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FEATURE: European VCs Grow Wary of Genomics

LONDON, Sept. 26 – For the past few years, European venture capital firms have been hustling to catch up with their American counterparts, establishing life science divisions and stepping up their investments in biotechnology companies.

Yet despite the enthusiasm for downstream companies promising novel medical technologies and treatments, European investors remain skittish about genomics and proteomics.

“A lot of money has poured into genomics for the past two to three years and the companies are working, but they didn’t deliver with the speed that was expected,” said Axel Polack, a senior associate with Techno Venture Management, based in Munich, Germany. 

As the global market slows and valuations for start-ups drop precipitously, investors are able to take their time to evaluate potentially promising technologies. And, after last year’s exuberance for genomics companies, investors are also more savvy and skeptical.

For example, while methods for studying G-protein coupled receptors may have excited people last year, this year investors are voicing greater doubts.

“There are some very valuable members of this class [of molecules], but like the kinases, they [GPCRs] are ubiquitously expressed,” said Polack. “We’re looking for a unique molecule and that is not easily found with normal homology searches.”

The skepticism is reflected in TVM’s investment strategy. Polack said that his firm, which has previously invested in companies such as GPC Biotech, Ingenium, and Sequenom, is looking for companies that can deliver treatments.

“We are becoming more and more product oriented,” said Polack, adding that TVM might make just one investment in a genomics or proteomics company this year.

Investment in Biotech Never Higher

Paradoxically, the caution surrounding genomics companies comes at a time when investment in the broader biotech category has never been higher in Europe. 

According to Initiative Europe, a private equity and venture capital research organization based outside London, 1.29 billion euros, or roughly $1.19 billion, was invested in biotech in 2000. (A breakdown was not available for the genomics sector.) And biotech was one of the few technology sectors that showed quarter-on-quarter growth.

In the fourth quarter the biotech sector posted a 300 percent increase in the volume of the deals and a 495 percent increase in the value of the deals, compared with the first quarter of the year. 

Despite all of the recent economic and political crises, the picture is still bright for 2001. 

“This year is expected to exceed last year based on the very large amount of capital raised for this area,” said Jim Wilson, an Initiative Europe editor, noting that even in an economic downturn, biotech is still appealing.

“Whether the economy is good or bad, people get ill,” he said.

But given people’s disappointment with the sector’s performance over the last year and the closing of the IPO window, many investors may no longer have the stomach for genomics that they once had. As a result, venture capitalists are honing their strategies.

Stephen Thompson a director in the London offices of Apax Partners, a global investment firm that has more than $1 billion targeted for early stage companies, said he was now more interested in companies with interesting genomics platforms than anything else. 

“Two years ago, target validation was good," Thompson said. "Now people have too many targets. Our focus will always be on platforms – there’s a clear end-market.”

If a company has a good platform, Thompson said, it could potentially generate revenues by licensing its system, while using the proceeds for internal research and collaborations.

Like TVM’s Polack, Thompson also said he was skeptical about the long-term outlook for many companies developing proteomics technologies.

“We’ve looked at a lot of companies and we are firm believers in the idea that all of the activity is at the protein end, but we haven’t found anything exciting,” said Thompson, noting that Apax has invested in only a couple of proteomics companies. “How do you build a business around 2-D gels?”

Bucking the Trend

While European venture capital firms’ love affair with genomics may have proved short-lived, there is at least one group of investors that is bucking the trend. 

IM Life Sciences of London is currently in the process of trying to raise about $100 million for its Next Generation Genomics and Bioinformatics Fund, which plans to invest in European genomics, proteomics, and bioinformatics companies.

“We perceived there was a need for a sector-specific fund focusing on Europe,” said Neil Swift, one of the company’s co-founders and a former chief financial officer for Gemini Genomics. “There are half a dozen funds in the US dedicated to genomics, and where the US goes, Europe tends to follow.”

Unlike many of the venture capital firms that make hub plays by investing in a diverse bucket of companies, Swift said that his fund would look to be more of a spoke, or niche, player focused on investing solely in companies that develop genomics technologies. By specializing, Swift said he hopes that the larger venture companies will also learn to use his fund’s expertise.

“If hub players get to a deal first they could bring us in as the spoke player,” Swift said. 

Over the next few months, as the Next Generation Genomics and Bioinformatics Fund tries to woo investors, Swift’s efforts could also serve as an industry litmus test. With the global markets heading for a recession the market will have to wait and see if investors will indeed be willing to go for broke and put all of their eggs in a genomics-only basket. 

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