We often think (correctly) that US biotechs lead the world in terms of developing the most innovative therapeutics, but Europe can’t be ignored in terms of delivering innovation in biotech (albeit less than US counter parts). I have been focused on I&I (inflammation and immunology) and oncology (cancer therapeutics) and I wanted to touch on European powerhouses for respective therapeutic areas.
While I do prefer investing in US biotech companies for many reasons, I also like to invest in select category leaders in Europe because of specifics around European institutional investors. US has the largest capital market (or stock market) in the world, and the scale allows for existence of many many healthcare dedicated shops, funds, or analysts. On the other hand, European market does not have that scale – there are fewer healthcare specialists or more generalists that are investing in healthcare. Therefore, European investors tend to pick their category leaders and just stick with them. This creates an environment in which the select few European biotechs that do large transactions with mega cap pharmas are viewed as the “category leaders” by European institutional investors and essentially get all the institutional money.
On top of this dynamics, European institutions tend to be more long-term oriented than American counterparts. Two things combine to provide a stable and supportive shareholder base for management team – I think that this provides a great investing opportunities for retail investors to invest long-term in some of these names for two main reasons – trading and management’s decisions.
Trading – share price movements could be less volatile (relative to US biotech companies)
European institutions do not trade as much as US institutions, and therefore, the stock price volatility tends to be lower in Europe and the US. Obviously in case of a clinical/regulatory events, the stocks move a lot, but stock price can recover a bit or there can be buyers defending the stock. This is because there is high regard to management teams and also there is scarcity value – for money that is earmarked for biotech, there just isn’t a lot of alternatives in the European biotech universe outside of select category leaders.
Management – with long-term minded investor base, management teams take a longer-term view when it comes to capital allocation / capital investment.
From corporate finance perspective, biotech is one of the most demanding industries – there is high upfront cost, very long investment period, high clinical risk, and, even if you cross all the risk, there is very high regulatory risk that is dominated by FDA or EMA. For instance, FDA can slap on warning language around some small toxicity signal observed in animal studies and the warning language could mean that the drug is dead on approval because of the legal risk associated with prescribing the product.
For above reasons, it is imperative that the management team invests capital prudently with long-term point of view to develop pipeline. The sad reality is that while management teams want to do so, the shareholder base is very short-term oriented, which forces management teams to make decisions that are more short-term oriented in order to manage share price. I think this is the sad reality for US biotech companies. In Europe, management teams of category leaders have the luxury of executing with long-term vision with relatively less interference from short-term swings or influence from shareholders.
Dr. Len Schleifer is one of the biotech executives for whom I have the upmost respect, and he noted that Regeneron, which now has grown to a market capitalization of over $60bn, has been able to drive growth because they had a 10-15 year vision when they entered into partnerships. Other biotech companies, he noted, entered into deals with large upfront component, but limited long-term participation rights because they wanted to manage short-term share price. This short-sightedness resulted in hampering growth of many innovative biotechs.
The culture of putting science first originates from the prolific partnership between CEO Dr. Len Schleifer and CSO Dr. George Yancopolous – this successful partnership and culture led development of mega blockbuster products Eylea (for wet AMD) and Dupixent (for atopic dematitis and asthma) and the discovery platform continues to generate pipeline drugs with blockbuster potential.
European category leaders are uniquely positioned for the management to execute on their vision with “Regeneron”-like view.
In the next part, I will discuss two category leaders in Europe that I love. One company has had multiple set-backs in pipeline recently, but I continue to like it because of its scarcity value and strong management team.
