The continued dearth of venture capital in Europe is highlighting the key role played by wealthy families as an alternative – or at least complementary – source of finance for biopharmaceutical firms.

Despite the best efforts of Europe's governments, including that of the U.K., to stimulate venture capital investment, some firms, such as Atlas Venture, have pulled back from the region, if not exited entirely Also see "UK Govt. Outlines Hands-Off Approach to Boosting VC" - Pink Sheet, 20 November, 2009.).

According to preliminary figures from Elsevier’s Strategic Transactions database, the downturn in venture capital funding continued in 2010 – European biotech companies received around $1.6 billion in venture capital last year, compared with $3.7 billion in 2007.

Venture capital firms in Europe have found it difficult to raise funds from their investors. Across all business sectors in Europe, not just biotech, venture capital firms raised €13 billion ($17 billion) in the first nine months of 2010, compared with €63.2 billion in the first nine months of 2007, according to figures compiled by the European Private Equity & Venture Capital Association.

There is a long tradition in Europe of family money supporting the biopharmaceutical sector, including large firms. Think Merck KGaA in Germany, or Roche Holdings in Switzerland. Descendents of the founders still have substantial holdings in these multinational pharmaceutical companies.

But it's for fledgling biotechs that funding from these well-heeled families and their affiliated financing vehicles looks especially important now. “There are currently more investment opportunities in Europe than can be satisfied with funding from venture capital,” notes one commentator, Erich Schlick of Munich, Germany-based investment company, Wellington Partners Venture Capital.

Germany: A Wealthy Family Hotspot

Wealthy families are particularly prominent in Germany, which hasn't had a long tradition of venture capitalists backing new risky companies; several of the firms that did emerge during the late '90s were hit by the country's spectacular post-2000 biotech bust (Also see "Germany's Biotech Bust" - In Vivo, 1 November, 2002.).

As such, “in German-speaking countries in Europe, for example, there are a couple of family investors who play an important role in funding biotech companies," Schlick comments, adding that some of these firms are also backed by venture capital.

Schlick knows a bit about wealthy family investors since he's on the board of immatics Biotechnologies GmbH, a German biotech which in September 2010 received an unusual co-investment from two of Germany's most prominent wealthy family investors, the Hopps and the Strüngmanns. Immatics raised €54 million to fund its lead renal cancer vaccine product through a Phase III clinical trial. (Also see "Immatics Raises €54 Million Series C To Fund Pivotal Therapeutic Cancer Vaccine Trial" - Pink Sheet, 21 September, 2010.).

Dietmar Hopp, the co-founder of the software company, SAP AG, has invested more than €300 million in 15 German biotech companies over the past 10 years, through his company, dievini Hopp Biotech Holding GmbH.

The companies in which he invests are mainly located in and around his home town of Hoffenheim, near Heidelberg, with the aim of supporting and developing the German biotech sector. They include Apogenix GmbH, Curacyte AG, CureVac GmbH and Sygnis Pharma AG.

One of his most recent investments was in the German biotech, Agennix AG. Hopp increased his ownership in the Heidelberg-based firm last October from 29% to 59%, during a private sale of shares that netted the company €76 million Also see "Financings Of The Fortnight: Finding Comedy In Today's Financial Environment" - Pink Sheet, 8 October, 2010.). Agennix’s lead compound, talactoferrin, is in Phase III trials for lung cancer.

In May 2010, Hopp invested €27.6 million in another cancer-focused biotech, CureVac, which has an mRNA-based prostate cancer vaccine in Phase II studies.

While Hopp has a background in computer software, the Strüngmann brothers, Thomas and Andreas, have a long business background in the pharmaceutical industry, having built up the German generics company, Hexal AG, before selling it to Novartis in 2005 for more than $7 billion. Also see "Novartis Boosts Sandoz Generic Business With Acquisition Of Eon, Hexal" - Pink Sheet, 22 February, 2005.).

But like Hopp, they are focusing their investments on German biotech. Besides immatics, the brothers have also invested in a number of companies in their home country, including MediGene AG, AiCuris GmbH, 4SC AG, Ganymed Pharmaceuticals AG, Nexigen GmbH and Suppremol GmbH.

Bertarellis Look Beyond Switzerland

Whereas the Hopps and the Strüngmanns primarily focus on supporting local biotechs, the Swiss-based Bertarelli family is investing beyond its home market. Ernesto Bertarelli and his family set up an investment arm, Ares Life Sciences, a year after the 2007 sale of Serono AS, which they owned most of, to Merck KGaA for CHF 16.6 billion ($17.2 billion) Also see "Merck KGaA Buys Serono, Gaining U.S. Commercial Organization" - Pink Sheet, 21 September, 2006.).

Ares' strategy is to invest exclusively in revenue-generating life science companies primarily based in Europe, with international expansion potential and the need for board-level support.

Ares makes a positive virtue out of its family origins. “We bring a deep understanding of the culture and values of family-owned businesses, stemming from the Bertarelli family’s success with Serono over three generations,” the company claims.

According to CEO Jacques Theurillat, previously Serono’s deputy CEO and senior executive vice-president, strategic corporate development, other advantages Ares offers to companies are its long-term investment horizon and its commitment to the life science industry. These factors give Ares "a unique place in the European landscape," says Theurillat, while stressing that the company's remit “is not really about filling an investment gap" left by conventional venture capital.

In November 2010, Ares, whose management team boasts previous experience at Serono, Rhone-Poulenc (now Sanofi Aventis), Guidant Corp., Actelion Pharmaceuticals Ltd. and Novartis AG, acquired a 45.86% stake in the French allergy products company, Stallergenes, for €358.8 million.

Ares bought its stake from another family-owned European investment company, Wendel, which is based across the border in France.

The Wendels have a much longer pedigree as investors than the Bertarellis – the family claims to have been active in steelmaking and other industrial activities in France since the 1700s, and more than a thousand Wendel family members are shareholders in the family company, SLPS, which holds around 35% of the Wendel Group.

Wendel has held its stake for 17 years, and made more than 35 times its original investment, realizing a capital gain of around €300 million by selling the stake to Ares, which the French firm said was better placed to help Stallergenes' international expansion strategy.

Stallergenes is at a critical juncture, being in the process of launching its sublingual grass pollen allergen desensitization tablet, Oralair, in various European countries. But it is struggling to find a U.S. partner.

Benchmarking prices is difficult, but one private equity investor described the price paid by Ares as "very full". Still, Ares and other private investors don't have limited partners or institutional investors to hold them to account; they can pay what they like, and take a very long-term perspective.

But there are possible downsides, too, to the family shareholder structure, at least from an investee company perspective. Families like the Bertarellis tend to want full control of the operation, which may not suit all company CEOs.

Philanthropic Activities

The Bertarellis are a good example of the way that business-related activities of wealthy families are separated from their philanthropic activities.

They have set up The Bertarelli Foundation, which supports the life sciences sector on a charitable basis. It recently announced a gift of $9 million to Harvard Medical School, which will collaborate with the Federal Institute of Technology in Lausanne, Switzerland, on the development of neural prosthetic devices. The Foundation had already donated CHF 10 million for the creation of a Neuroprosthetics Centre at the Lausanne faculty.

Hopp also has a philanthropic outlet: the Dietmar Hopp Foundation provides funding for medical researchers, particularly those working in childhood cancers. As such the European families are following in the footsteps of U.S. billionaires like Bill and Melinda Gates, and Paul Allen, who have donated large sums to medical research.

By John Davis

Wealthy Families Play A Growing Role in European Biotech Financing

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