Biotech outlook for 2005 – the ups and downs ahead
By Emma Palmer, Associate Director, Financial Communications

2004 was a good year for fund raising in the European biotechnology sector, for both unlisted and listed companies. In terms of the outlook for 2005, the year has started well with a burst of consolidation activity and expectations of IPO transactions. However, big pharma’s annus horriblis last year may have far-reaching implications for the small cap sector in the year ahead.

IPOs & private fund raising in 2004
There were more than 15 biotech and medtech flotations raising in excess of £200m in London in 2004, the majority of which were on AIM. This helped to cement AIM’s reputation as the market for European growth companies, and was reinforced by figures showing that companies floating on AIM raised as much as those on the main list last year (£2.6bn each). Interestingly, the amount of money raised on AIM in 2004 exceeded that raised during the dot-com boom of 2000, showing that London’s junior market is sustainable source of capital for growth companies. On the unquoted side, private European biotech companies raised almost $1.2bn in 2004, according to BioCentury.

Going forward, the ongoing fundraising activities of venture capitalists focused on the life sciences sector imply that 2005 may also be a good year for private biotech companies looking for increased investment. In addition, more than 15 European biotech companies have been mooted as IPO candidates this year.

What will be the impact of big pharma’s woes?
What will be the effect on the sector in 2005 of the atmosphere of enhanced scrutiny of drug development and regulation following the SSRI and COX-2 inhibitor product scares, not to mention the impact of high profile late-stage drug development failures, such as AstraZeneca’s Iressa and Exanta? Other issues which are currently exercising the industry include the increased regulatory scrutiny of clinical trial data and the move towards public databases of such information.

The positive view of these challenges is that with its R&D productivity issues firmly in the spotlight, big pharma needs biotech and its products more than ever. This could lead to more deal making and increased valuations for the smaller companies which could provide the products that the larger companies so obviously need.

However, if big pharma companies respond to these challenges by becoming risk averse, then partnering opportunities may be less frequent, may appear later in the development cycle and create less value. Valuations of both unquoted and quoted companies may therefore be negatively impacted. If required, larger clinical trials may significantly increase the costs in terms of both time and money of bringing a drug to market, which may have an impact on the ability of small companies to raise funds – meaning lower valuations and more funding rounds.

Consolidation ongoing
So far in 2005, the consolidation process that has changed the face of the European life sciences sector over the last few years has continued. Transactions that have been announced this year have involved both unquoted – in the case of the Paradigm Therapeutics (a Northbank client) and Amedis transaction – and quoted companies. Both Paradigm Therapeutics and Amedis are based in Cambridge, UK. Other companies involved in M&A so far this year include Antisoma, with its purchase of private US company Aptamera. Northbank client Oxford BioMedica has also been the subject of an approach, and is in discussions that may lead to a potential merger. All this activity has the potential to enhance the quality and robustness of the sector.

All in all, 2005 should be an interesting year for the European life sciences sector.

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