Index eyes bargains in biotech's "candy shop"

LONDON (Reuters) - Bombed-out valuations present an unprecedented buying opportunity in the European biotech sector, according to venture capital firm Index Ventures, which is eyeing both early and late-stage opportunities.

"It's like being in a candy shop," partner Francesco De Rubertis told Reuters. "I'm very optimistic about the fact that a year from now, or a year and a half from now, the market will be very high."

He sees a major disconnect in current pricing for biotech assets, with Big Pharma companies regularly paying 50 to 100 percent takeover premiums for businesses that have been shunned by risk-averse investors.

Europe is a particularly fertile ground because of its relative immaturity.

It boasts just four listed biotech companies with a market capitalisation above $1 billion -- Actelion (ATLN.VX), Genmab (GEN.CO), Intercell (ICEL.VI) and Basilea (BSLN.S) -- out of a field of around 60.

Yet a decade of steady work in the lab means many smaller companies contain hidden gems in terms of promising experimental drugs in mid-stage Phase II development.

"In 1998 and 1999, stocks were really down but the companies then were not really full of assets. Now the boxes are full," De Rubertis said in an interview at Index's London offices.

"I'm not saying every company has great drugs, but there are tens of drugs which are working and are going to deliver real value."

CASH DROUGHT

Many biotech companies have been left struggling for cash. Venture funding for the biotech sector in Europe plunged last year by 21 percent to 1.2 billion euros, according to Ernst & Young, and the credit crunch has made matters worse.

Index, which backed Web phone-calling leader Skype before it was bought by online auction house eBay Inc (EBAY.O), has a deliberate strategy of focusing on European technology and biotech -- in contrast to the U.S. focus of most rivals.

More than 80 percent of its planned investments will be in Europe, with the remaining 10 to 20 percent in the United States.

The firm currently has a 400 million euros ($600 million) venture capital fund, Index Ventures IV, and a similar-sized growth fund focused on late-stage companies called Index Ventures Growth I that was formed in January.

Just under half the investments in each will be in biotech with the balance in information technology.

De Rubertis said he expected to close the first biotech investments from the Growth fund in three or four months time, typically making a 10-20 million euros investment for a 10-30 percent stake in a company.

Index's current biotech portfolio includes Swiss-based Addex (ADXN.S), which he said was "completely undervalued". Shares in Addex leapt on Tuesday on takeover talk, although management said it was not currently involved in M&A discussions.

(Editing by David Cowell)