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Macro-economical doubts trigger investor jitters

21/09/2011

"Belgian Biotech does not escape from the current macro-economical turmoil", Jan De Kerpel, KBC Securities

Since our last update of April 2011, the financial markets have found themselves in the grip of yet another major crisis, driven by monetary issues in the Eurozone and macro-economic concerns. Since the start of the second quarter, close to 30% of the aggregate value of the publicly-listed Belgian biotech companies has been erased, compared to 20% of the Bel20 index and 16% of the European biotech index.

Since Tigenix strengthened its cash position via the Cellerix-merger and the successful rights issue that followed, all of Belgium’s public biotechs have solid cash positions. Galapagos was hit hard by a failed proof of concept test, but a smart trial-design could enable the company to re-allocate quickly resources to other valuable development programs, while Ablynx’ Nanobody platform reached clinical proof of concept. However, the question mark implied by the word ‘whether’ used in the press-release (“Whether and how partner Pfizer would take the product forward…”) caused investors to pull back. Reaching such an important development milestone would usually lead to a sharp valuation upgrade, investors now only focus on the potential impact if Pfizer would not move forward according to previous expectations.

In fact, sentiment on Ablynx is typical of the current mood on the financial markets: due to the macro-economic environment, investors are more concerned about managing downside risk than seeking upside potential. While life-science related businesses (healthcare, agro, etc) are generally considered as crisis-resilient, cash-burning development-stage biotech companies are mostly classified as high risk. On top of that, some institutional investors were forced to abandon small and midcap stocks (mainly for liquidity reasons), thus explaining why Belgian biotech stock prices have been hit more than average, despite solid business and product development progress.

Consequently, in the current turmoil, public financing may be more difficult, causing certain promising companies to postpone their IPO plans. Biotechs, just like other cash intensive businesses, will have to weather the storm. The crisis again confirms that in development-stage biotech, refinancing is not only a question of ‘if’ but also of ‘when’. Nevertheless, funding has not dried up: this summer, private company Amakem raised € 18m and Therasolve closed its first financing round, both led by a strong life-science syndicate, while recent press rumours suggest that still others are close to raise as much as € 50m.

To conclude, despite difficult market conditions, we firmly believe that there will always be funding available for solid value propositions.

Source: Jan De Kerpel, KBC Securities