I recently returned from a month in Europe as part of our effort to expand Locust Walk’s European practice. It was an amazing trip meeting great people and learning valuable lessons. While I did not visit all countries for business, I thought I’d share a few observations.
The Woodford “situation” is having a material impact on many companies in the UK. For those that have not followed, the largest investor in the UK made dozens of investments, often at increasing and sometimes unrealistic valuations. Woodford has run into difficulty due to redemptions in the fund and inability to continue follow-on investments in these companies. Consequently, the portfolio companies are having trouble raising money having spent their war chests with massively overinflated valuations. People will likely invest on the other side of the carnage but not many people want to lead a big down round. There will be opportunities for savvy investors and strategic partners but at the right time and for the right price. There is a concern about someone filling this void from a capital perspective, which has not yet been answered. Many of these companies will turn to the partnering markets for capital since the capital markets are tight because of their circumstances.
I met with a few sophisticated board members with both Europe and US board experience who bemoaned the professionalism of some European boards. Companies they said are getting mixed advice based on the quality of their boards – some board members are great but in their eyes a majority do not have the same level of experience as their US counterparts. This is not US arrogance speaking but feedback shared from sophisticated European board members. I’m sure some of this exists as well in the US; however, the sheer volume of companies with material amounts of financing in the US conveys additional experience on board members of these companies.
Sweden has a lot of great companies, but the trend has been and will continue to be going public on the local stock exchange way too early with too low of a valuation to raise the real capital they need to get to clinical proof of concept. It is very hard to break out of this viscous cycle, yet it is driven by Swedish retail investors’ openness to support local IPOs and a sense of nationalism. There are exceptions to this rule like Hansa and Calladitas. I was presently surprised about how much startup activity was going on in Sweden.
US capital markets
I learned that strong European companies prefer to go directly to US NASDAQ rather than going public in their local market and then up-listing to NASDAQ, which can be challenging. The people I spoke with estimate that maybe 1 in 3 to 1 in 5 EU-based company management teams are ready for the due diligence experience provided by US institutional investors. Many of these companies would be “eaten alive” (their words) if they tried to raise capital from the US crossover and public markets. It is clear that the science in Europe is no different than the US but management in Europe tends to undersell compared to their US counterparts, who are often more directly promotional. It is a cultural difference for sure but one that impacts the US IPO-ability of a team. Universally, every company I spoke with, whether US-ready or not, wanted access to the US investor base. The advantage of the relative shallowness of the European capital markets is that European companies tend to do more with less capital and get further on shorter Euros, Pounds, Kroner, Francs, etc. I believe we’re starting to see US investors understand this value arbitrage where more such investors are increasingly looking for European portfolio companies. A greater cultural bridge for EU management teams and greater awareness of the strength of the EU biotech community might further enhance the access to capital by European companies.
This might be controversial, but I don’t perceive Brexit will be as big of a deal for life science companies as everyone thinks. The UK is heavily incentivized to keep this growth engine running and will likely enact programs to counterbalance what subsidization companies in the UK lost from leaving the EU. These government incentives are like the NIH in the US and play a material role in the formation and continuation of such enterprises. UK and European biotech companies employ management from all over Europe and are often evenly spread among many countries. Of all the immigrants at issue in the Brexit debate, this is not the group anyone is focused on. Most people I met in London were against Brexit, but in private most also agreed things will reach an equilibrium and life will continue. Like the Y2K scare or a good horror film, the anticipation is worse than the actual moment. Economics aren’t compatible with uncertainty so once the uncertainty is resolved, people can start making decisions.
China’s impact on Europe
China’s role in biotech is starting to have a bigger impact on Europe. CIFIUS does not affect Europe as the restrictions on investments are only found in the US at this point. Before CIFIUS, China was plowing money into the US; however, this pace has slowed down dramatically and the capital is looking for other homes.
Since the capital markets are far more shallow and more spread out among regional exchanges in Europe, I learned that Chinese money is of great interest to European companies. The Chinese are attracted to Europe for many reasons and are starting to travel to find opportunities. From a deal perspective like the US, investments often come with Chinese rights attached to the deal and technology transfer, which needs to be navigated.
This is one area where Europe has done a better job than in the US. European management teams and board rooms are more diverse from a gender perspective than in the US. Only from my recent travels and experience, I believe this to be true. In fact, I didn’t hear a single person mention this as an issue compared to the constant stream of efforts in the US to get more female board members, like the California mandate. I don’t think it’s fair to put this all on biotech as my perception is that gender balance is more common in Europe compared to the US. Culturally, that is an area where the US is lagging and can do more to foster female advancement.
Overall, I think the American capital system cannot and will not be replicated in Europe and therefore each European company needs to have a US strategy. Many companies I met with only thought locally about getting products through their local regulators and didn’t worry about the US or elsewhere. Such thinking can work if you can raise sufficient local capital. However, the capital requirements often outstrip the abilities of the local markets; therefore, requiring global thinking. The more sophisticated companies are keeping their R&D headquarters in Europe and opening clinical and executive offices in the US, often in Boston given the geographic proximity. This helps get US investors comfortable about having span of control as well as potential access to the US market for commercialization. I would expect to see more two-office companies end up raising more money and ultimately achieving more success.
Overall, I was enormously impressed by the quality of the science and the entrepreneurial nature of the people leading these companies. From that perspective, I see little difference across the oceans. I would encourage my US counterparts to visit more frequently in search for partners, investment opportunities, and experience new perspectives. I found all three in abundance.
Geoff Meyerson, CEO and Co-founder, Locust Walk