Vantage Point - EU venture fund accentuates the positive

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With funding in the pharma and biotechnology sectors becoming harder to secure in today's turbulent markets, in two articles EP Vantage asks investors on different sides of the pond to give their view.

Allan Marchington - Apposite Capital

For a venture capital fund operating solely within the healthcare space, Apposite Capital believes the current doom and gloom prevailing in the pharma industry following the credit crisis, particularly within Europe, reflects a vicious downward spiral and is an all too easy excuse for poor share price performance and sector valuation.

Speaking to EP Vantage at BIO Europe Spring, Allan Marchington, partner, highlighted the need to focus on the positives and referring to current woes within UK pharma in particular, believes “the market needs a success story to lift the gloom. All the key ingredients of talent, capital, intensity and big pharma presence are in place, they just need to be harnessed”.

Following a comprehensive investment strategy review last year, Apposite Capital has segmented its investments into two main areas:

a.  healthcare service providers, mainly for the UK’s National Health Service
b.  biotech companies, with a focus on therapeutic products, whether conventional or small molecule, mainly within Europe and the US

Interestingly, Apposite is currently wary of investing in diagnostic-focused companies, citing uncertainty over the market dynamics of who will actually pay for these agents. That is not to say the door is shut completely to this segment, just that the fund prefers to wait and see how it develops.

Attractive investments

Specifically within the therapeutics segment, Apposite is prepared to make early and late-stage investments, from technology platform and target discovery companies to those with tangible clinical-stage products.

Regarding therapeutic areas of preference, the fund believes the larger segments, such as cardiovascular and CNS are not viable due to the huge costly trials required for success, opting instead for more niche indications within oncology, metabolic disorders and infectious diseases.

However, almost of highest importance to Mr. Marchington when considering investment opportunities is the management of the company. “A management team needs to display the necessary diversity, experience, commercial awareness, ambition and passion before we develop a relationship. Without these skills, or at least a recognition and plan in place to acquire these skills, we are unlikely to invest.”

IPO window ajar

Contrary to comments made at the conference’s opening panel session by Denise Pollard-Knight, managing director of Nomura Phase4 Ventures, that the IPO window is “completely shut in 2008”, Apposite reckons that IPO remains a viable exit option for VCs, albeit mainly in the US.

Mr. Marchington believes “a good company will always be able to execute an IPO, even in current market conditions, especially in the US where a decent value is still applied to technology, although an IPO may not realise the maximum value that a trade sale could attract. However, with respect to Europe, an IPO exit is currently much more limited due to the significant discrepancy between the money invested in EU biotech and the relatively low IPO price a company can attract.”

Hold out for trade sale

Given the limited IPO potential, trade sale remains the most attractive exit option for venture funds. Apposite prefers to wait for as long as possible for the company to reach the critical proof of concept stage, currently seen as phase Ib for a biological product and phase IIb for conventional therapies.

Indeed, the fund would even consider supporting a company to develop a product all the way to the market, given suitable conditions are in place, such as the type of product, therapeutic area, prior evidence of efficacy and safety and manufacturing capabilities.

And with time-to-exit so critical for VCs, Mr. Marchington does not believe the current problems in the financial markets will extend their current timeframe: “We still expect to generate a return on our investment within nine years, any longer and we have clearly made the wrong investment.”

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