in the US life sciences arena in a way that they have yet to emerge in Europe. This is due to the US market being larger and better developed. "The issue in Europe is that the sector is relatively small and many investors have come to it relatively recently," says Ken. "The US investors have been around much longer and have a deeper understanding of the issues."

2. Specialisation

A number of European companies are taking drugs to market, but they tend to focus in niche areas. In Scotland, Grant Thornton advises Ardana, a company that specialises in developing and marketing therapeutics in the area of reproduction. "The key difference when you are targeting a niche market is that the infrastructure, and therefore the funding required, is significantly reduced, allowing the company to take their products all the way to market," reflects Neil McInnes.

3. Promote Local Success

Switzerland boasts a vibrant life sciences sector based on the success of local companies – although one of the most prominent, Serono, recently sold itself to Merck of Germany. A similar clustering effect is being attempted in countries like Norway and Denmark. In contrast, in the UK, potential beacons in the sector are bought out and the company loses visibility, such as Celltech, which was bought by UCB of Belgium, and Cambridge Antibody (CAT), which was purchased by AstraZeneca.

4. A Move Towards Collaboration

Another solution is that the industry organically, or guided by informed advisers, moves towards collaborations to create a cluster of projects in a therapeutic or research area thereby giving the group critical mass. An example of this would be Antisoma: it is listed on the main market and, despite its ups and downs, demonstrates a model that shows resilience through the aggregation of cancer targets.

Although these four suggestions outline ways in which to create a UK world-beating company with a pipeline of its own along the lines of US corporations, it has to be seen in the wider context. Today, the US has the strongest biotechnology sector, but in the future it will undoubtedly be India and China that takes on this mantle. So a different approach may be that the most efficient business model for European life sciences is the one that has already evolved: developing companies to a critical stage and then selling out. If all the stakeholders approve and we can retain the unique skills and jobs in pharmaceutical R&D, and the investors have a satisfactory exit, why should we really worry?

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