Smaller firms may hold key to success

However, recent industry developments are providing an interesting case for investors to start paying attention to opportunities in the small- and mid-cap European biotech sector.

Compared with the US, the infrastructure for creating and developing new healthcare firms is still in its infancy. But over the past decade, the sector has begun to show more promise. The advances in knowledge about human disease and its molecular basis have improved beyond all recognition.

This is due primarily to the sequencing of the human genome at the end of the 1990s. This led to a dramatic surge in biotech valuations on both sides of the Atlantic – but results proved slow to materialise and valuations fell.

Since then, biotech firms around the world have started to produce some impressive products, based mainly on complex biological compounds such as antibodies and other proteins.

However, most of this value generation has been focused in the US. This has been true even where the original intellectual property came from Europe and the UK. For example, the world’s biggest-selling drug, Humira, was originally developed by Cambridge Antibody Technology. Due to lack of finance in the UK, the profits have very largely been earned by a US company, AbbVie.

US companies were able to pluck the low-hanging fruit with such drugs as Epogen and Neupogen, used for dialysis and cancer patients, anti-inflammatory antibodies for rheumatoid arthritis, which have sold hundreds of billions of dollars, and more recently cancer drugs that target cancer cells with greater accuracy and fewer side-effects.

After the disappointments in European biotech it took some time for confidence to be restored. Many billions of euros and pounds have been spent by universities and research institutes in the biotech area in Europe to create novel drug targets.

This intellectual property has been picked up by new companies in Europe and the UK to produce a new generation of companies and products that this time round are of much better quality and have a good chance of making it through the complex approval process.

Unfortunately, industry in Europe is still hampered by a lack of scale and finance and often has to partner with large US companies to finance the development of its products.

Nonetheless, some promising companies and technologies in the small- and mid-cap arena are emerging – for example, in the highly fashionable area of immuno-oncology, where the body’s own immune system is recruited to fight invading cancers.

In France, Innate Pharma, a spin-out from the University of Marseille, is a leading proponent of an approach that is markedly different from other players. Checkpoint inhibitors are the most well-known immuno-modulatory drugs under investigation. The leading companies in this area have focused on the adaptive immune system responsible for learned immunity, which protects from infection over the long term.

Checkpoint inhibitors prevent a cancer cell from fooling the immune system into recognising the cancer cell as a normal cell, allowing the immune system to attack and kill the cancer cells.

Innate Pharma employs the same logic in the innate immune system, which provides a blunter but quicker immune response against invaders. By providing the same checkpoint inhibition in the innate system as the leading drugs provide in the adaptive system, further control of the immune response can be achieved. The science is still early, but could be very exciting. Indeed UK firm AstraZeneca recently licensed a drug in this area from Innate Pharma.

Bavarian Nordic, a Danish vaccine developer also in the small- and mid-cap category, is taking a different, but very promising approach. By using vaccine technology to prime the immune system against typical cancer-cell markers, a better immune response can be created.

Excitingly, the two approaches of checkpoint inhibition and vaccine immune stimulus are complementary and could lead to very significant improvements in cancer survival rates.

It goes to show that investors needn’t always look to larger biotech firms for exciting, ground-breaking investment opportunities – smaller companies, closer to home, may hold the key to success.

Mark Evans is a partner at THS Partners