Belgium is internationally known for its flourishing biotech scene. Companies such as Galapagos and Ablynx are now synonymous with innovation and high-quality research, assets that are, in turn, widely associated with the region’s biotech ecosystem. But every success story starts somewhere. In this first article of a two-part series on biotech financials, ex-biotech analyst and seasoned industry veteran Jan De Kerpel discusses how Belgium became a biotech hotspot and how biotech companies find suitable funding.
After about eight years of industry experience at Tibotec-Virco and Devgen, Jan De Kerpel decided to watch the biotech scene from a different angle. In 2007, De Kerpel became a biotech and pharma analyst at KBC Securities, where he got to know the ins and outs of corporate finance in the biotech sphere. Today, De Kerpel puts his experience to work at Kempen & Co, a merchant bank that specializes in all things life sciences.
According to De Kerpel, the seeds of the current biotech ecosystem were sown decades ago:
“Biotech in Belgium has been able to prosper due to decisions made 20 to 30 years ago. An important aspect was the creation of the VIB [Flemish Institute for Biotechnology]. The VIB not only focuses on innovative technologies, it also has the drive to valorize cutting-edge research and create companies around them. There are many other fantastic research institutes, but 20 years ago no one was trying to turn this into economic value.
Money is available, but it’s not always the right money
Also, the presence of dedicated capital was an essential aspect: The investment fund Gimv quickly acknowledged the potential of biotech and funded the sector from early on. In addition, the government supported the sector with both financial and regulatory means. In this sense, the importance of non-dilutive grants and other support from VLAIO (previously IWT) cannot be underestimated. Both regional and federal governments created initiatives to jump-start biotech, and they remain committed to the sector to this day.”
Of course, biotech has changed since the early ’90s. During his nine years as a biotech analyst, De Kerpel watched several early-stage biotech companies mature into professionally managed enterprises.
“When I started as an analyst, ThromboGenics and TiGenix had products in clinical trials,” recalls De Kerpel. “Ablynx came to the stock market in 2007 with one product in a phase Ib trial, and Galapagos had no clinical programs at all. In the past decade, companies have built solid product portfolios that are truly promising. The product pipelines have made huge progress, and the businesses behind them have evolved accordingly. The entire sector has evolved and grown: There are more companies now, later-stage companies with products on the market or in advanced clinical phases in major disease indications, more employees, bigger deals with big pharma companies and so on.”
Peeling the onion
It’s no secret that biotech companies need enormous amounts of money to achieve their goals, whether they’re looking to develop new drugs or bring innovative diagnostic devices to the market. While funding is available in many shapes and sizes, De Kerpel stresses the importance of funding that grows in parallel with the sector.
Pioneering companies such as ThromboGenics, paved the way for younger enterprises 5 to 10 years ago.
“Money is available, but it’s not always the right money. Start-ups and spin-offs need seed funding, investors that can provide a few million euros, for example. With funds such as V-Bio Ventures, Vesalius Biocapital, Capricorn, PMV, Fund+ and Qbic, seed capital is most certainly available in Belgium. As the sector grows, however, larger sums are required, and investors are needed that can provide these larger sums.”
This need for increasingly larger investments typically follows an onion-like model: The local environment provides the smaller initial capital, but companies must look further away — to interested foreign investors — to find larger sums.
“When a company has outgrown its local seed funding, it might opt to list on the stock market to raise money. Again, it’s typically the local environment, local investors, governments and VCs that will support an IPO. A stock listing provides a lot of visibility and eventually also attracts foreign investors. The company continues to grow, as does the required supply of cash, and a second layer of investors is added: more specialized European biotech funds. With these funds, biotech companies are able to drag their drugs into phase II clinical trials.”
Reeling in the big bucks
Beyond the point of phase II drug development, things get tricky. After phase II, truly gigantic investments are necessary. Funding phase III trials requires some heavy lifting, a feat of financial strength that most European funds aren’t up to. And so our biotech companies turn to the Land of Opportunity to find a third layer of investors.
“At a certain point, a successful biotech company grows beyond the capacity of European investors, especially since such investors like to diversify and do not put all their eggs in one basket. Unfortunately, for companies with successful mid-stage results that are in need of larger investments to fund the final large clinical trials, the big money simply isn’t present in Europe. Specialized European biotech funds aren’t large enough to support big capital transactions, and that’s why a gateway to America is so important. There you can find the largest biotech funds around, some of them managing more than 10 billion dollars. These are the funds that can support late-stage development.
“Today, this is possible because the sector has the attention of bigger, foreign funds. This is in no small part thanks to pioneering companies such as ThromboGenics, who paved the way for younger enterprises 5 to 10 years ago. Also local mature companies such as UCB were instrumental in putting Belgium on the radar of the Yankees.”
Another option is licensing a drug candidate to a major pharma company, which will fund the final clinical trial — but also get away with most of the profits. From a financial perspective, this is a pity for the small biotech companies who put their hard effort into the development of promising new drugs: They are forced to leave a substantial part of the future value on the table.
When we compare Belgium to other EU countries, Belgium ranks in the top three, and it has for many years. This means that the average Belgium biotech company is higher valued and is high quality.
“We have many promising projects, but usually these are developed until phase II and then licensed to a big multinational pharma company,” explains De Kerpel. “These companies get away with the true value of the product, and as long as our sector is forced to license its key value drivers prematurely, it will remain dependent on the unpredictable agendas of such big firms. Creating a sustainable and mature sector requires profit-generating companies. Most often, this is only possible by bringing products to the market, and this is where we need to arrive in the long term. Of course, this is easier said than done, as such an ambition requires huge investments while there is still considerable risk in the commercial phase. Sometimes, however, you need to risk it and take the jump.
“Clearly financing and investors are needed that can grow together with the companies they invest in. That’s where Belgium — and, more generally, Europe as a whole — still has a gap to fill. Why did Galapagos license filgotinib after phase II? At the time, back in 2012, the necessary funding to further develop the molecule wasn’t available to them.”
Crunching the numbers
We Belgians know that we live in an amazing place for biotechnology, but is there any hard evidence to back up that belief? Most definitely.
“Belgium represents 15% of the total European biotech market cap,” confirms De Kerpel. “That’s certainly something to be proud of, considering we’re such a small country. What I find a particularly interesting statistic is the biotech market cap of a country divided by the number of biotech companies constituting that value. This number represents the value of the average publicly listed biotech company in a given EU state. When we compare Belgium to other EU countries, Belgium ranks in the top three, and it has for many years. This means that the average Belgium biotech company is higher valued and is high quality. In general, Belgian companies have interesting, innovative products, are well financed and often have a highly qualified, professional management team. The bottom line is that Belgian biotech is doing very well, and we need to be careful to maintain that leadership by continuously putting the right measures in place.”