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Josep M. Echarri

Founding Partner and CEO of Inveready Capital Company


At the beginning of the year it is tradition to make a list of New Year’s resolutions, which are usually of a personal nature. Given the current economic situation, the best resolution we can make is to guarantee financing for our company, regardless of the sector we work in.

For the biotech sector, this situation is nothing new. Unlike other fields that enjoyed easy access to financing during the boom years, the Catalan biotech sector did not participate in this whirlwind. This fact, however, can open up interesting opportunities for 2009 beyond just the idea that “the sorrow of many is a fool’s consolation”.

The other day I spoke with an important venture capital investor, who normally participates in transactions of over 100 million euros with a high debt level. During the venture capital boom years (2004-2007), this investor focused on investing in good-sized companies with a low risk level, making profitability relatively low but also relatively safe. The question is: if the profit level was low, how were they making money? The answer is simple. Eighty percent, or more, of the resources invested came from the debt of the same companies they invested in. The cost of this debt is relatively low, so with the return on the company’s stock (7%-9%), the venture capital funds achieved yearly profit levels of over 25%.

This same investor explained that, right now, he has hundreds of millions of euros to invest, but the financial crisis has made it impossible to continue with his traditional investment model. Finding himself in this situation, he realized he only had two options: return the money to his investors and go on the dole, or invest in sectors that don’t need credit (which is almost impossible to get right now), and have a high expected return on investment.

After discarding the first option for obvious reasons, my friend explained that he only knows of two types of companies that meet the previous conditions: (1) companies that are in crisis, which have never received financing from a bank (and which, because they can be bought cheaply, can offer a high return if they are turned around), and (2) technology companies, particularly those that belong to anti-cyclic sectors (meaning those that do well during times of economic crisis). At this point in the conversation, the word biotech came up for the first time because, as he explained, this sector meets the aforementioned criteria.

After that, the investor reflected on the main risk in either of the two options compared to the type of company he was used to investing in before the crisis. We came back to the subject of biotechnology because we are both aware that, thanks to public financing tools, investment in this sector could count on public leverage, which would allow the circle to be closed and facilitate the inflow of capital to a sector with a high return potential with a certain amount of leveraging. Finally, after this long digression, the investor agreed that the biotech sector is a clear candidate to receive some of his resources.

And here we have the opportunities that the crisis is bringing to the biotech sector. For the first time in his career, the investor was seriously considering investing in biotechnology and, for this decision, the public financing necessary to leverage the investments in order to increase the expected return on the same level of risk.

In short, 2009 can open up important opportunities for Catalan biotech companies, specifically those that are more mature. If the various public administrations commit to the sector, I dare say that 2009 will bring us a great deal capitalization transactions involving biotech companies and that, for the first time in this sector, we will see transactions over 20 million euros thanks to the inflow of venture capitalists that, up to now, were specialized in leveraged transactions in other sectors. In this situation, I believe that initiatives like the new interest-free line of credit that ACC1Ó offers can be a good way to dynamize the sector. Now, more than ever, public financing can attract new “players” that can contribute to financing and consolidating the biotech sector.

2009 will be a difficult year for the financial markets, maybe the worst we’ve seen. It is also true that the crisis will have drastic effects on private capital investment. But we can’t forget that, historically, the Catalan biotech sector has developed independently from the financial sector. In 2008 the biotech sector saw only 0.3% of all venture capital investments. For the first time in its history, and now that it is a more consolidated sector, biotech can attract investors in a situation like the present, when investing in the stock market or in real estate isn’t a very attractive option. However, we must be alert in order to take advantage of opportunities as they arise and never forget that perseverance allows us to do marvelous things.

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