Mounia Chaoui, General Partner at Ventech : « European biotech has gained strong credibility »

BioPharmaceutiques: The economic crisis has strengthened financial difficulties for biotech companies. What’s your evaluation, your assessment of 2009 for biotech companies generally speaking and for european biotech companies in particular ?

Mounia Chaoui: The beginning of 2009 has been very difficult for biotech companies particularly with regards to venture capital financings. Indeed, at that time, most big pharma were handling a wait and see policy, most European public company valuations were under pressure and consequently, most funds with Biotech focus were more interested towards their own fund raise and financial support of their existing portfolio. The European Biotech environment has improved a lot during the second half with the signature of several large biotech-pharma deals : ie GSK -Prosensa, Abbott -Pangenetics, Alcon-Esbatech, Sanofi – Fovea, etc. So, despite a difficult 2009′ start, the European Biotech has proven to be a counter cycle industry with still significant M&A transactions in a locked IPO market. Moreover, these transactions have proven that the European biotech has gained strong credibility towards big pharma players. Consequently, we believe that the European biotech industry has become stronger through this difficult crisis and has shown that it could be a sustainable business model.

BioPharmaceutiques: What main issues did european biotech companies have to overcome to get financed ? What were the hardest phases to finance (seed, start-up capital, medium-term financing, long-term financing…) ?

Mounia Chaoui: Most European countries (except maybe France) were, and for some, are still lacking funds dedicated to Biotech. Consequently, it is much more difficult to create competitive VC syndicates all the more the amounts raised by biotechs in a single financing round are usually in the double digit million Euros. The only way to get more easily properly financed is to limit the capital intensity by focusing on a small number of programs and pretty rapidly grap a partnership or M&A transaction with a big pharma-biotech player. We do not believe there is a specific phase which is more or less difficult to finance. All depends upon the assets within the company, the amount needed to reach the next key inflection point and the potential value you could expect at the exit time vs your valuation at the time of your financing round. Though, we believe that the easiest companies to finance are those for which, at the time of investment, VCs believe that a unique financing round (even if huge ie in the €20-30 M range) shall bring to the next key inflexion point at which time, the valuation shall be increased significantly through a partnership or M&A transaction.

BioPharmaceutiques: What was the most successful financing round in Europe in 2009 ? Why ?

Mounia Chaoui: I believe the most impressive financial round was the Series B Prosensa successfully raised beginning of 2009. This round was followed a few months later by a significant deal with GSK and shall be the latest round of financing for Prosensa.

BioPharmaceutiques: In 2009, did you participate in European biotech companies financing rounds ? If so, what major reasons have driven these choices ? If not, why did you prefer not to invest in european biotech companies ?

Mounia Chaoui: 2009 has been a very busy year for us. Indeed, we participated in four closings. First, we financially supported our existing biotech portfolio companies. Actogenix (Belgium) completed a € 15 M fund raising in March and Cellerix (Spain) has just announced a €27 M first Series C close. Second, we closed two new deals: Biovex (a UK-US based company) and Covagen (a Swiss based company). Despite very different development stages, both companies share the possibility of reaching the next key inflexion point (and hopefully asset monetization) within a single financing round. Biovex is the typical late stage deal a VC could not get in in normal market conditions. Biovex develops an oncovirus in melanoma called Oncovex which started a Phase III this year after promising Phase II data. We co-led this $ 70 M round together with MVM and Morningside with the objective of getting the necessary data for product approval by mid 2011.
At the other end of the spectrum, we just joined Novartis Venture Fund and Mitsubishi Pharma healthcare Venture Management in a seed financing round of Covagen. Covagen develops small protein binding fragments, called fynomers. The company operates in an area of high interest to pharma, in which many high value M&A and licensing deals are being signed at quite early development stages (ie Esbatech was sold in Phase I/II for up to $ 600 M, Ablynx and Molecular Partners signed significant deals still at the pre-clinical stage, Domantis was acquired in phase I/II for £ 230 M). We believe that Covagen has the potential to evolve as a potential winner in this competitive area, based on its differentiated technology and its proprietary drug discovery programs focused on very hot targets. The objective will be to raise a Series A round over the course of 2010 in order to reach a clinical proof of concept on one of its lead programs.

BioPharmaceutiques: Did you make some arbitration between biotech companies and other kind of companies (medical device, diagnostics, clean technologies, green technologies, TIC….) ? If so, why ?

Mounia Chaoui: We have looked at biotech, medtech and diagnostic companies. We have finally ended up with these two new deals (ie Biovex and Covagen) in classical drug discovery because we believe that they have the potential to generate the most important financial/risk return among all the deals we looked at in 2009. Moreover they are complementing well our Ventech III portfolio in the Life Science Sector which includes also Cellerix (Stem cell therapy company) and Actogenix (Oral protein delivery company).

BioPharmaceutiques: What main evolutions and/or modifications could help European biotech companies to get an access to new financing sources ? What could be there the role of venture capital ?
Mounia Chaoui: Besides VCs, other most natural financing sources for a biotech company include government funding, IPO funding and Pharma financing. We believe that government funding, at least in France, has been significantly increased in particular with the establishment of and shall help the companies to be refinanced in decent conditions. I believe that the UK is also investigating the creation of a government sponsored VC fund specialised in Biotech. As we have seen earlier, European biotechs have significantly improved their capacity to attract Big pharma. Finally, the IPO market is by far the less well defined financing/exit route though, hopefully all these M&A/partnership transactions will comfort institutional investors. Today, the key trick in order to be properly financed is to raise as little money as possible before exit and to get an enough strong VCs syndicate which can refinance the company internally if so required. Capital efficiency is key and discussions with potential big pharma partners/acquirers very early on after company creation are fundamental in order to succeed. Through its network within big pharma and other VCs, Venture capitalists shall play a key role in this success by introducing their portfolio companies to their colleagues and pharma BDs. Moreover, through their
knowledge of pharma needs, VCs shall play a key role in the best strategy definition that
will enable a good asset monetization.

BioPharmaceutiques: Do you plan to invest in European biotech companies in 2010 ? If so, why ? If not, why ? Do you feel optimistic or pessimistic for European biotech companies that will try to raise funds in 2010 ? If so, why ? If not, why ?

Mounia Chaoui: We will still invest in 2010 in Biotech companies. We have still lots of new investments to make out of our € 150 M fund, which was fully raised late 2007. We believe that 2009 has proven that European biotech companies could compete very well with their US peers, especially in the perspective of being fully or partly acquired by big pharma. Very importantly, this industry has also proven to be counter-cycle. Consequently, we are pretty much optimistic. We believe that if market conditions continue to improve, which is not fully graved based on the Dubai crash and the others that may happen afterwards, Biotech funding will further improve since a reopening of the IPO window will offer financial funding alternatives even if most of the cases, illiquid. We believe that the next key positive change all Biotech VCs are expecting is the possibility to exit through public markets. Most of the IPOs having happened over the past 7 years have remained illiquid and despite refinancings at interesting IPO valuations, most VCs are still shareholders of these public companies; only an M&A potentially enabling them to successfully exit.