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Venture capital warms to European biotechs

By Caroline Copley

ZURICH (Reuters) - While a wave of stock market enthusiasm in the United States for biotech company flotations has yet to cross the Atlantic, venture capital appetite for promising European companies is returning.

Biotech is hot on Wall Street, with the Nasdaq sector index up 43 percent this year, listed U.S. stocks scaling all-time highs and roughly 23 biotech companies going public.

It's a trend that is helping pique interest in exciting new science further afield.

As the industry launches more and more drugs developed by identifying genes associated with disease - the fruit of decoding the first human genome over a decade ago - investors are looking to back the most promising ideas.

Private biotech companies globally raised almost $1.3 billion through venture capital deals in the second quarter - a 190 percent leap over the amount raised in the prior three months, says BioWorld Snapshots, a Thomson Reuters company.

European companies are taking more than their share of the spending spree, accounting for 44 percent of completed deals in the quarter. And shares of listed European biotech companies have risen as investors become more optimistic about getting a return on their money.

Shares in Switzerland's Actelion have soared 48 percent so far this year, while Norway's Algeta has gained over 50 percent and Swedish Orphan Biovitrum is up around 36 percent.

"Maybe you could describe the U.S. market as a tsunami and Europe as a rising tide, but it's growing and it's growing steadily," said Jim Healy, partner at California-based venture capital firm Sofinnova Ventures.

Sofinnova was one of the investors in a 47.1 million Swiss franc ($50.6 million) fundraising by Auris Medical in April. The group plans to take another punt on a Swiss biotech company in the next month or so, Healy said.

LITMUS TEST

Switzerland, with its long history of drug research and network of specialist investors, is often regarded as a litmus test for the rest of Europe.

Biotechs in the Alpine country have attracted 73 million francs in venture capital funding so far this year, according to data compiled by the Swiss Private Equity & Corporate Finance Association.

In late June, BioVersys, a developer of experimental drugs that can switch off bacterial resistance, closed an oversubscribed fundraising round, while Lausanne-based OncoEthix raised 18 million francs in July.

Granted, Europe has long been a bit player in biotech compared with the United States. Total funding for the U.S. sector was $23 billion last year against $4 billion for Europe, according to Ernst & Young - and the region has a smaller pool of specialist investors.

The United States had 316 public and 1,859 private biotech companies at the end of 2012, compared with 165 public companies and 1,799 private in Europe, Ernst & Young says. Europe's biggest biotech group Actelion has a market value less than a tenth that of U.S. players such as Gilead Sciences Inc and Amgen.

The U.S. boom has been partly fuelled by a more favorable regulatory environment - the FDA approved 39 drugs last year - as well as a low cost of capital and interest from generalist investors hunting for strong earnings growth potential.

Setbacks to listed companies such as Switzerland's Addex Therapeutics, which cut its staff to two at the end of May, have also hit sentiment in Europe.

RISING SUPPORT

"You need these sort of companies to draw interest in the sector and to be an anchor, so those companies going does sort of depress the outlook a little," said Ursula Ney, chief executive of Swiss-based Genkyotex, which is developing drugs to treat oxygen-radical mediated diseases.

Yet there are signs of rising support for European companies, for whom a flotation in the United States is becoming a viable option.

Thomas Meyer, managing director of Basel, Switzerland-based Auris Medical, said having the option of going public in the United States gives biotech firms a stronger hand when seeking private investment.

"It's becoming tempting to go straight for an IPO and that means the balance of power in the market has started to shift," said Meyer, whose firm is developing drugs for hearing loss.

One company which eschewed European investment, tapping directly into the U.S. IPO craze instead, was Dutch firm Prosensa Holding, a specialist in drugs to treat muscular dystrophy. It raised $78 million in a listing on Nasdaq at the end of June.

Prosensa has fared better than Belgium's Cardio3 BioSciences, which priced its initial public offering in Europe in early July at the bottom of its hoped-for range and took a further knock from questions over its research, which it said were unfounded.

Such floats remain rare in Europe, with only a couple of other small biotech IPOs this year - French and Swedish cancer specialists Erytech Pharma and Immunicum. For the most part, venture capital remains the main funding source.

Kate Bingham, managing partner at SV Life Sciences, a venture capital firm which invested in OncoEthix, said sentiment towards the sector had improved this year and there were more funds in Europe and a greater appetite to support new science.

Venture capital groups, however, remain picky.

Rather than risk an investment on a single drug, some groups prefer to back companies which have found a way to inhibit a pathway known to be involved across a gamut of different diseases, said Francesco De Rubertis, partner and co-founder of Index Ventures' life sciences practice.

"This spreads the risk across a number of assets so there is no single 'bad event' that can kill the company," De Rubertis said. "It's more important they have multiple shots on goal."

(Editing by David Holmes)

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