Young biotech companies from Germany are almost traditionally faced with major hurdles when it comes to financing, especially during the growth phase. The success of BioNTech, CureVac & Co. could mean a turnaround. But future developments will not be a sure-fire success either.
Platform Life Sciences: Mr. Pfaadt, young biotech companies from Germany are always faced with major challenges. Many raise capital from abroad or go public directly in the USA. Why is that?
Pfaadt: Our experience is that the type of capital that a company like c-LEcta needs is not available to the appropriate extent in Germany. There are various reasons for this, but it is due to the business models, for example. Biotech investors are buying a bit of fantasy, future revenue, but certainly not a dividend for now. It may be that the German mentality is somewhat opposed to this – which is why many biotech companies go abroad to raise capital. c-LEcta also brought international investors on board three years ago, and despite the positive results we are still receiving more inquiries from investors from abroad. Especially in the Anglo-Saxon area there is more capital available for biotechnology. In addition, the analysts there can better scan the biotech market. In addition, investors are more concerned with the topic – I notice that when we receive inquiries from abroad. You ask yourself: Where are the markets of tomorrow? Investors from Germany can be more enthusiastic about a certain technology in the present. And currently, especially in the USA, the valuation ratios are much higher. It's not necessarily easier to be listed on the Nasdaq than in Frankfurt - but the valuations are of course much more attractive.
Investors in Germany often complain about a lack of willingness to take risks. Is the accusation justified?
I think so. Years ago, a colleague from Great Britain once said to me: "You Germans are cost-driven, we are revenue-driven." This thought has accompanied me over the last 20 years and I see it confirmed again and again. My impression is that US investors don't even want to hear from companies how good and innovative they are. These investors think in terms of markets and market potential. Lucid Motors' "SPAC IPO" is a case in point: a company that was valued incredibly highly before it even sold its first electric car. On the other hand, if you look at income in Germany, you automatically always look at the necessary costs – that sometimes slows down the willingness to invest. However, I don't want to judge that conclusively, because German investors are now also represented internationally. I am not able to judge whether common prejudices are still generally valid.
Conversely, risk appetite in the US is viewed positively. Does that mean that everything is automatically better on the other side of the Atlantic?
I wouldn't generalize that. Of course it depends on the perspective. If you are looking for a lucrative exit, the USA is already a kind of "promised land" for the investor, because this is the best way for him to maximize his profit. Whether this is also the best solution for the company itself can certainly be discussed and depends on a variety of factors.
c-LEcta is very experienced in working with venture capital companies. How do you rate the exchange with German and international investors?
In fact, I can only report positive things. We at c-LEcta have a very constructive group of shareholders, some of whom have been with us for years. When we were able to win an international investor with Capricorn for the first time three years ago, that was an additional boost, and a new "spirit" came into it. Capricorn invests not only in Belgium or Europe, but worldwide. This also requires a large-scale, international network from which we benefit - because although we are a German company, we make the largest part of our turnover with international business. c-LEcta itself is therefore an international company. With almost 100 employees, our employees currently come from eleven different countries. This internationality is also reflected in our investor structure.
What role can a company like c-LEcta play towards young biotechs in this context, for example as a mentor or as an intermediary towards potential investors?
Ultimately, we do this indirectly, for example by being organized in various associations or on platforms where regular exchange takes place. Due to our shareholders, we also have several sister companies. In this way, we can exchange and pass on experiences and support one another.
How can Germany strengthen the industry on different levels? Is it enough for the industry to rely only on government subsidy programs?
That's not an easy question. Of course, Germany is not badly positioned per se: there is a lot of knowledge, good institutes and universities in this country. I think we also manage to get people to spin off. On the other hand, three years ago it was not easy for us to generate growth financing, i.e. to attract investors who would accompany us into the next growth phase. My impression at the time was that more support was needed here. The spin-off and research and development is not the big hurdle. There is sufficient access to capital in Germany, which is also supported accordingly by the state. In the classic growth phase, it becomes more difficult when it comes to commercialization and scaling. I believe that the state is no longer the right contact here either – a functioning capital market and a platform are needed here on which investors and the right companies can come together. I think at this point some companies are having a really hard time because they just don't get the right funding.
Which key factors ultimately play a role in the transformation of a research project into a successful company?
We're talking about what I think is the most exciting phase of a company, namely the transition from pure research and development to a profitable company. This is about the transformation of a company that was previously purely scientific and project-driven to one that suddenly had to think in terms of products and sales. The mentality of the company is also shifting here. The technology platform is already installed, but suddenly sales experts come into a company who think completely differently. Our experience shows: Here you have to practice active opportunity management and be able to establish new processes. When these changes are mastered, you hold the key to further successful growth. c-LEcta hired around 20 new employees last year. We expect to hire around 30 new employees this year.
The success of companies such as BioNTech in the course of developing active ingredients against Corona seems to be giving biotechnology a new boost in Germany. Will everything be alright now?
Biotech always goes through ups and downs. I think the current development is helping the industry. In Germany in particular we have many great projects. Today almost every child in Germany knows the name "BioNTech". This is a great result with a signal effect. I can imagine that many students want to go into this area in the next few years. Many Germans today are aware of the potential of biotechnology. Almost 20 years ago, when biotech experienced its first boom, that was still too early. The industry has now matured and there are more concrete applications. The field of gene and cell therapy is a major growth market for us. This is where biotech offers real solutions and I think people understand that. It's no longer just about fantasies, but about concrete solutions. I think the current development will bring an important boost from which Germany can also benefit. I have hope that biotechnology will get the recognition it deserves.
Mr. Pfaadt, thank you very much for the interesting discussion!
The interview was conducted by Holger Garbs.
TO THE INTERVIEW PARTNER
Thomas Pfaadt has been CFO and Managing Director of c-LEcta GmbH since 2018. Previously he worked for a private equity operator of rehabilitation clinics in Berlin and for a family-owned integrated healthcare group and was responsible for M&A and Corporate Finance and Investor Relations respectively. In addition, he gained experience as a banker and consultant with a strong focus on the healthcare sector. Pfaadt studied business administration at the Goethe University in Frankfurt am Main and at the University of Southampton.
Source: GoingPublic editorial office from 28.03.2021/XNUMX/XNUMX
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