- Catalio Capital has invested in US biotech startups like Thrive Earlier Detection and Recursion.
- The VC just opened an office in London and plans to invest roughly 20% of its new fund in Europe.
- The European biotech market offers better valuations than in the US, Catalio’s cofounder said.
George Petrocheilos, the cofounder of the biotech investment firm Catalio Capital Management, started 2022 with a big resolution: Open up a location in Europe.
The venture-capital firm is based in Baltimore, but instead of opening up offices in biotech hubs like Boston or San Francisco, Petrocheilos and R. Jacob Vogelstein, Catalio’s cofounders, decided last year to send a member of their management committee, Dr. Diamantis Xylas, to open an office on London’s famous Baker Street.
Catalio was spun out of the private-equity firm Camden Partners two years ago and has invested in biotechs like Recursion Pharmaceuticals and Thrive Earlier Detection. The firm is in the middle of raising its third fund, which is at $241 million. Roughly 20% of it will be invested in European drug startups, according to Petrocheilos.
There aren’t many US biotech investment firms with locations in Europe, but Petrocheilos doesn’t think Catalio will be the last. The European healthcare market has been sleepy for many years, but it’s attracting more investment capital as valuations in the US continue to balloon.
Private US biotechs are worth nearly three times what they were in 2011, rising from $51.3 million to $135 million last year, according to data from PitchBook and the National Venture Capital Association. Seasoned biotech investors like Omega Funds’ Otello Stampacchia and Canaan’s Colleen Cuffaro have said that US biotech valuations are too high and unsustainable.
These skyrocketing valuations are one of the reasons Catalio has its sights set on Europe. The early-stage startup valuations are “two-, three-, four-times cheaper” Petrocheilos said, which means Catalio can make more profit for its limited partners. The net returns on late-stage investments in European biotechs have surpassed those in the US, according to the consulting firm McKinsey.
The European biotech sector was previously stifled by limited funding and a confusing patent process
Europe used to be a world leader in the pharmaceutical industry, but it lost its edge over the past couple decades. A January 2020 report from the European Federation of Pharmaceutical Industries and Associations wrote that 47% of new medical treatments were made in the US, while only 25% came from Europe.
One reason for the European slowdown is that startups have been stifled by the lack of capital. British CEOs told McKinsey last year that they had a hard time raising early-stage funding because there was a scarcity of investors in Europe who understood the biotech business.
The issue isn’t only a lack of capital. European universities can also stymie startups. The science coming out of research centers like Imperial College London and the Max Planck Institutes in Germany is catching up to the US, Petrocheilos said, but the patent process in Europe can be a minefield. Without a patent, a startup is vulnerable to lawsuits or being lapped by competitors.
Catalio Capital
Countries like the UK, France, Germany, and Switzerland have trailed behind the US and China in biotech patents, according to McKinsey. It can be a difficult to figure out what scientific research the European Patent Office will consider eligible for a patent, according to patent attorneys.
Additionally, entrepreneurship is often discouraged in European academia, the Air Street Capital founder Nathan Benaich wrote in a May op-ed for the Financial Times. British universities, for one, often demand an equity share of 25 to 50% in a startup in exchange for licensing the science, compared with 10% at leading academic institutions in the US. That’s unappealing for founders because it means they may become minority owners of their company in just the first or second of several rounds of funding.
But there are signs that the European biotech market is slowly heating up again
There are signs that Europe’s biotech market is undergoing a revival. Startups in the UK raised $3.6 billion between 2018 and 2020, which was 20% more than they had raised in the previous three years, according to the McKinsey report.
In March 2021, Mubadala Investment Co., one of the largest sovereign-wealth funds, announced it would invest 800 million pounds, about $1.02 billion, in UK life-sciences companies over five years. On top of that, the British government launched a 200 million-pound life-sciences investment fund in July.
Petrocheilos is optimistic these changes will continue. But in the meantime, Catalio is focusing more on investing in companies that have some sort of ties to the US, whether that’s an office or a partnership with an academic center or research hospital that can file patents.
It made the first investment out of its third fund last October in DNA Script, a company that hopes to print synthetic DNA and has dual headquarters in Paris and San Francisco. Catalio is also closing on an investment in a startup, which would it not name it because it’s in stealth, that has offices in Hamburg, Germany, and Cambridge, Massachusetts.
“It’s not where we want it to be today, but I still feel strongly about Europe having come a very long way from where it used to be three, four, five years ago,” Petrocheilos said.
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