Managing the EU Capital Gap Toward Successful Investment Outcomes
European life science companies face a relative lack of capital compared to US companies. This gap engenders differing styles of investment and exit opportunities in Europe that can have meaningful implications for business plans and execution differences between the two continents.
Capital Efficient or Deficient
In 2017, the US VC community invested around $84 billion into 2500 companies. European VCs invested around $17 billion into a similar number of companies. By this measure, European life sciences are viewed as either capital efficient, capital deficient or some combination of both. The US and EU styles of investing and management are markedly different. Europe tends to work in smaller tranches and tighter milestones, while the US tends to capitalize to completion or, at least, far longer runways.
Challenges exist both for US investors looking to invest abroad and for European companies looking to transfer some or all operating and financing centrality to the United States. These challenges encompass:
Setting up companies in new domiciles and structures
Creating cross-Atlantic subsidiaries
Managing intellectual property
Establishing research and regulatory paths that are inclusive and capital efficient
Working within the means of the company while simultaneously creating enough promise to maintain momentum
Balancing ambitious visions with practical realities
Rendering decisions regarding partnering at a regional or global level
These challenges converge with the issues of exit management and investor returns. Presence and capability in European capital markets will differ from those in the United States, and exit values, although theoretically efficient for assets at a similar stage, can also vary widely based on the regulatory, IP, and commercial trajectory and planning.
Back Bay Life Science Advisors recently hosted a lively discussion on this topic at DKBIO 2019: Investing and Growing Abroad. We discussed corporate growth and cross-border investment and current operational and investor issues from both geographic perspectives. Lessons shared apply broadly to US and European life science companies and investors.
Geography
From a geographic operational viewpoint, the challenges in any company are ensuring that personnel know each other, work together, and are managed toward the same goals. Thus, cross-border staffing, ensuring that each office is occupied by people from both locales, hiring people that have had experience working across cultures as well as languages, and ensuring that leadership has had enough exposure, as well as operating experience across territories, remains logistically challenging and critically important.
Intellectual Property
Intellectual property also reveals significant differences between US and European approaches. The consensus in our panel discussion was that the retained European IP counsel was much more sensitive and aggressive about non-US territories. However, US patent attorneys were inevitably more transactionally-oriented. The latter, which we have seen as game-changing in many M&A deals, ensures that strategies to identify and eradicate gremlins in partnering or M&A agreements are implemented early.
Regulatory
From a regulatory and, therefore, commercial perspective, similar dynamics are at play. European companies, seeking to grow and or exit in the US or obtain a public listing as a means of further financing, must be sure that the US regulatory component is at least visible, well thought out, and documented—if not already under execution. Mere conjecture as to contemplated US development execution plans is not enough to create value in any transactional setting.
Full-fledged transatlantic regulatory strategies and commercial market knowledge, with the appropriate capital, are ideal approaches. The lack of these can create two problems:
Any potential partner, without a clear US regulatory path, will be able to dictate the perception of cost and time, which translates into valuation (and never in the target’s favor);
For total exit value, being able to articulate and defend development path time, target label, and, therefore, commercial potential will translate into creating an efficient M&A or public market outcome versus one where the company will remain on the defensive in negotiations or fundraising or be devalued by a lack of symmetrical knowledge and information.
Financing
The final pre-exit common pathway for all these strategic and tactical considerations is the accumulation of proper funding. The differences between public and private European and U.S. funds can be profound.
For European companies that are focused in Europe but seeking a global exit, initial conversations with the FDA, and, at the very least, a clear delineation of U.S. regulatory plans, as well as full understanding of the U.S. target markets, competitive intelligence, asset positioning, and asset and indication prioritization, is often lacking but always critically important to have in place.
Issues of fund size and, therefore, the appropriate amount of capital deployment and expected returns, fund focus regarding stage, as well as hold periods, are the leading edge of E.U. and U.S. fund differences. The fund agenda in the U.S. is primarily related to returns to the limited partners, whereas in Europe, especially with the proliferation of government sponsorship, ecosystem support can take as active a role as returns on capital. These differences can lead to challenging syndication. Local knowledge from a global VC, with dedication and incorporation of a European based partner into centralized US decision-making, as well as the ability to access regional markets of strength, is often the case with the US venture capital, and investment banking relations will become significant contributors to syndicate strategies.
Governance
Styles of board management differ between the US and Europe, with US boards tending to be far more interventional. Some companies in European countries exclude management from supervisory boards and this inevitably also leads to a dichotomy in decision making to which US investors are not necessarily acclimated.
Investments across the Atlantic can be highly valuable concerning the opportunity and under-recognized value creation but also have significant challenges on the use of capital, transatlantic regulatory and intellectual property investment, cultural and operational issues from multiple offices, and syndicate cohesiveness.
Dedication to building a sustainable company with appropriate prioritization of capital use into critical development pathways that are achievable and knowledge of those opportunities, even if full funding is unavailable, creates growth which leads to a measurable and outsized value.
Back Bay observes that when scientific, clinical, and financial functional strategies are interpreted, though capital is seeking to return the money and companies are seeking sustainable operations, the final common pathway of working together to these ends is best provided by cogent overall strategy addressing all the issues described.
All on the panel emphasized the pre-determination of common styles and goals as a critical aspect of building in either geography.
Europe remains an ecosystem of talent and technology capital efficiency and with proper management, efficient, and therefore, potentially highly attractive contributions to patient care and the ensuing investor returns.
Contact our investment team, info@bblsa.com.