EUROPE IS CATCHING BIOTECH FEVER (int'l edition) More startups are going public--and luring crowds of investors In the early 1980s, Dinko Valerio was laboring in obscurity at the Netherlands' Leiden University. His big break came when he cloned the gene whose mutation causes ADA deficiency, a rare hereditary disease that weakens the body's ability to fight infection. Soon after, Genentech Inc. invited him to spend four months at its California headquarters. Inspired, Valerio returned to his native Holland, quit his academic post, and founded a company called IntroGene, backed by a Dutch venture-capital firm. Now, Valerio says, U.S. and European investment bankers are pestering him to take his company public. ''They all see Europe as a growth market,'' says the bemused 40-year-old. That's a dramatic change. Europe has long produced world-class research in the biological sciences from its ancient universities and research institutes. But until recently, few scientists were willing to swap their cushy academic careers for risky startups. The situation was compounded by scarce financing, weak patent protection, and almost no entrepreneurial role models. As a result, U.S. companies attracted the lion's share of financing and talent--while Europe was seen as a biotech backwater. Now, the tide is turning. Europe's industry is still half the size of America's. But it's catching up fast, fueled by several new small-company stock markets that are giving startups a fresh pool of capital. On July 16, the industry is expected to clear a major hurdle if the European Parliament approves a measure to equalize biotech patent protections across Europe. Just as important, several European drugs are moving into late-stage clinical testing. First to hit the market, possibly by next spring, may be British Biotech PLC's Zacutex, for acute pancreatitis. There are now 716 emerging bioscience companies in Europe, up from 584 last year, according to a recent report by Ernst & Young. And the number of publicly traded biotech companies in Europe surged 75% last year, to 49. Although most are in Britain, France's Genset led the first wave of Continental offerings in June, 1996, with its $99 million initial public offering on NASDAQ and Paris' Nouveau Marche. Overall, the industry raised $1.4 billion in equity last year--quadruple the amount of the year before. ''Three years ago, you couldn't have created a balanced portfolio of quoted European biotech companies,'' says Geoffrey Vernon, a director of Rothschild Asset Management Inc., whose two global biotech funds have combined net assets of $550 million. ''There just weren't enough out there. But now, you can.'' That's reflected in the growing proportion of venture capitalists' funds devoted to European biotech. In the mid-1980s, Munich-based TVM Techno Venture Management invested less than $5 million of its first, $97 million fund in biotech. Thirteen years later, it plans to sink up to 40% of its third fund, with $100 million, into the industry. Meanwhile, American venture capitalists are beating the bushes for deals in Europe. U.S. technology-investment boutique Hambrecht & Quist recently set up shop there. Several sizzling IPOs have roused U.S. interest even further. NeuroSearch was 17 times oversubscribed when it went public on the Copenhagen Stock Exchange just over a year ago. It was founded in 1989 by six researchers from a small Danish drugmaker who struck out on their own, pledging their homes to get a startup loan. Their credentials helped: NeuroSearch CEO Jrgen Buus Lassen invented Seroxat/Paxil, the $1 billion antidepressant sold by SmithKline Beecham. Now, NeuroSearch has a promising drug for Parkinson's disease in Phase II trials. Its shares have more than doubled, to $61.30, since they began trading. GOVERNMENT PUSH. Germany's QIAGEN has created just as much of a stir. Founded in 1984 by three scientists to commercialize DNA-purification technology, its stock has soared to about $55 a share from $12 following its IPO on NASDAQ last year. Based in Dusseldorf but headquartered in the Netherlands for tax reasons, QIAGEN does 30% of its trading in the German over-the-counter market. Indeed, Germany is pushing to overtake Britain as Europe's leader in biotech, with $794 million in annual government spending on biotech research and development and about $30 million a year in soft loans to help seed startups. It may work. German funding helped persuade New Zealander Simon E. Moroney to make Munich the home of his human-antibody research company, MorphoSys, in 1992. Moroney rounded up $4.6 million in venture capital, almost as much in matching government soft loans, plus a $1.3 million grant from a research foundation associated with the Bavarian government. ''I don't think you could get that kind of backing anywhere else in the world,'' he says. France is also trying to catch up in the biotech race. Paris plans to provide $203 million over five years to biotech startups, and the previous government offered a 50% tax break on new R&D spending by biotech companies each year. But French entrepreneurs still face a harsh environment. ''To create and manage enterprises is viewed as a lowly activity in France,'' says Daniel Cohen, chief scientist at Genset, the star of French biotech. Cohen created a public furor last year when he quit his directorship of a public research institute and took his team of 26 along to Genset. And Europe as a whole has far to go before it catches up with the U.S. in biotech. So far, not a single major drug has come out of a European startup. Companies such as Belgium's Innogenetics are selling diagnostic techniques, which can be brought to market much faster than drugs. The industry has a big problem finding and recruiting experienced managers, for which it often turns to the U.S. And American investors still find more attractive options in their own backyard. ''As a California investor, it's hard to get into early-stage deals in Europe,'' complains Lori F. Rafield, a venture-capital principal at Robertson, Stephens & Co. in San Francisco, who says she can't compete with large European venture firms. DELAYS. Although products in Europe's pipeline are getting closer to market, investors must put up with painful fits and starts. On July 9, for instance, British Biotech's shares dropped 8%, to around $2.86, after the company announced that two promising drugs in late-stage trials will make their debuts later than expected. Yet the Oxford-based company remains so confident of eventual approval that it's setting up marketing offices across Europe. Still, it took the U.S. industry nearly a decade to start producing winners. And one sign of maturation of European biotech is the flurry of deals between startups and their big pharmaceutical brethren. Over the years, SmithKline Beecham has done about 140 development and licensing deals with smaller companies. Until recently, most of them have been American startups. But SKB senior researcher Peter Goodfellow says the company has been looking closer to home lately. Of the two major deals it has announced this year, one is with Germany's Evotec BioSystems, which has a novel screening technology that can detect single molecules, even within cells. As more of Europe's biotech startups go public, forge ties with blue-chip drugmakers, and bring their products to market, U.S. investors are likely to pay more attention to the fledgling industry. The highly volatile American tech sector, too, may drive them to look elsewhere. Ultimately, if European biotech really heats up, it could give investors a fast-growing alternative. By Julia Flynn in London, with Gail Edmondson in Paris, Thane Peterson in Frankfurt, William Echikson in Brussels, and Joan O'C. Hamilton in San Francisco RELATED ITEMS TABLE: To Market, to Market

Updated July 11, 1997 by bwwebmaster
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