Study on the competitiveness of the European biotechnology industry

The financing of biopharmaceutical product development in Europe
The Framework Contract of Sectoral Competitiveness Studies – ENTR/06/054

Final report

European Commission European Commission Enterprise and Industry Enterprise and Industry

This report was prepared with the help of funding from the European Commission's Entrepreneurship and Innovation Programme (EIP) under the Competitiveness and Innovation Framework Programme (CIP).

Legal notice Neither the European Commission nor any person acting on its behalf may be held responsible for the use to which information contained in this publication may be put, nor for any errors which may appear despite careful preparation and checking. This publication does not necessarily reflect the view or the position of the European Commission. NB-31-09-224-EN-C ISBN 978-92-79-14055-6 doi: 10.2769/33524 © European Communities, 2009 Reproduction is authorised, provided the source is acknowledged, save where otherwise stated. For use/reproduction of third-party copyright material specified as such permission must be obtained from the copyright holder(s).
Cover image: Red and yellow pills on white background © Dmitry Sunagatov (Fotolia)

Study on the competitiveness of the European biotechnology industry – The financing of biopharmaceutical product development in Europe
The Framework Contract of Sectoral Competitiveness Studies – ENTR/06/054

Final report

Report prepared by Danish Technological Institute for the European Commission, DG Enterprise and Industry

Copenhagen/Brussels, October 2009

2.1-1 W www. Box 4175 3006 AD Rotterdam Watermanweg 44 3067 GG Rotterdam The Netherlands T +31 (0)10 453 88 00 F +31 (0)10 453 07 68 E Registration no. 24316726 ECORYS Macro & Sector Policies T +31 (0)31 (0)10 453 87 53 F +31 (0)10 452 36 60 2.ECORYS Nederland BV P.1-5 .ecorys.

2  Implementation of the survey 3.Table of Contents 1.  Executive summary 2.3.1  Number of drug candidates in the pipeline 6.4  Impact of the financial crisis 5.  Introduction 2.  The framework and methodology 3.1  The pipeline of the biopharmaceutical sector 6.2  The biopharmaceutical sector – key figures  Different forms of capital 5.2  Venture capital investment strategies 5.3.  Strategies for product development 6.defining the different development stages 3.1  Development of biopharmaceutical products 4.2  Capital supply in Europe 5.  The capital base available for the biopharmaceutical sector 5.1  Different sources of capital  Establishing the inventory of biopharmaceutical enterprises for the survey 3.3  Comparing the capital supply for life sciences in the US and Europe 5.1.2  Defining business activities 2.1.1  Background 2.3.2  Challenges facing the European venture capital industry 5.4  R&D cost for developing drug candidates 4.2  Objective of the study 2.2.2  Grouping the biopharmaceutical enterprises 6.3  Business dynamics within the biotechnology sector 4.2.3  Representativeness of the interviewed enterprises 3.3.3  Drug development .  The biopharmaceutical sector 4.1  The overall conceptual framework 3.5  Conclusion 5.5  Conclusions 6.3  Conclusion 1  5  5  6  6  6  8  9  11  11  12  12  14  14  16  17  17  20  23  23  25  27  27  27  29  30  33  35  37  37  39  41  41  42  43  45  46 .2.4  Selection of case studies 4.2  Methodological approach 3.2  Strategies for bringing the drug candidates to the market 6.3  Defining the biopharmaceutical industry 2.1  From biotechnology sector to the biopharmaceutical sector 2.1  Financing gaps in biopharmaceutical product development 5.

7.6.6  Conclusion and recommendations 9.2  Recommendations focusing on increasing the access to finance for biopharmaceutical companies 9. Germany MolMed.2  Internal barriers 7.2  International markets – barriers. Sweden Apogenix.1.1  SWOT analysis 9.2  Strengths 9.1  Recommendations addressing early stage drug development 9.1  Public policy and regulation related to funding 57  8. distortions and negotiations 64  9.1  External barriers 7. Denmark BioArctic Neuroscience AB.  Policy and regulation 57  8.5.6. Switzerland Cellzome.1  Capital raised for drug development 7. United Kingdom 67  67  68  69  71  71  73  74  75  77  79  87  88  89  95  101  107  113  119  125  129  2.3  Need for capital 7. Italy Innate Pharma.5  Threats 9.7  Conclusions 47  47  48  51  52  52  53  54  54  56  8.  Strategic outlook– conclusion and recommendations 9. Spain Arpida.3  Weaknesses 9.3  Improving framework conditions for the biopharmaceutical sector and venture capital Bibliography Annex 1: List of interviewed expert Annex 2: Case studies Symphogen A/S.4  Opportunities 9. France Oryzon Genomics.2  Regulatory measures related to product development and commercialisation 61  8.1-8 .  Financing strategies 7.6  Exit strategies of investors 7.6.4  Impact of financial crisis 7.1.2  Access to capital 7.1  Regulatory environment 57  8.5.5  Impact of capital shortage 7.

The challenge for Europe The European biopharmaceutical sector faces a huge challenge concerning access to finance. and improve public health by ensuring that new innovative medicines are developed. new statistical data gathered through a survey of biopharmaceutical companies in Europe (carried out in May 2009 where 87 enterprises participated in the survey ). As a result. the financial crisis has limited the funding available to investments and made investors more risk-adverse. In turn. Consequently. The study is based on desk research of reports and existing studies. In terms of capital supply. but excludes bio-manufacturing enterprises.1. Moreover. a dedicated effort to support the biopharmaceutical sector in Europe can promote economic growth and employment in Europe. In addition. eight in-depth case studies of European 1 . Within the last 10-15 years. Executive summary A small and specialised sector of research-intensive SMEs in the biotechnology industry focuses on the discovery and development of innovative biopharmaceutical medicines for human healthcare. Developing new biopharmaceutical products is very capital-intensive and it takes up to 10-15 years to bring a new product to the market. many biopharmaceutical companies – especially in the early stages of product development – are struggling to gain access to funding for their R&D activities. Investors are therefore focusing their investments on late-stage biopharmaceutical companies or investing in other sectors that are considered less risky than the biopharmaceutical sector. and 3) a historical funding problem due to the financial crisis. This also includes firms specialized in the development of research tools for this objective (“platform firms”). The biopharmaceutical sector is defined as enterprises focused on discovery and development of biopharmaceutical products for human healthcare. there is a high risk of failure compared to other sectors. the biopharmaceutical sector is facing 1) a structural funding problem relating to the sector’s risk profile. 2) a supply side problem due to the challenges facing the European venture capital industry. based on tools and approaches from modern biotechnology. biotechnology enterprises providing services to biopharmaceutical and pharmaceutical enterprises. this biopharmaceutical sector has become one of the most research-intensive sectors with a great potential for delivering innovative human medicines in the future. and enterprises involved in the production of biosimilars. much more capital is invested in life sciences in the US than in Europe. These characteristics make the biopharmaceutical sector less attractive to investors compared to other sectors. Objectives of the study The European Commission has launched a study on the access to finance for biopharmaceutical companies in Europe to analyse these challenges and to formulate evidence-based policy recommendations that can support the competitiveness and innovative capacity of the European biopharmaceutical sector. and the European venture capital market is not sufficiently developed to support the biopharmaceutical sector.

biopharmaceutical companies (carried out in May and June 2009) and interviews with experts. On the other hand. 75% of the biopharmaceutical enterprises in the survey indicate that the financial crisis has made access to capital more difficult. The financial crisis has especially limited the access to capital via an IPO or venture capital. often have only limited resources. late-stage companies are also struggling to gain access to capital at the a wider perspective – European innovation. economic growth and employment. Approx. the product pipeline of many of the large pharmaceutical companies is drying out and the research projects in the biopharmaceutical sector thus constitute an opportunity for the pharmaceutical companies to ‘fill up’ their own pipelines with promising biotechnology-based drug candidates. If the funding situation continues to be critical. but three major funding gaps relating to the different stages of product development can be identified: • First funding gap: obtaining funding for platform development and pre-clinical development (early stage) • Second funding gap: obtaining funding for clinical trials phases 1 and 2 (middle stage) • Third funding gap: obtaining funding for clinical trials phase 3. and . and they may gain access to capital by selling/out-licensing drug candidates or establishing alliances with pharmaceutical companies. This result is very much in line with the results of other studies. The survey is representative of the European biopharmaceutical sector. Among the surveyed enterprises. the survey shows that the financial crisis has had a negative impact on the access to capital for enterprises in the European biopharmaceutical sector. and only few (17%) biopharmaceutical companies in the survey indicate that they intend to bring products to the market on their own. The need for better access to capital is evident in all phases of product development. more than 40% of the biopharmaceutical enterprises will need to raise capital within the next year to maintain their current activity level. the biopharmaceutical enterprises indicate that they will probably have to postpone new R&D activities or reduce the number of drug candidates. The dominant product development strategy is aimed at either entering into alliances and/or outlicensing the drug candidates to reach the market. Biopharmaceutical enterprises. 2 . manufacturing and marketing (late stage) The survey of biopharmaceutical companies in Europe shows that the early-stage companies are finding it more difficult to gain access to funding. on the one hand. but with a bias towards the smaller and younger enterprises as this has been a key sampling criterion for the European Commission. However. This symbiotic relationship is reflected in the survey of European biopharmaceutical enterprises. In line with expectations. Product development strategies in Europe There is a symbiotic relationship between the biopharmaceutical sector and the pharmaceutical sector. This may eventually have a negative impact on drug development activities in Europe. The demand for capital The survey of biopharmaceutical enterprises in Europe shows that they lack access to capital.

capital-intensive. the analysis shows that the US is the world leader in life sciences investments accounting for two thirds of the total venture capital investments in life sciences. Venture capital is the most important capital source for European biotech companies. Yet. This gives the US biopharmaceutical companies a comparative advantage over European biopharmaceutical companies. the European VC funds may even be too small to ensure sufficient capital for follow-on investments or develop the expertise needed to invest in the biopharmaceutical sector. In Norway. and other initiatives are currently discussed in other European countries to ensure that the biopharmaceutical sector can survive the crisis. while the share of the EU Member States is 20%. and the performance of the European biopharmaceutical drug developing companies depends on access to capital from venture capital funds or large pharmaceutical companies. European funds manage 50% less capital in total. sector such as the biopharmaceutical sector. The supply of capital in different development stages of biopharmaceutical product development is undergoing several changes. for instance. The early stage is increasingly dominated by private investors such as business angels as well as public incubators and state-backed investors. Data on the average amount of capital invested in companies suggests that European venture capital funds support too many companies with insufficient funding.The capital supply in Europe Comparing the investments in life sciences in the US and Europe. The European venture capital industry The amount of capital invested in each biopharmaceutical company largely determines the company’s level of activity and the strategic options available to the company. the government has launched a package of measures to help the Norwegian biotechnology industry through the financial crisis. Studies indicate that Europe has 64% more VC funds than the US. Several European countries have launched new funding initiatives to ensure that the national biotechnology sectors are in a better position to deal with the financial crisis and the risk that their funding may dry out. Moreover. while their share of early-stage investments has declined thus making early-stage funding a more serious challenge for new biopharmaceutical companies. the financial crisis constitutes a serious threat to the future development of the sector. For a highrisk. One of the major changes is that venture capitalists have increased their share of late stage investment. Impact of the financial crisis The financial crisis has had a negative impact on investments in all industry sectors even though it difficult to estimate how much the total venture capital market has been reduced. 3 . A possible explanation for this under-funding of companies in Europe is that the European venture capital industry is more fragmented than the US VC industry and that there is less capital available to the funds in Europe than in the US.

4) The establishment of such a fund will increase the public co-investments in the European biopharmaceutical sector. Based on the analysis. This could include speeding up the centralised procedure for marketing authorisation (EMEA) and adopting the successful Young Innovative Companies (YIC) scheme in European countries. The analysis suggests that future financing regimes should ensure that the sector has better opportunities to access finance in the product development process. the scheme does not currently consider the structural characteristics of the biopharmaceutical sector. we propose the following policy actions to make it easier for European pharmaceutical companies to gain access to capital: 1) Increasing public co-investments in venture funds focusing on biopharmaceutical companies is only part of the solution. However. 3) Policy makers should consider increasing the availability of risk capital to biopharmaceutical companies by establishing a European Biopharmaceutical Innovation Fund. In fact.Recommendations Currently the biotechnology industry has insufficient access to finance. Such sector-specific measures would constitute a new approach in European industrial policy (compared to the current horizontal approach) that could successfully support the future development. New accelerating tech transfer models need to be explored by the biopharmaceutical sector. However. 4 . 5) Finally. The fund should operate on market conditions to ensure that funding is allocated to biopharmaceutical companies with a substantial market potential. The fund should focus on investing in biopharmaceutical companies based on principles of economies of scale and specialisation to provide sufficient funds and act as highly qualified and professional fund within biopharmaceuticals. the European Commission should consider a mapping and an in-depth analysis of the effects of different models used within and outside Europe (good practice). long time to market. innovative capacity and competitiveness of the European biopharmaceutical sector. Consequently. the effects of these different models have not yet been analysed. the European Commission should recognise the unique structural characteristics of the biopharmaceutical sector (capital-intensive. Consequently. high risk of failure) by considering sector-specific policy measures targeting the special needs of the biopharmaceutical sector. European and national policy makers will also need to consider the geographical reach of the existing funding mechanisms at European and national level to ensure that global funding opportunities are exploited. the framework conditions for both biopharmaceutical companies and the venture capital industry in Europe should be improved to better support the development and competitiveness of these two industries. public authorities and the investor community. However. 2) The lack of capital is especially a challenge for biopharmaceutical companies in the early stages of product development. One solution is to support micro-funds and investments by business angels in early-stage biopharmaceutical companies through public co-investments and tax incentives. The effectiveness of biopharmaceutical R&D and commercialisation needs to be improved to ensure that the sector is competitive and able to attract private funding. policy makers need to support early-stage investments to ensure that innovative companies continue their development activities. and policy makers should therefore consider expanding the current timeframe of the YIC scheme from eight to 15 years.

2.1 The importance of the biopharmaceutical sector in relation to the pharmaceutical industry is growing. biopharmaceuticals require large investments. The lack of adequate access to funding may in turn have a very negative effect on the level of innovation in the European biotechnology sector and the sector’s global competitiveness. the Commission argued that the growth and economic sustainability of Europe's biotech enterprises are being held back by three main European Parliament website.1 Background The European biopharmaceutical sector is an important platform for developing innovative products and services that may contribute to Europe’s competitiveness in the world market and ensure the health and well-being of citizens around the world. The time to market is relatively long and the risk of failure when developing new biopharmaceuticals is very high.000 million.htm European Biopharmaceutical Enterprises estimates that – on average – the process of developing and bringing a new drug to market takes between 10 to 15 years with an estimated average cost of more than €1. However.europarl. Danish Technological Institute (DTI) conducted the study in cooperation with the ECORYS SCS Consortium. 2. Other industrial sectors also use scientific discoveries in the biopharmaceutical sector to develop novel products and improve production methods. Thus. Source: European Biopharmaceutical Enterprises (2008): Annual highlights 2007/2008 3 The 2007 European Innovation Scoreboard indicates that the EU is experiencing a declining gap with the US in earlystage venture capital. Bio4EU 2008).2 European biotech enterprises are unable to raise as much capital as US biotech enterprises. medicines deriving from biotech innovations (biopharmaceuticals) are estimated to account for approx.4 The European Commission has addressed the funding problems facing the European biotech industry on several occasions.europa. JRC/IPTS.3 The substantial differences in the availability of and access to capital for biotech enterprises in Europe and the US have lead European stakeholders such as Europabio to conclude that the European biotech industry “shows signs of chronic underfunding”. http://www. In its 2007 Communication on the midterm review of the Strategy on Life Sciences and Biotechnology. According to the Europabio 2006 and US enterprises are able to raise twice as much venture capital compared to European enterprises. European enterprises only have access to a fifth of the private equity finance that US enterprises have. The potential scientific and socio-economic impacts of the sector are thus substantial (European Commission 2006. Introduction This report is part of the framework contract on Sectoral Competitiveness Studies (ENTR/06/054). These characteristics of the biopharmaceutical sector affect the willingness of external investors to invest in the development of new biopharmaceuticals. 20% of all marketed medicines and represent around 50% of all new medicines in the pipeline (Europabio (2009). 30th May 2006 2 11 5 . Source: Pro Inno Europe (2008): European Innovation Scoreboard 2007 4 Europeabio press release.This makes biotechnology vital in the context of realising the major European goal of becoming ‘the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion’.

2. Furthermore. we analyse and describe the challenges that Europe faces regarding supply of risk and debt capital. the financing problem was explicitly addressed and two likely causes for the inadequate access to finance in Europe were identified. namely underdeveloped venture capital markets and the fragmentation of financial markets (European Commission 2007b).constraints: Europe's fragmented patent system. the biopharmaceutical industry is defined according to a definition of biopharmaceutical products as well as to business activities related to the development new biopharmaceutical drugs and medicine. On this basis. According to the official EU definition of SMEs. In this context. we analyse the ways that biopharmaceutical enterprises benefit from various funding sources and what strategies they have adopted to achieve growth and revenue generation. Based on this data. venture capital funds. However. products and models thereof. We also provide good practice examples that may provide inspiration to policy makers and stakeholders at the even though large enterprises have been excluded from the study. to alter living or nonliving materials 5 EU website.1 From biotechnology sector to the biopharmaceutical sector Modern biotechnology .2 Objective of the study The study aims at analysing the access to finance for European companies developing biopharmaceutical products. insufficient supply of risk capital and shortcomings in the cooperation between science and business (European Commission 2007). http://europa. In this analysis. The Communication was followed by an analysis of the overall competitive position of the European biotechnology sector in July 2007. national and European levels. as well as parts. etc.3. 2. they are still relevant as partnering companies or as a source of funding together with banks.5 This size criterion implies that we have excluded large enterprises from the study.3 Defining the biopharmaceutical industry The study's focus on “biopharmaceutical product development” means that it only deals with one subsector within the biotechnology industry.defined as ‘the application of science and technology to living organisms. the Commission suggested that policy measures could improve framework conditions to make enterprises more attractive for earlyand late-stage investors and increase the overall availability of investment capital for European biotechnology enterprises. small and medium sized enterprises are defined as independent enterprises with fewer than 250 employees.htm 6 . These two dimensions define the target group of the study and will be discussed in further detail below. Furthermore. A key element in the study is the collection of new and unique data on the funding situation for European biopharmaceutical enterprises and its impact on strategies and performance. the study only includes small and medium sized biopharmaceutical enterprises. 2.

tissue engineering) • Stem cells • Gene therapy • Enzymes • Recombinant vaccines and therapeutic vaccines 7 ... This includes diagnosis of health risks and the prevention and treatment of illnesses. on the other hand.1.g.1: The biotechnology sector – technologies and products Red biotech (biomedical) Biopharmaceuticals Medical devices Green biotech Diagnostics White biotech Red biotech can be further divided into three subsectors. Exhibit 2. Exhibit 2. Biotechnology used in the treatment of human beings is often referred to as ‘Red biotechnology’.enables the development of new products and services in a wide range of economic sectors. IPTS 2007): • Recombinant insulins • Other recombinant hormones • Growth factors (including erythropoietin’s) • Recombinant blood factors • Recombinant thrombolytic • Interferon’s and interleukins • Monoclonal and engineered antibodies • Cell-based therapies (e.. The specific types of biopharmaceutical products that are relevant to this study include (Rader 2005. namely biopharmaceuticals for human healthcare including different biotechnology-based therapies and preventives. including agricultural production. food processing.for the production of knowledge.g. increasing the efficiency of substances used in industrial production). industrial production and healthcare. ‘Green’ and ‘White’ biotechnology. goods and services’ (OECD 2005) . and diagnostics using biotechnology as the main technological platform. This study of the financing of biopharmaceutical product development focuses exclusively on biotech-based therapies and preventives. increasing the resistance of plants to specific diseases) or for industrial purposes (e.g. cf. refer to use of biotechnology in agriculture (e. medical devices.

Exhibit 2. As the study only focuses on biotech for human healthcare (´red biotech’). 2008). however. we can use the OECD definition of biotechnology enterprises as a starting point for defining a biopharmaceutical enterprise. 8 . This definition of drug discovery firms (DDFs) refers to enterprises that “do very little else than biotech research” (Valentin et al.2 Defining business activities The study only focus on enterprises specialised in biopharmaceutical drug discovery and product development (referred to as ‘biopharmaceutical enterprises’ in the following).3. The OECD distinguishes between biotechnology active enterprises defined as “a firm engaged in key biotechnology activities such as the application of at least one biotechnology technique to produce goods or services and/or the performance of biotechnology R&D” and dedicated biotechnology enterprises defined as “biotechnology active firm whose predominant activity involves the application of biotechnology techniques to produce goods or services and/or the performance of biotechnology R&D” (OECD 2005). Exhibit 2. Focusing on research only. These two OECD definitions are very broad and may include enterprises that do not carry out research and development of biopharmaceutical products.2. may result in the exclusion of enterprises that have left the drug discovery phase and are either carrying out clinical trials or applying for drug approval. cf.2. 2006).2: Defining a ‘biopharmaceutical enterprise A narrower definition of biopharmaceutical enterprises can be found in a recent comparative analysis of Danish and Swedish drug discovery firms (Valentin et al. There are many definitions of ‘biopharmaceuticals’ and this complicates the definition and identification of biopharmaceutical enterprises (Rader 2005).

and companies will face different financial challenges in the respective stages of the development process. Such a continuous and stepwise development model typically consists of the following stages: • Development of a technological platform – identification of (the technological potential • • • • • for) new drug candidates Pre-clinical test involving in vitro (test tube) and in vivo (animal) experiments Clinical trial phase 1. Some of these firms will give up their ambition to develop their own new drug candidates and become pure service providers while other firms are hybrids operating both as a platform company and a drug discovery firm (Lanza 2009). biotechnology enterprises providing services to biopharmaceutical and pharmaceutical enterprises6 and enterprises involved in the production of biosimilars. The challenge for the biopharmaceutical sector is to develop new medicine based on new scientific knowledge and research results. development. prototype development. 2. applied research. The biopharmaceutical firms will typically develop new medicines based on a technology platform.3. the target groups of this study are enterprises focused on discovery and development of biopharmaceutical products for human healthcare.testing in a small group of people (20-80) Clinical trial phase 2. we define the target group for this study in line with the OECD definition of a dedicated biotech enterprise.3 Drug development . manufacturing and marketing The access to finance for biopharmaceutical companies largely depends on an assessment of the risks and uncertainties related to these different development stages. we have excluded bio-manufacturing enterprises. Enterprises that have actually managed to introduce a product on the market may also be part of the target group if they are currently involved in biopharmaceutical R&D. some firms become specialized in the development of research tools and services based on their technology platform (platform firms) as a service to make the R&D process more efficient and predictable. Damian and Barnard. Thus. However. John.7 However. This study focuses explicitly on the different development stages to better understand the challenges facing companies in the process of developing new drugs and to provide policy recommendations that Examples of specialised service companies are Clinical Research organisation (CRO) specialised i clinical trials and procedures for approval of new medicine as well as Contract Manufacturing Organisation (CMO) specialised in bringing or scaling test and research results into manufacturing 7 The value chain of development of new biopharmaceutical product consists typically of several business activities such as basic research. Rose (2004)) 6 9 . This technology platform represents scientific knowledge and tools for drug development. verification and validation.test on large groups of people Later stages including authorization. based on tools and approaches from modern biotechnology including firms specialized in the development of research tools for this objective (“platform firms”). The main challenge for many drug-discovering companies is to move from the early stage in the value chain to reach the market with new products. The target group thus constitutes an important part of the category defined by OECD as Dedicated Biotech Firms. manufacturing and marketing (Kapeleris.Therefore. Hine.defining the different development stages Drug development is very often understood as a ‘trial and error’ process from the initial research results to the final market introduction of the new product. clinical trials.testing in a larger group of people (100-300) Clinical trial phase 3 .

take these differences into account. mid-stage (clinical trials phases 1 and 2) and late-stage development (clinical trial phase 3. 10 . However. we group the stages into early-stage development (development of technological platform and pre-clinical test). manufacturing and marketing). authorization.

The study will distinguish between the supply of capital to biopharmaceutical enterprises (supply situation) and the impact of the supply situation on strategy and performance of biopharmaceutical enterprises.. 3. progress in the development of new drugs) may result in a mismatch between demand and supply of capital.g.g. The underlying logic is that the supply situation has an impact on the choice of strategy and thus. approval procedures as 11 .3..1 The overall conceptual framework The European Commission has requested an in-depth analysis of the demand for and supply of capital for biopharmaceutical enterprises – in a global perspective as well as focusing on developments in the EU’s internal market. in turn. decreased risk tolerance among investors) or in the demand for capital (e.1: Conceptual framework Changes in the supply of capital (e. regulation of biotech research and product development. The framework and methodology The aim of the conceptual framework is to define the key concepts and delimit the scope of the study. Such a mismatch may result in a change in strategy by biopharmaceutical enterprises – for instance by relocating from a region with limited access to capital to other regions with better access to capital – and may also affect enterprise performance. we will briefly describe key elements of the analytical approach that will guide the analyses. on the performance of enterprises. We structure the analysis of the financing of biopharmaceutical enterprises according to the following analytical model: Exhibit 3. In addition. Framework conditions include a wide range of factors that may affect the demand and supply of capital as well as enterprise strategies and performance such as regulation and structure of capital markets.

Unfortunately. 3.e.2. and much of the basic statistical data on the sector is therefore not available (European Commission 2007b). based on tools and approaches from modern biotechnology which also includes firms specialized in the development of research tools for this objective (“platform firms”).. researchers and government officials). risk attitude in society. A key challenge is to identify and select biopharmaceutical enterprises for the survey. attitudes towards entrepreneurs). Instead. strategic choices and perceptions in the industry. Interviews with experts (venture capital funds..2 Methodological approach Our methodological approach to examining and analysing the competitiveness of the European biopharmaceutical industry with a particular focus on the financing of biopharmaceutical product development in Europe is based on the following sources of data and information: • • • • Desk research (literature review) focusing on relevant European and foreign publications and the collection of statistical data (OECD. The case studies are enclosed in Annex 2. the contact information for the biopharmaceutical enterprises was collected via the regional and national cluster organisations in Europe. industry representatives.g. Survey of 87 European biopharmaceutical enterprises carried out as telephone interviews. Europabio. In fact. In several cases they have been able to 12 . The survey and case studies constitute the main evidence base for this study. The enterprise were interviewed in May and June 2009 Case studies of eight biopharmaceutical enterprises in Europe. EBE. These case studies provide qualitative information on enterprise strategies and impacts of the capital supply situation on performance.). The target group ‘biopharmaceutical enterprises’ was defined as small and medium sized enterprises focused on discovery and development of biopharmaceutical products for human healthcare.1 Establishing the inventory of biopharmaceutical enterprises for the survey The ‘biopharmaceutical industry’ does not exist in official statistical industry classifications (i. The list of experts interviewed is enclosed in Annex 1. Moreover. 3. we describe our approach to preparing and carrying out the survey and case studies. degree of public involvement in R&D. Eurostat. The survey provides mainly quantitative data on the financial situation. OECD 2008). much of the existing data on the sector is based on surveys carried out among a selection of biopharmaceutical companies. there is no official Eurostat data on the sector and there is no public register of biopharmaceutical enterprises in Europe. access of enterprises to international markets (Romain & Pottelsberghe 2004. NACE codes). Below. Biopharmaceutical clusters represent a high concentration of relevant enterprises as well as a concentration of potential capital suppliers such as venture capital funds and big pharmaceutical companies. flexibility of labour markets. These interviews provide mainly information on key issues related to the financing of biopharmaceutical product development and help identify good practice examples. the national and regional biotech organisations have ‘local’ knowledge about enterprises in their region or Member State.well as cultural aspects (e. EFPIA etc.

In some cases the organisations have also been able to provide detailed contact information for local biopharmaceutical enterprises.2: Selected biopharmaceutical regions   1  2  3  4  5  6  7  8  9  10  Country  Denmark/Sweden  France  France. 2. We put together a list of biopharmaceutical/biotech regions and clusters in Europe. In this way. we screened the homepage of each of the companies to ensure that the core activity of the companies was biopharmaceutical product development. some potential or pure platform firms could be included in the samples as they also represent the first stage of product development and/or hybrid forms between product development and service providers. The European Cluster Observatory has identified 36 biotechnology clusters (Identification of the used NACE codes has not been possible).eu 9 Competitiveness in Biotechnology: ec. The list was based on information provided by the European Cluster Observatory8. The ten selected biopharmaceutical regions are shown in Exhibit 3. An appropriate geographical distribution in order to ensure that the study provides a representative picture of the state of affairs in Europe. the Council of European BioRegions (CEBR).eu/enterprise/phabiocom/comp_biotech_clusters. Europe INNOVA and the European Commission. A high concentration of small and medium sized enterprises involved in biopharmaceutical product development. Finally.htm 8 13 .europa.clusterobservatory. This definition of biotechnology contains several industry classifications. Switzerland and Germany Germany  Germany  Hungary  Italy  Spain  Sweden  UK  Region  Copenhagen and the Scania (Skåne) Region  Marseille Alsace. Cambridge Our contact with the regional associations and cluster organisations enabled us to put together a list of biopharmaceutical enterprises.identify enterprises that are relevant to the study. An innovative enterprise environment with focus on research and development activities and access to capital. South Baden and Northwest Switzerland  Berlin Brandenburg Metropolitan Region Rhine‐Neckar‐region  Kozep‐Magyarorszag (Budapest) Lombardy Milano Catalonia  Stockholm and Uppsala England.2 below: Exhibit 3. As the focus of this study is limited to biopharmaceutical enterprises only a limited number of the clusters identified in the Observatory are relevant for this study. we identified a list of 429 biopharmaceutical enterprises (SMEs). However. 3. EuropaBio.9 The clusters were then evaluated according to the following criteria: 1. www.

Whenever possible the interviews were carried out immediately or else an appointment for an interview was made.3). cf.3: Implementation of the survey    The total sample Total number  Vertical  of enterprises   percentage     1  2   30  12  27  51  12  20  25  88  41  33  46  385  8 3 7 13 3 5 6 23 11 9 12 100 The interviewed enterprises Number of enterprises     3  8 1 6 6 3 4 11 24 9 12 3 87 Vertical  percentage   4   9 1 7 7 3 5 13 28 10 14 3 100   Response  rate  (percentage)  5=3/1  27  8  22  12  25  20  44  27  33  36  7  23    Denmark  Belgium  France  Germany  Hungary  Italy  Spain  Sweden  Switzerland  The Netherlands  UK  Total  A total of 87 interviews were carried out with either a CEO or a CFO.3 Representativeness of the interviewed enterprises It is difficult to assess the representativeness of the sample of enterprises identified through the regional associations and cluster organisations as there is no official data on biopharmaceutical enterprises in Europe. This number of interviews corresponds to a response rate of 23 percent. The interviews were carried out by English speaking interviewers. Unfortunately.2 Implementation of the survey The survey data was gathered via telephone interviews with CEOs or CFOs of biopharmaceutical companies. 800 (EuropaBio 2006. This reduced the number of potential interview cases to 385 enterprises (cf. Studies carried out by business associations have. however.2.3. Exhibit 3. estimated the number of biopharmaceutical enterprises in Europe to be approx. 14 . the contact information for some 50 enterprises was not up to date or incorrect. The survey was implemented in four steps: • Development of the questionnaire • Pilot test of the questionnaire by interviewing two biopharmaceutical enterprises and subsequent revision of the questionnaire • Sending out a letter of introduction concerning the survey to all enterprises in the survey • Contacting the enterprises by phone. Exhibit 3. 3.2.

it is difficult to know whether the country distribution of enterprises is representative for the whole population of European biopharmaceutical enterprises. cf. the survey largely represents the segment of young biopharmaceutical enterprises with significant growth potential rather than the segment of large and more established enterprises. we consider the sample to be representative of the European biopharmaceutical sector. is overrepresented in the survey.4).3 for a general characteristic of the sector. In this study. 10 The same goes for the entire sector. but the reader should keep in mind that the survey only gives a partial picture of the biopharmaceutical sector. Unfortunately. • Research oriented (61% of the employees are researchers and 84% of all business activities are dedicated to product development). but with a bias towards small and young enterprises as this has been a key sampling criterion for the European Commission. However. Exhibit 3.4: Number of employees in the interviewed enterprises (N= 87) In conclusion. Looking deeper into the characteristics of the enterprises that participated in the survey. Sweden.3 15 . • ‘Young’ enterprises (71 % of the companies are established in year 2000 or later)10. cf. This suggests that the identified sample of 385 enterprises represents more than half of the biopharmaceutical enterprises in Europe. on the other hand. we will refer to the survey as the DTI-biopharmaceutical survey or as the DTIbiopharmaceutical surveyed enterprises. We do find that the number of respondents in the UK and to some extent also in Germany is very low. sections 4.Section 4. this bias will not have significant impact on the analysis as the focus of the study is on the overall conditions for the biopharmaceutical enterprises in Europe and not on differences between the Member States.2 and 4.2). we find that the interviewed enterprises are: • Small enterprises (66% of the enterprises have less than 20 employees. section 4. This bias does not erode the value of the survey. Exhibit 3. In other words. cf.

The regional/cluster organisations were asked if they could recommend any local enterprises within the target group. France. the selection of enterprises in different regions has enabled us to examine the impact of differences in regional financing conditions and regulatory frameworks.4 Selection of case studies The regional/cluster approach was also used to identify and select enterprises for the case studies. Italy.3. The information provided by the organisations was validated before the companies were contacted. 16 . Denmark. Spain. Furthermore.2. The case studies are based on web research and on an interview with the CEO or CFO using a common semi-structured interview guide for all the case studies. The case studies represent biopharmaceutical enterprises with drug candidates in different phases of product development and also enterprises with products on the market. Switzerland. Our aim has been to cover different types of enterprises in different regions. The case studies are enclosed in Annex 2. We have carried out eight case studies of enterprises located in Sweden. Germany and the UK.

The first (modern) biopharmaceutical technologies were introduced about 40 years ago when the first DNA technology experiment was performed. recombinant human insulin was approved and soon after introduced to the market (European Federation of Pharmaceutical Industries and Associations 2008). This trend also represents a movement towards an increasing complexity in the development of medicines.1.than the defined target group for this study – enterprises focused on discovery and development of biopharmaceutical products for human healthcare. Overall. cf. EuropaBio and The European Federation of Pharmaceutical Industries and Associations. Some 10 years later. biopharmaceutical product development is carried out by pharmaceutical companies as well as by independent biopharmaceutical enterprises established on the basis of research carried out at universities or in pharmaceutical companies (spin-out). Exhibit 4.typically the entire biotechnology sector . in 1982. e. The most reliable data sources for a quantitative overview of European biopharmaceutical enterprises are OECD’s biotechnology statistics and sector analyses carried out by. 4. they are also facing an increasing need for funding research and early drug development (Ernest & Young 2008). However. 17 .. Unfortunately.1 Development of biopharmaceutical products The biopharmaceutical sector is a relatively young sector compared to the pharmaceutical sector which introduced Aspirin® to the market more than a century ago. a range of scientific and technological breakthroughs in biotechnology and nanotechnology has had a tremendous impact on product development in the pharmaceutical sector. the introduction of modern biotechnology brought a shift from tissue and cell biochemistry to a focus on molecular structures. based on tools and approaches from modern biotechnology which also includes firms specialized in the development of research tools for this objective (“platform firms”). Since then. the sector does not have its own classification in the Eurostat database.4. the biopharmaceutical enterprises are included in the statistics for the pharmaceutical sector. the chemical sector or simply as ‘research and development’. in most cases the statistical presentation will include other sectors . these data sources apply different definitions of biotechnology/biopharmaceutical enterprises and are subject to a range of methodological reservations that need to be taken into account when analysing the biotechnology sector. Instead. Today. The initial focus on drug discovery and development based on biotechnology was later complemented by research focusing on a better understanding of the causes of diseases by mapping the human genome. As a result.g. The implication is that the biopharmaceutical enterprises are not only facing increased challenges when turning fundamental research into drug development and new medicines. The biopharmaceutical sector The aim of this chapter is to give a short presentation of the biopharmaceutical sector based on available statistical information as well as highlighting the characteristics of the sector.

Exhibit 4. Among all the US biotechnology patents. 18 . biopharmaceuticals) at the beginning of the 1990s resulted in a wave of patents.1: A chronology: Research and drug development focus within biopharmaceuticals Source: European Federation of Pharmaceutical Industries and Associations 2008: The Pharmaceutical industry in figures. while Germany is the only EU Member State to follow the US. In other words. The development and discoveries in biotechnology (e. In the same period the number of patents application originating in US was significantly higher.200 to 2.300 patents per year.Exhibit 4. However. From 1994 the number of biotechnology patents applications increased significantly in the EU27 countries from 1. cf.315 in 1994 to 2.. the total number of “healthcare” patent applications in EU27 is assumed to be below the number of patent applications in the US (Eurostat 2007). 65% of US patent applications are within “healthcare” (red biotech).2.790 patents in 2000.g. by 2005 the number of new patents had dropped and seems to have stabilized at a level of 2. but in recent years a converging trend in the number of patents applications between EU27 and US has been observed.

Ernst & Young (2009) is applying a definition of “biotechnology” corresponding to the both red biotech.3. The European Medicines Agency assesses applications for marketing authorisation for new medicines (biopharmaceuticals as well as traditional pharmaceuticals) for human use. However. This might indicate a change of focus in the (bio)pharmaceutical industry from developing new medicines to exploring the potential of existing medicines. etc.2: Number of biotechnology patent applications to the European Patent Office by priority year.000 of which approx. cf. hybrid products. Another interesting point is that Ernest & Young (2009) finds that the smaller European biotech companies have less success with regard to approvals. more than 600 in phase 2 and about 160 drug candidates in clinical trials phase 3 (Ernst & Young 2009). we observe (especially in 2006 and 2007) an increase in the number of application for new medicinal products. Source: Eurostat database 2009.1) as well as larger companies is included. analysing the pipeline of the biotechnology companies Ernst & Young (2009) is apparently applying a more narrow definition somewhat equal to the definition of biopharmaceutical companies. The number of applications for new medical products was rather stable from 1996 to 2005 when the number of positive evaluations increased dramatically. Exhibit 2.11 The development in the number of patents does not seem to have had any impact on the number of drug candidates in the pipeline yet. green biotech and white biotech (cf. In 2008. 11 19 . whereas in 2008 almost half of the applications were for generics. Looking at the initial evaluation applications by type of application. Exhibit 4. 350 were in clinical phase 1. the total number of drug candidates in the pipeline was estimated to exceed 1. EU 27 and US. The number of drug candidates in the pipeline (clinical trials phase 1-3) in the European biotechnology industry increased in the period 2006-2008.Exhibit 4.

163 biotechnology enterprises in Europe (excluding large pharmaceutical enterprises and enterprises in the supplying sectors). 12 20 .2008 Source: Annual reports of the European Medicines Agency Since 1996.Exhibit 4. The biopharmaceutical sector is (still) a relatively small industrial subsector compared to other sectors that are also characterised by a high international orientation (high export share) and A definition: biotechnology enterprises includes enterprises whose primary commercial activity depends on the application of biological organisms.3: Outcome of initial-evaluation applications for medicines for human use. 30 to 85 in 2005 in the EU.500 in R&D.5bn in 2006 (EuropaBio 2006. the EU market for biopharmaceuticals as a share of all pharmaceuticals increased from approx. US companies have developed 54% of the products. Swiss companies have developed 10% of the products on the world market (JRC/IPTS. the accumulated number of biopharmaceuticals on the market increased from approx. or on the provision of specialist services to facilitate the understanding thereof.6bn on R&D and generated a revenue in excess of €21. 4% to approx. Studies covering dedicated biotechnology enterprises12 have identified 2. 10% (JRC/IPTS. Bio4EU 2008). systems or processes. 4. number of initial-evaluation applications1995 . In contrast.500 people. while only 15% of the products have been developed by EU companies. including 42. the sector is one of the fastest growing sectors and one of the world’s most wealth-creating industries. EU currently holds a comparatively weak position in the development and marketing of biopharmaceuticals.2 The biopharmaceutical sector – key figures The biopharmaceutical industry is not a large industrial sector in terms of number of enterprises or employees. Nevertheless. According to these studies. Of all available products in the world market (154 products). Bio4EU 2008). the sector employed over 96. In the same period. European Commission 2006). spent about €7.

precision and optical instruments” with respectively 771. it is not possible to estimate the economic importance of the sector for other industries due to lack of data (JRC/IPTS.4. and new biopharmaceuticals are likely have a positive impact on the healthcare sectors and healthcare in general.13 The R&D intensity of the biotechnology sector can be illustrated by the EU industrial R&D Investment Scoreboard (JRC/IPTS and DG Research 2008) in which an analysis of industrial research among the world’s top 1402 companies found that 15 sectors constitute 93. Exhibit 4. The 2. while US companies account for 49%.600 and 1.800 employees. and human healthcare.R&D. cf. television and communication equipment” or “medical. The top three sectors were pharmaceuticals & biotechnology (19. service. Within pharmaceuticals & biotechnology. not least the pharmaceutical industry.2%).163 dedicated biotechnology enterprises identified in Europe (see above) can be divided into four sectors: biodiagnostics.3) and automobiles & parts (17. Exhibit 4.0%) The pharmaceutical & biotechnology sector even exhibited double-digit R&D growth over the last three years.046. technology hardware & equipment (18. EU companies (including Switzerland) account for 28% of the investments in R&D. The biopharmaceutical sector is considered a driver of innovation in a range of industries.4: European biotechnology industry by subsectors Biodiagnostics 18% Agbio and  environment  11% Human  healthcare 37% Services 34% Source: EuropaBio 2006 13 Eurostat 21 . However. agrobio and environment.3% of the total R&D.intensity such as “radio. Bio4EU 2008).

will probably increase further. Many countries and regions strive to attract this rich source of taxable wealth and potential in job creation. Denmark. drug discovery.5. 800 enterprises. The majority of biotechnology enterprises are located in Germany. In the new EU Member States data on the biotechnology industry is still sparse and fragmented. France. Many of the biotechnology enterprises in the new Member States are recently established and the biotechnology industry in the new Member States is mainly involved in manufacturing activities. European biotechnology enterprises produce fewer products and employ fewer people than their US counterparts. This sector is the largest group comprising 37% of the total number of enterprises in the biotechnology sector corresponding to approx. such as the biopharmaceutical sector. Germany and France. the main global competitor is currently the US biopharmaceutical sector. The number of biotechnology enterprises in European countries differs significantly.The business activities of the human healthcare sector14 largely represent the definition of the target group for this study. However. Especially Denmark and the UK are characterised by relatively large enterprises. the leading countries are the UK. whereas countries such as Sweden and the Netherlands are characterised by small enterprises. but global competition is fierce. 14 Biomaterials. The availability of capital in Europe is also limited compared to the US (EuropaBio 2006). Exhibit 4. drug delivery.5: Number of biotechnology enterprises in 2004 Source: EuropaBio 2006 Looking at the size of the enterprises in relation to number of employees. With countries such as India and Singapore moving up the global value chain. Exhibit 4. There are more biotechnology enterprises in Europe than in the US. For Europe. cf. genomics. vaccines. the UK. red biotech 22 . gene therapy or healthcare cell therapy. innovation and growth. the competitive pressure on the researchintensive sectors in Europe.

which are at least four times higher than in the US. which have mostly occurred in Germany. costs associated with clinical trials. the risk of failure in biopharmaceutical research and development is extremely high compared to other research-intensive sectors.(source: Eurostat) 15 23 . Restructuring activities instituted to gain critical mass have been the main reason for the mergers and acquisitions. 25% of the biotechnology enterprises are less than 2 years old and they employ just over 5% of the employees in the sector. The new enterprises were mostly small in relation to number of employees. resource-intensive approval procedures and costs associated with manufacturing (if the trials are successful). This resulted in a slight decrease in the number of biotechnology enterprises in Europe. A recent study estimates the average capitalized cost per approved biopharmaceutical in 2006 to be approx. In contrast. they employ almost 50% of the total number of employees and earn about four fifth of the total revenue. China and South Korea thus constituting a financial burden on especially small biopharmaceutical enterprises in Europe (van Pottelsberghe 2009). The implications of a fragmented patent system in Europe include high uncertainty. The total cost of R&D increased significantly from the mid-1990s to 2007 from approx. €8bn to approx.3 Business dynamics within the biotechnology sector During the mid 1990s the number of biotechnology enterprises doubled in Europe. The size and the relatively young age of the European biotechnology enterprises may therefore be an important issue in relation to the competitiveness of the sector. €27bn reflecting an increase in R&D activities15 (European Federation of Pharmaceutical Industries and Associations 2008). €1. In the years after 2001 the industry was characterised by consolidation through mergers and acquisitions.4. This means that even though there is a strong entrepreneurial spirit and a rapid development of new enterprises in Europe. 10% of the enterprises in Europe were formed before 1989. the majority of the biotechnology enterprises are small and generate very limited revenues (EuropaBio 2006).(index 2005= 100) estimates the prices to have increased from index 79 in 1997 to 105 in 2005 indicating a significant increase in R&D cost in real terms equivalent to a 78% increase in real terms. The increase in R&D costs is resulting in an increased need for funding (European Federation of Pharmaceutical Industries and Associations 2008). Furthermore. and between 2003 and 2004 the number of European biotechnology enterprises decreased by 2% (EuropaBio 2006). quality drop and prohibitive costs. The study observes that these costs as well as the time it takes to bring a new drug to the market have increased significantly the last 10 years (DiMasi and Grabowski 2007 and DiMasi J.4 R&D cost for developing drug candidates It is costly to discover and develop a new drugs/medicines due to expensive research processes.000 m. Promising new substances often reach an advanced stage of research before the results of clinical tests demonstrate that they do not Current prices: Harmonized Indices of Consumer Prices (HICPs for EU 27.A. 4. In Europe. Scandinavia and the UK. An additional point is that European R&D costs are higher than in other world regions due to the fragmented European patent system. and Gabowski H.G 2007).

the product pipeline of many of the large pharmaceutical companies is drying out and the research projects in the biopharmaceutical sector thus constitute an opportunity for the pharmaceutical companies to ‘fill up’ their own pipelines with promising biotechnology-based drug candidates.6: Typical phases from research to the market for a drug candidate Source: European Federation of Pharmaceutical Industries and Associations 2008 Most patents expire after 20 years. only an average of five will progress into the human testing phase.6. the time it takes for a drug to travel from the laboratories to marketing authorisation can take up to 10 to 13 years or even longer. only one will be approved (DiMasi et al 2003). Of every 500 product candidates entered into the approval process. Exhibit 4.perform as required to have any market value. and considering the long time it takes to bring a biopharmaceutical product to the market. On the one hand. the window for generating market revenue can be very short (5-7 years). Exhibit 4. The cost of every successful drug includes the cost of all the failures. cf. The relationship between the biopharmaceutical sector and the pharmaceutical sector is a symbiotic relationship. On the other hand. as biopharmaceutical enterprises tend to have limited resources and may gain access to capital by selling/out-licensing drug candidates or establishing alliances with pharmaceutical companies. Finally. Of those five product candidates. 24 .

R&D investment has almost doubled since the mid-1990s and reached a level of more than €27bn in 2007. but on average only 1% will process into human test and fewer will be approved.5 Conclusion In conclusion.000 drug candidates in clinical trial phases 1-3. Increasing the R&D investments in biopharmaceutical R&D will be one of the key success factors in realising the full potential of the sector. The development in the number of patents does not seem to have had any impact on the number drug candidates in pipeline yet.300 patent application per year from European companies. 25 . The number of biopharmaceuticals has almost tripled in 10 years and has reached a market share of all pharmaceuticals of approx.4. The number of the new drug candidates in the pipeline has increased to more than 1. So has the average cost of gaining approval for the drug candidate. €1. The number of biopharmaceuticals patents has increased significantly. but it has also become costly to take new drug candidates through clinical trials. A recent study estimates the average capitalized cost per approved biopharmaceutical in 2006 to be approx.000 m. 10%.200 – 2. but the last few years the number of patents seems to have stabilised at a level of 2. • • • All in all. More research is carried out. it should be noted that: • • Biopharmaceuticals is a dynamic research area where new scientific discoveries generate a technology platform for developing new drug candidates. the biopharmaceutical sector is still a minor industrial sector but with a significant growth potential.

26 .

This is illustrated below in Exhibit 5.. making grants the second most important source of funding for European biotech companies after venture capital.1 Different forms of capital An overall assumption is that the potential investors in biopharmaceutical product development can be organised along two axes: The first axis is related to the process of product development (innovation) and the other axis to the degree of involvement by the investor in the enterprise. attracting venture capital. FP/CIP). Exhibit 5. e.g. out-licensing drug candidates. companies investing in biopharmaceutical companies.g.1: Key financial actors   Low level of  involvement  High level of  involvement  Discovery  Family and friends  Government (e.1. loans)  Business angels  VC and CVC  VC and CVC  Note: CVC is an abbreviation for Corporate Venture Capital. The capital base available for the biopharmaceutical sector 5. more than two thirds of the European biotech companies participating in the survey also planned o raise capital through grants. According to the report. etc. and bank loans.public funding is often used (grants.5.1 Different sources of capital The composition of capital sources for biopharmaceutical product development tends to vary with the development stage of a product. PIPEs (Private Investments in Public Equity). Exhibit 5.g. 5.  grants)    Early development  stage  Government loans  Late development  stage  Banks (e.). In a report by Ernst and Young (2007). 27 ..1. In the very early stages of product development ..often before the product ideas turn into a business idea . forming alliances with (bio)pharmaceutical companies. In the later stages we find IPOs (Initial Public Offerings) and public equity are also important sources of funding.g. e. venture capital is the most important capital source for European biotech companies. Initial Public Offerings (IPO) and follow-on offerings. There are different ways of raising capital for drug development such as applying for public grants (national as well as European.2 shows some of the key sources for funding in the early stages of product development (and business development).

Other types of private equity include growth or expansion capital. Finally. Mezzanine finance can be considered an alternative to banks who are often reluctant to lend money to high-risk projects as well as private equity investors who will often demand shares in exchange for capital. Mezzanine funding is a hybrid form of capital combining features of equity financing with classical debt features. developing a new product or making strategic acquisitions.16 16 EIB website. from the first concept to the point where the company has developed its first product.eib. The different types of private equity include venture capital. buyouts typically involve mature businesses and a change of control over the company.Exhibit 5. to the point where the company needs capital to expand commercial operations (EVCA 2009). etc.) in small and medium sized companies to help with specific growth challenges such as entering a new for instance by buying out all or the majority of the shares in a company (EVCA 2009). Mezzanine financing is thus an opportunity for companies involved in high-risk R&D to raise capital without diluting existing shareholders’ rights.2: Sources of funding typically for early-stage product development Source: OECD (2008) Private equity is an important source of capital in biopharmaceutical product development. In contrast to traditional bank loans. i. This refers to investments (often minority stakes held by informal investors such as friends. which usually covers the early development stages. http://www. business angles. family..htm 28 . a mezzanine finance provider will be compensated for the risk associated with lending money by getting a share of the upside when the borrowing company achieves its growth objectives.

The most dominant types of VC funds are: • Bank-backed VC firms • State-backed VC and incubators • Corporate venture capital (CVC) • Pension funds • Insurance companies • Individual investors such as Business Angels There is evidence that the type of VC fund affects its investment activities. One example is Switzerland which is characterised by a very close and long-standing relationship between the financial sector and the life sciences sector. According to a comparative analysis of VC funds in four countries.1. The close relationship and the expertise of the Swiss financial sector in the life sciences domain could be one of the key elements in explaining the relative success of Switzerland in terms of providing access to capital for biotech companies (Ernst & Young 2008b). VC firms relying on private investors favour early-stage activities. One example is Novartis’s venture funds that include a ‘traditional’ venture fund focusing on financial returns and an option fund focusing on providing funding for innovative start-up companies during their 29 . the investor could be interested in acquiring the technological platform under development in the portfolio company. However.. Exhibit 5.3: Exhibit: Different types of relationship between CVC and a portfolio company (e. bank-backed VC firms in Israel and the UK invest in late-stage activities compared to other funding sources. the CVC funds may pursue financial as well as strategic objectives in their investment strategies. However. However.5. investment strategies within CVC funds may differ..2 Venture capital investment strategies Venture capital funds are not a homogenous group of investors. For instance. while bank-backed VC firms in Germany and Japan do not differ from other VC funds (Mayer et al 2001). Typically. VC funds get involved in the management of their portfolio companies. VC firms backed by banks and pension funds often invest firms in the late stage of enterprise activities. large pharmaceutical enterprises) may differ from the strategies pursued by other types of VC funds. the investment strategy of corporate VC funds (e. Specifically.g. and they may use their experience and expertise to help them raise further early-stage capital.g. start up). In contrast to VC funds that are guided by a financial investment objective.   Tight link to operational  capability of investor    Loose link to operational  capability of investor  Source: Chesbrough 2002 Strategic investment objective  Driving – advancing current  business strategy  Enabling – complementing  current business strategy  Financial investment objective  Emergent – exploring potential  new businesses  Passive – financial returns only  Adding to the complexity. The differences in investment strategies may reflect differences between different countries with regard to financial systems and traditions. differences in the structure and development of national technology sectors are probably also an important element in explaining national differences in investment strategies. execute an IPO or complete a trade sale to a larger company (EVCA 2009). there are country specific variations.

These types of drugs have a different expected return of investment (ROI) than traditional blockbuster medicines.g. Technological developments suggest that the next generation of innovative drugs are not ‘blockbusters’ but rather personalised medicines. As a result. 17 Novartis website.17 Venture capital funds are increasingly moving up in the market and are less inclined to take on very early-stage companies. while venture financing ‘only’ experienced an minor backdrop of 15% compared to 2007 (in the US. venture financing fell 19%). orphan diseases) or even personalised medicines. In the case of the option fund. NESTA 2008) A key issue concerning the current ‘blockbuster business model’ underlying many investment decisions is that biopharmaceutical research provides an opportunity to develop specialised medicines for small groups of patients (rare 30 .novartis-venturefunds. business angels). Exhibit 5.earliest stages. the field of capital providers in the very early product stage to increasingly consists of small private investors (e. and investors may thus be less inclined to invest in them. the initial equity investment is coupled with an option to a specific therapeutic programme managed by the portfolio company. 5.4: Private equity investments in Europe Source: EVCA 2009 According to Ernst & Young (2009). and if investors continue to focus on the ‘old’ blockbuster business model. cf.. http://www. European biotechnology financing dropped dramatically from 2007 to 2008 due to the financial crisis. The main cause was a collapse of public-equity financing (IPO and follow-on and other offerings) from €4bn to less than €1bn.4.2 Capital supply in Europe Private equity investments in Europe have increased considerably in the last decade. Exhibit 5. biopharmaceutical enterprises will face even more difficulties in the future with regard to gaining access to funding. public incubators and state-backed investors (Vaekstfonden 2006. This serves as early validation for the start-up company’s technology or programmes which may attract other investors and provides Novartis with an opportunity to gain access knowledge and technologies that may be of strategic interest to Novartis in the future (Ernst and Young 2008).

cf. early-stage investments have gained more attention among European investors.5. US companies are better at generating value than European companies. In terms of the distribution of investments by development stage. venture capital investments in the US generate more value than investments in Europe.5: Private equity investments in European countries as% of GDP in 2007 Source: EVCA 2009 Overall. cf. This performance gap mainly reflects regional industry differences rather than differences in the competencies of venture funds as US-based venture funds do not perform better in Europe than European venture funds (Hege et al 2008). Exhibit 5.In terms of private equity investments as percent of GDP. In other words. the share of late-stage investments has increased in both the US and Europe. the UK.58% of GDP). however. Exhibit 5. Exhibit 5. and France were all above the average for Europe (0. Sweden. the Netherlands. After 2000/2001. 31 .6.

while Israel is somewhere in between. Israel and the UK the following differences were identified (British Private Equity and Venture Capital Association 2009): • In Israel. 18 The same trend has been identified in other countries 32 . Pension funds are important players in the UK and US VC industries. The public sector involvement is also increasing relative to private investors. while the share of early-stage investments in the US and the UK ranges between 20-30%. more than 90% of the funds raised came from foreign funds.18 Instead. The UK is currently experiencing a change in composition of types of investors engaging in early-stage companies. private investors. • The average amount of capital invested per early-stage company is significantly higher in the US than in the UK. but only play a marginal role in Israel.6: Share of early-stage investments in total investments Source: Vaekstfonden 2006 Countries differ in terms of the composition and activities of venture capital. while 70% of the funds raised in the UK came from foreign sources. are becoming more important in early-stage investments. In a recent benchmarking of the venture capital industries in the US. This suggests that early-stage companies in the UK receive less VC than early-stage companies in the US and Israel. private funds are moving away from early-stage companies towards late-stage companies.Exhibit 5. These differences suggest that the UK – one of the largest venture capital markets in Europe – is not able to keep up with the US and Israel – not least with regard to the size of early-stage investments. but mainly in the form of coinvestments with private investors rather than free-standing investments (NESTA 2008). According to NESTA. such as business angels and ‘angel syndicates’. • Israel and the US invest more venture capital as a percentage of GDP than the UK • VC in Israel is almost entirely dedicated to early-stage capital (80-90% of all VC investments are early-stage.

019%. cf. The OECD country average was 0.3% of total venture capital investments in life sciences (biotechnology.3 Comparing the capital supply for life sciences in the US and Europe The capital base for biotech (life sciences) in the US outmatches the capital base in Europe. followed by Denmark and Switzerland.089%). Exhibit 5.7: Total venture capital investments in the life sciences.. early development. million PPP$. health services. 2007 Source: OECD (2009) Note: ‘Venture capital’ covers investments in seed.7. and expansion stages. OECD data covering 25 OECD countries shows that the US accounted for 68. and medical devices and equipment). while the EU members of the OECD accounted for 20. cf.5.8 33 . start-up.8% (OECD 2009). pharmaceuticals. Exhibit 5. Later stage venture capital investment in replacements and buy-outs are not included Sweden had the highest share of GDP in 2007 from venture capital investments in life sciences (0. Exhibit 5.

The level of biotech investments in the US and Europe increased until 2001. Sweden also had the highest life sciences share of total venture capital investments (36. start-up.4 below). but rather seek to enter partnerships with other companies or sell off their products candidates.9%). total venture investments decreased to one fifth of the level before the bubble burst. section 5. However. investment activity has increased in the US as well as in Europe. Since 2004. In the US. However. when the tech bubble burst caused a substantial drop in total investment activity.8: Life sciences venture capital investments as a percentage of GDP.7%) followed by the US (29.Exhibit 5. Later stage venture capital investment in replacements and buy-outs are not included. interviewees and several case studies (for instance Bioartic Neuroscience and Apogenix) also indicate that there is a difference in the culture and mindsets 34 . Canada was second (30.7%. The case studies carried out as part of this study (see Annex 2) suggest that European biopharmaceutical companies most often do not intend to take products to the market on their own. The OECD country average was 14. 2007 Source: OECD (2009) Note: ‘Venture capital’ covers investments in seed. the current financial crisis has put an end to this development for the time being (cf. This may be a result of the limited availability of capital as these activities are very capital-intensive. early development.9%). and expansion stages.

where the researchers focus more on conducting research than developing their research into business opportunities.3. the aim of the initiative is  to complement existing programmes to create 110 new companies in 2008 and 130 in 2010. In 2007. cf.20 By the end of 2008. the European Investment Bank and the Commission launched a Risk Sharing Finance Facility (RSFF) to boost investment in R&D projects in Europe that have a higher than average risk profile.of researchers in Europe. Specifically. life sciences and ICT. 5. a total of €2. only few biotech companies have benefited from the RSFF (examples include Zeltia in Spain and BIA Separations in Austria/Slovenia). the programme will also seek to provide  Spanish and foreign investors with a showcase of the best opportunities in Spanish technology. Exhibit 5. Emphasis is placed on  technology‐oriented funds. Exhibit 5. The European Investment Fund invests in venture capital funds that support SMEs . http://ec. and US enterprises are able to raise twice as much venture capital compared to their European counterparts. an entity under  the Spanish Ministry of Industry. Through the  creation of an active network fostered by EIF and CDTI.9: The NEOTEC fund in Spain The NEOTEC Fund was established in 2006 by the European Investment Fund and CDTI.htm 21 European the European Commission has launched several initiatives to ensure access to capital for biopharmaceutical companies.    19 The 2007 European Innovation Scoreboard indicates that the EU is experiencing a declining gap with the US in earlystage venture capital.1 Financing gaps in biopharmaceutical product development European biotech enterprises currently do not have access to as much capital as US biotech According to the Europabio 2006 study. but generalist funds that invest in companies developing commercial  applications of new technology or deploying technology supports are also included.  The NEOTEC mandate comprises a fund‐of‐funds and a co‐investment vehicle.pdf 35 . So far.5bn has already been allocated to projects located in 14 European countries and within a range of industry sectors.europa.9 below.particularly technology-oriented SMEs in the early-stages of development – one example is the NEOTEC fund in Spain.21 To date. Together with the European Investment Bank and the European Investment Fund. One reason for this could be the low or moderate credit rating of many biotech companies because of their lack of income. €1.19 The substantial differences in the availability and access to capital for biotech enterprises in Europe and the US have made European stakeholders such as Europabio conclude that the European biotech industry “shows signs of chronic underfunding”. European enterprises have access to only a fifth of the private equity finance that US enterprises have.are not well-positioned to obtain funding from the RSFF.4bn had been authorised by the European Investment Bank under the RSFF. the main sectors receiving funding via the facility are renewable energy technologies. The fund aims at increasing venture capital  investment in Spain to boost the Spanish SME technology sector. http://ec. This suggests that biotech companies – in particular SMEs . Tourism and Commerce. Source: Pro Inno Europe (2008): European Innovation Scoreboard 2007 20 European Commission website.europa. engineering and automotive.

GIF1 covers early-stage investments (seed. By the end of 2008.europa. Typical funding sources include venture capital funds. Typical funding sources include seed capital from grants. In notion of a ‘funding gap’ in relation to biopharmaceutical companies is therefore a key issue for policy makers and the VC industry in Europe. Nevertheless. and public equity (IPO). Overall. http://www. The typical funding sources include venture capital funds. • Second funding gap: the funding of clinical trial phase I+II. government-backed investment funds. 30th May 2006 Global Lifescience Ventures. Biotech Investment Barometer Reveals Continued confidence in Sector (press release).   The programme seeks to strengthen Spain's visibility amongst foreign venture capital funds by  encouraging leading technology investors in other countries to include Spain on their investment map  through attractive co‐investment opportunities. the EIF had made a total of 13 investments amounting to €144m (€108m under GIF1 and €36m under GIF2) targeting SMEs within various industry sectors. buy-outs.pdf 36 .-known-as-neotec. corporate venture capital. hybrid capital (mezzanine). GIF is split into two parts. licensing and collaborations. authorisation and marketing. founders.  The co‐investment vehicle  The co‐investment fund is for direct co‐investments into technological SMEs. European Commission 2007): • First funding gap: the funding of technology transfer and concept development. including pre-clinical testing (often referred to as early-stage development). managed by  skilled teams based in Spain. in parallel with  previously selected private equity and venture capital funds.• • Fund of funds  NEOTEC will act as fund of funds. the companies that develop biopharmaceutical product face three funding gaps (Cooke et al 2006. Source: EIF The relatively limited availability of capital in Europe vis-à-vis the US may have a negative impact on the level of innovation and growth in European biopharmaceutical companies. a survey of 200 European and US biotech executives and members of the investment community suggested that the early-stage funding environment in Europe had improved considerably. start-up) and GIF2 covers expansion stage investments. • Third funding gap: the funding of clinical trials in phase III. corporate venture capital.23 22 23 Europeabio press release.22 In addition. licensing. 62% of the European respondents considered the European funding environment to be difficult (down from 74% in 2006). investing in venture capital investment vehicles.htm The funding of the EIF originating from the European Commission’s budget is allocated under the High Growth and Innovative SME Facility (GIF). government-backed investment funds. and business angels. collaborations.eif. the limited availability of capital could make European biopharmaceutical decide to look for funding opportunities in the US or even relocate to the US. The total budget is estimated at around €200m.

the VC funds in Europe may be too small to ensure sufficient capital for follow-on investments. Thus. Data on the average amount of capital invested in companies suggest that European venture capital funds in Europe support too many companies with too little funding. This constitutes a threat to high-risk sectors. In this perspective. According to Grabenwarter (2006) Europe has 64% more VC funds than the US. European companies simply receive less capital than their US counterparts. but the pooling of resources in specialised life sciences VC funds will also benefit the European biopharmaceutical sector due to improved access to funding and support for business development. biotechnology. 5. This possible lack of expertise could make European VC funds more reluctant to invest in complex sectors such as the biopharmaceutical sector and/or result in a situation in which their investment decisions are not based on an informed assessment of the biopharmaceutical company and its prospects for success. clean tech.) suggests that they are unable to build up sufficient expertise in the different sectors. Moreover. it is very difficult to say whether the companies that are trying to raise capital actually ‘deserve’ more capital or if they are simply not able to present projects that are worth investing in.4 Impact of the financial crisis Overall. Moreover. etc. thus increasing the risk of failure for the venture capital fund. the market is working to its perfection. medical technology.2 Challenges facing the European venture capital industry The amount of capital invested in each biopharmaceutical company largely determines the company’s level of activity and the strategic options available to the company. A 2009 survey of venture capitalists showed that 51% of all respondents are reducing the number of companies in which they plan to invest and just 13% are increasing their investment activities (Deloitte/EVCA 2009).3. such as the biopharmaceutical sector.g. However.. They are simply not able to support companies with sufficient funding for the entire development process (British Private Equity and Venture Capital Association 2009). European venture capital funds are currently exploring new paths to achieving higher diversification and maximising their returns – for instance through fund-of-funds strategies where venture capital funds invest in other funds (and thereby de facto outsource the management of a share of their assets to another larger and/or specialised funds).24 5. the global financial crisis has made investors reconsider their investment strategies. Nesta (2008) 37 . as investors may consider investing in less risky business sectors. yet European funds in aggregate manage 50% less capital.The identified funding gaps have been interpreted as a ‘market failure’. 24 Grabenwarter (2006). This could increase the performance of the venture capital industry. the relatively small size of European VC funds and the need for the funds to diversify their risks by investing in different sectors (e. A possible explanation for this under-funding of companies in Europe is that the European venture capital industry is more fragmented than the US VC industry and that less capital is available to the funds in Europe than in the US.

oslo.49m. and the only investor in Norway that is  solely dedicated to investing in private equity 38 . the country's main industrial development  agency.10: Anticipated level of investment change in select sectors. over the next three years Source: EVCA (2009) A possible explanation for the substantial increase in the interest in clean technologies (63% of the respondents stated that they would increase their investments over the next three years) could be the increase in government/political support for clean technologies in recent years.However.10.11: Norwegian crisis package for the biotechnology sector Key measures in the Norwegian crisis package:   • Innovation loans operated by Innovation Norway. Contracts are to be focused on industry development in  the health sector and internationalisation. This testifies to the importance of government involvement in specific sectors for attracting private investments. Exhibit 5. Exhibit 5.argentum. Funding increased from €37m to €111m. 48% of the respondents stated that they would not change their involvement in the biopharmaceutical sector over the next three years. The aim is to stimulate increased cooperation within the  industry on research and  Source: http://www.   • Argentum. cf. Exhibit 5. Exhibit 5. (fund‐in‐fund) gets increased equity capital  of €233m.   • Tax breaks for individual SMEs: Companies may deduct €0.11. according to the survey.   • Additional €8m for R&D contracts.teknopol. Argentum can now increase its investments in private VC funds focusing on life  sciences in Norway and abroad (www. the government‐owned investment company. The Norwegian government has launched a package of measures to help the Norwegian biotechnology industry through the financial crisis. cf.68m in tax breaks ‐ this is an increase  from €0. Several European countries have launched new funding initiatives to ensure that the national biotechnology sectors are in a better position to deal with the financial crisis and the risk that their funding may dry out. These loans may be used as working capital  for the biotech companies.

the government intends to support R&D in high-tech companies by setting up a £750m investment fund focusing on emerging technologies and biotechnology. successful collaboration between biopharmaceutical companies and the venture capital funds appears to be based on a very close and long-standing relationship between investors and the companies that allows the companies to benefit from the investors’ in-depth knowledge and expertise in the life sciences sector. In France. This performance gap mainly reflects regional industry differences rather than differences in the competencies of venture funds as US-based venture funds do not perform better in Europe than European venture funds. The study indicates that US companies are better at generating value than European companies. In recent years. 5. 39 . However. The study of the financial markets suggests that policy makers should not only focus on bringing more capital into the market. and the performance of the European biopharmaceutical companies relies on the performance of the venture capital market and the access to capital for biopharmaceutical companies. Among the OECD countries the US accounts for two thirds of the total venture capital investments in life sciences while the share of the EU Member States is 20%. The current financial crisis has had a negative impact on access to capital even though it difficult to estimate how much the total venture capital market has been reduced. However. In the UK. but also address structural problems in order to improve access to funding for biopharmaceutical drug developing SME.Several other initiatives may be launched at national level to help the biotechnology industry through the crisis. venture capitalists have increased their share of later-stage investment while their share of early-stage investments has declined thus making early-stage funding a more serious challenge for new biopharmaceutical companies. Another success factor is the R&D efforts and the business competencies of the companies.5 Conclusions Venture capital is the most important capital source for European biotech companies. private equity investments have increased in Europe. the French biotech industry organisation recommended that the "young innovative company" fiscal status be extended from 8 to 15 years. The very early stage is dominated by private investors such as business angels as well as public incubators and stat-backed investors.

40 .

However. One enterprise may decide to bring drug candidates to the market on its own. Exhibit 2. a survey of biotechnology companies in Europe found that more than 1.2). a higher share of the biopharmaceutical drug candidates are in the early development stages compared to Ernst & Young (2009) is applying a definition of “biotechnology” corresponding to the both red biotech. In any case. and the fact that the DTI-biopharmaceutical surveyed enterprises represent approximately 10% of the European biopharmaceutical enterprises. The overall profile of the pipeline of DTI-biopharmaceutical surveyed enterprises is very similar to the profile found for the European biotechnology industry as a whole. Exhibit 6. The surveyed enterprises are representative of the European drug discovering biopharmaceutical industry.1).4). the number of drug candidates is relatively low. while another enterprise may decide to bring the product to the market by entering into partnerships or out-licensing the drug candidate to another enterprise. analysing the pipeline of the biotechnology companies Ernst & Young (2009) is apparently applying a more narrow definition somewhat equal to the definition of biopharmaceutical companies in this study.000 products were in the pipeline (clinical trial phase 1-3) of the European biotechnology industry (Ernst & Young 2009). Strategies for product development Biopharmaceutical enterprises that develop drug candidates can apply different product development strategies.25 Taking into account the limited differences in the profile of the companies included in the two surveys. However. the pipeline identified in the DTI-biopharmaceutical survey seems to correspond to the pipeline identified in the Ernst & Young study. According to the DTI-biopharmaceutical survey. section 4. The survey includes 87 enterprises focused on discovery and development of biopharmaceutical products for human healthcare.6. green biotech and white biotech (cf. In 2008.1 The pipeline of the biopharmaceutical sector According to the biopharmaceutical enterprises in the DTI-survey there are currently a total of 458 drug candidates in the pipeline and 100 of these drug candidates are in clinical trial phase 13. the largest number of drug candidates are (in line with expectations) found the in the pre-clinical phase and in the development of technology platforms. Biopharmaceutical enterprises typically start out with a technology platform from which several drug candidates can be explored and developed. (cf.1) as well as larger companies is included. 6. Only a limited number of drug candidates are expected successfully to enter the subsequent clinical trial stage. the choice of product development strategy will have an impact on the enterprise’s demand for capital and its overall business strategy. but with a bias towards the small and young enterprises. (cf. 25 41 . based on tools and approaches from modern biotechnology including firms specialized in the development of research tools for this objective (“platform firms”). In the subsequent phases. In this chapter the product development strategy of enterprises will be examined on the basis of the DTI-biopharmaceutical survey carried out in May 2009 (see Chapter 3.

while the number of drug candidates increases in clinical trial 2. The data on the pipeline suggests that the DTI-biopharmaceutical surveyed enterprises (the part of the biopharmaceutical sector characterised by the small and R&D oriented enterprises) will be focusing on research and development rather than business development and commercialisation for the time being. very few enterprises in the biopharmaceutical sector only have one drug candidate in the pipeline.2.1.the drug candidates in the biotechnology pipeline identified by Ernst & Young (2008). the majority of the biopharmaceutical enterprises have between of one to six drug candidates in the pipeline. Furthermore.1 Number of drug candidates in the pipeline One way to counter the high risk of failure associated with biopharmaceuticals – and increase the rate of success – is to have several drug candidates in the pipeline. According to the data. Such a portfolio of drug candidates can be seen as an attempt to ensure a continuous flow of drug candidates so that the 42 . A research-intensive sector such as the biopharmaceutical sector is expected to have a high number of drug candidates in the pre-clinical phase.1: Number of drug candidates in pipeline by phase of drug development. A possible explanation for these findings is that completing clinical trial 1 is relative quick. This can be explained by differences in the research orientation of the company samples (se section3. N = 458 Source: DTI-biopharmaceutical survey in Europe. Exhibit 6.2. Exhibit 6.3). the enterprises often have drug candidates in both early stages of product development and in the late stages. May June 2009 The survey data indicates a sharp decline in the number of drug candidates from pre-clinical to clinical trial 1. 6. In fact. cf. while completing clinical trial 2 is more difficult and takes more time (Ernst & Young 2008). This may have implication for the enterprises' ability to attract external financing and especially venture capital.

6. N = 87 Number of  enterprises  Number of drug candidates  Source: DTI-biopharmaceutical survey in Europe. This will provide us with a better understanding of the specific 43 . However. May June 2009 Nevertheless. has early-stage drug candidates that can form the basis for the survival of the company if later-stage candidates fail to reach the market.2 Grouping the biopharmaceutical enterprises In order to analyse the capital needs and strategies at a more detailed level. we have grouped the biopharmaceutical enterprises according to the stage of development of the companies’ most advanced drug candidates. there is a limit to the number of drug candidates that companies can afford to have in the pipeline. in case of a capital shortage. Moreover. the pipeline should not be too diverse (see case study of Apogenix in Appendix 2). Consequently. the product candidates must be sufficiently developed to be of interest to other companies (see the case study of Arpida. the company can out-license or sell product candidates to raise money for the further development of its lead products. Symphogen and Bioartic Neuroscience in Appendix 2). Companies may thus benefit economically and strategically from out-licensing or selling compounds to other companies. the drug candidates may be used as leverage in negotiations with potential investors and partners or be sold/out-licensed to raise capital.2: Number of drug candidates in pipeline. Moreover. Exhibit 6. companies have to match the need to build up a strong pipeline and the financial means available to the company.1.

3: Grouping the biopharmaceutical enterprises according to the stage of development of the companies’ most advanced drug candidates. The financial challenges for enterprises with products in the market are thus expected to differ significantly from the challenges facing enterprises with drug candidates in the early development stages. enterprises with products on the market often have drug candidates in the early development stages. gaining access to capital) that biopharmaceutical enterprises face at different development stages. this grouping of enterprises is not perfect. Enterprises that have drug candidates in the pre-clinical phase 3.challenges (e. 44 .g. May June 2009 Obviously. as many of the companies will have drug candidates in different phases. however. Enterprises with drug candidates in clinical phase 1 4. The six groups are: 1. is a learning process that will strengthen the operational. N= 87 Number of  enterprises  Source: DTI-biopharmaceutical survey in Europe. Enterprises that are still in process of developing their technological platform 2. Going through the different development stages. Enterprises with drug candidates in the late stages 6. financial and strategic management of an enterprise as well as build up its reputation in the investor community. Enterprises with drug candidates in clinical phase 2 5. For instance. Enterprises with products on the market Exhibit 6.

Either because they are unable to raise sufficient capital or because they simply wish to remain a research-oriented 45 .4: Exhibit 6.even before the drug candidate has been launched on the market.both in terms of drug development as well as for successfully entering the market with other candidates in the pipeline. biopharmaceutical enterprises may (as illustrated in several of the case studies in Annex 2) benefit from gaining access to the research. and biopharmaceutical SMEs often find it very difficult to attract competent and experienced managers (see case study of Apogenix and to some extent also Bioartic Neuroscience). The enterprises mostly apply a mix of strategies such as taking some drug candidates to the market on their own. May June 2009 Note: Data is aggregated due to multiple answers Number of  responses   15  73  72  53  1  214   Percent N = 87  17%  84%  83%  61%  1%  ‐  The dominant product development strategies are 1) bringing some of their drug candidates to the market by entering into an alliance with another company (84% of the enterprises). manufacturing and marketing competencies of the partner. They require a set of business competencies that are often not available in small research-intensive enterprises – good researchers are not necessarily good managers. and 2) out-licensing the drug candidate to another company (83% of the respondents). Alliances or out-licensing will typically entail a milestone payment to the biopharmaceutical enterprise . N = 87    We intend to bring one or several drug candidates to the market  ourselves  We intend to enter into an alliance (partnering.4: Product development strategies. Exhibit 6. but manufacturing. while developing other drug candidates with external partners.2 Strategies for bringing the drug candidates to the market Drug development and clinical trials require considerable investments. sales and marketing are also very resource-intensive. cf. Enterprises may also decide not to take any of their drug candidates to the market. The majority of DTI-biopharmaceutical surveyed enterprises do not intend to bring drug candidates to the market on their own. this will enable the enterprise to continue operations without raising capital from other investors or via grants. By choosing to enter into an alliance.6. This lack of business competencies and financial means may serve as a barrier to companies that are interested in bringing their own products to the market. which can be an advantage for the enterprise in the future . For a while. collaboration) with  another company  We intend to out‐license the drug candidate to another company  before the product(s) can be introduced to the market  We intend to sell the drug candidate to another company before the  product(s) can be introduced to the market  Others  Total  Source: DTI-biopharmaceutical survey in Europe.

46 . Most of the enterprises are developing their technology platform or have drug candidates in the pre-clinical trial stage.e. i. Competencies and capital may determine which strategy the enterprises apply as well as the ambition of the entrepreneurs. Through this strategy. Only 17% of the companies in the survey intend to take products to the market on their own. manufacturing and marketing competencies as well as capital.3 Conclusion The majority of the DTI-biopharmaceutical enterprises have between one to six drug candidates in the pipeline. Only one out of ten enterprises has products on the market.enterprise working as a supplier of innovative drug candidates to large (bio)pharmaceutical enterprises.licensing the drug candidates to reach the market. According to the DTI-biopharmaceutical surveyed enterprises. 6. The overall pipeline profile is characterised by many early-stage drug candidates while only 21% of the drug candidates are in the clinical trial phase 1 or later phases. This observation indicates that limited access to capital (and lack of competencies) may force an increasing number of the drug developing enterprises to become platform enterprises or to leave business in the long run. the enterprises may be able to benefit from gaining access to research. the dominant product development strategy is aimed at either entering into alliances and/or out. a technology platform enterprise (Lanza 2009)..

1 Capital raised for drug development To date. Therefore biopharmaceutical enterprises need to attract investors. N = 87   Development of platform  Pre‐clinical  Clinical phase 1  Clinical phase 2  Late stages  Products on market  Total  Average amount of  capital raised  (million Euro)   7.9  11.0  289. This can be explained by the capital-intensive tasks of carrying out clinical tests and – if successful – starting the manufacture and sales of new products (see Section 6. cf.On average enterprises with drug candidates in the later stages have raised more capital than enterprises in the earlier stages.2 The respondents indicate that private equity (including venture capital. Financing strategies Drug discovery and development is a long and costly process which exceeds the financial capacity of most (if not all) small and medium sized biopharmaceutical enterprises. 7.1. In this chapter. etc.7.5  Number of  enterprises   6  33  8  20  8  12  87  Source: DTI-biopharmaceutical survey in Europe.0  87. we examine how biopharmaceutical enterprises have financed their product development and how their financing strategies change from one stage of product development to another.9  6.2: 26 Data does not include income generated from business activities 47 . apply for grants and gain access to capital from the financial market.) constitutes the main source of capital for biopharmaceutical enterprises followed by grants and income from business activities. The need for capital increases significantly after clinical phase 1.0  25. cf.1: Average amount of capital raised for current pipeline (million Euros) by a group of biopharmaceutical enterprises. May June 2009 Note: The grouping is defined in section 6. €36m to finance their current pipelines26.1.7  151. We will also assess their need for further capital as well as the impact of shortage of capital on the strategies of the biopharmaceutical companies. The current financial crisis is adding to the challenge of gaining access to capital as funds dry out or investors become reluctant to invest in high-risk sectors such as the biopharmaceutical industry. Exhibit 7. Exhibit 7. the DTI-biopharmaceutical surveyed enterprises have been able to raise an average of approx.1) Exhibit 7. business angels.

Exhibit 7.27 The respondents also indicated that it has become increasingly difficult to gain access to loans (except for government loans) and venture capital. 27 Ernst & Young (2009): Global Biotechnology report 2009 48 . the IPO window is currently shut down.2 Access to capital Overall. May June 2009 A closer study of the data for each of the different groups of biopharmaceutical enterprises reveals some interesting differences.g. Exhibit 7. N= 83   Grants  28% 22% 12% 13% 7% Equity  41% 63% 66% 75% 58% IPO  0% 0% 7% 2% 14% Loans  11% 2% 1% 2% 5% 3% Income from business  activities  21%  9%  14%  3%  15%  30%  Development of platform   Pre‐clinical  Clinical phase 1  Clinical phase 2  Later‐stages  Products on market  13% 33% 13% Source: DTI-biopharmaceutical survey in Europe. the respondents indicate that within the last year it has become increasingly difficult to gain access to funding via an IPO or through follow-on offerings. cf.4.3: Main sources of capital – average share for all respondents by group of biopharmaceutical enterprises. Exhibit 7. According to observers.2: Main sources of capital. cf..3: • Grants constitute an important source of capital for platform enterprises and enterprises with product candidates in pre-clinical research • IPOs and follow-on offerings constitute an important source of capital for later-stage enterprises and enterprises with products on the market • Loans constitute an important source of capital for platform enterprises • Income from business activities (e. N= 83   Grants  Equity  IPO  Loans  Income from  business activities  12%  Mean  17%  60%  4%  3%  Source: DTI-biopharmaceutical survey in Europe. May June 2009 7. selling products or (research) services) constitutes an important source of capital for platform enterprises and enterprises with products on market Exhibit 7. average share of total capital raised.

65  4.45  Although it has become more difficult to gain access to venture capital for the different groups of biopharmaceutical enterprises. With regard to current financing.76  4.33  3.Exhibit 7.21  4. a relatively high share of these late-stage companies finds that gaining access to funding via alliances and partnerships has become more difficult. Most of the DTI-biopharmaceutical surveyed enterprises have been able to raise capital in the last 12 months.5. 31% of the enterprises have been able to raise between €1 – 5m within the last 12 months.09  3.58  4. N = 87   Friends and family  Business angels  Venture capital facilitated by an incubator. 33% of the enterprises have been able to raise less than €1m.4: Difficulties in obtaining funding compared to the situation 12 months ago (scale from 1 “easier” to 5 “harder”). cf.75  4.43  4.54  4. a university or. and approx. a research centre  Government‐backed venture capital (regional/national innovation funds)  Venture capital  Alliance/partnership with other company (project deals)  IPO (Initial Public Offering and subsequent public offerings) Other   Bank loans  Industrial bond  Loans guaranteed by the state/Government loans Other types of loans  Source: DTI-biopharmaceutical survey in Europe.39  3. the DTI-biopharmaceutical survey suggests that later-stage enterprises and enterprises with products on the market do not find it as difficult to gain access to venture capital as companies in the earlier development stages. Exhibit 7. Nevertheless.60  4. May June 2009 Mean  3. 49 .

May June 2009 Exhibit 7. while the relatively large amounts of capital (€5m+) were raised by later-stage enterprises and enterprises with products on the market. May June 2009 50 . N= 87.6:. Number of  enterprises  Source: DTI-biopharmaceutical survey in Europe. Exhibit 7.9  5 and 10  1 million  million  capital  million  million  EUR  EUR  EUR  EUR  Number of enterprises  0  4  1  1  0  1  1  2  0  2  6  16  1  5  2  1  29  13  3  6  1  3  27  1  2  3  1  3  11  1  0  3  4  3  11  Do not  know/no  answer  0  1  1  1  0  0  3  Total  6  33  8  20  8  12  87  Source: DTI-biopharmaceutical survey in Europe. N = 87.6 suggests that the relatively small amounts of capital (up to €5m) were primarily raised by early-stage enterprises.     Platform  Pre‐clinical  Clinical  phase 1  Clinical  phase 2  Later‐stage  Product(s)  on market  Total  Between  Between  Less than  Over 10  None/no  1 and 4.Exhibit 7.5. Capital raised within the last 12 months by type of enterprise. Capital raised within the last 12 months the DTI-biopharmaceutical surveyed enterprises.

the survey results should be treated with caution.7: Assessment of the need for capital by the DTI-biopharmaceutical surveyed enterprises. Exhibit 7. later-stage companies and companies with products on market still have some time before the lack of capital could become critical. May June 2009 In particular. 51 . approx. 7% of the enterprises are in immediate need of capital if they are to maintain their current activity level.3 Need for capital One of the key issues to be addressed in the survey is the need for capital among the European biopharmaceutical enterprises. a survey by Ernst & Young (2009) suggested that the share of biotech companies in Europe with less than one year’s cash to hand is 37%. within the next 6 months). Consequently. A survey carried out in February 2009 by European Biopharmaceutical Enterprises found that more than 20% of European biotech SMEs and start-ups faced potential bankruptcy before the end of 2009 (i. the critical lack of capital is also evident among companies with drug candidates in clinical phases 1 and 2 (13% and 15% of the respondents respectively). 30%) need capital immediately or within the next 6 months.7. According to the DTI-biopharmaceutical survey. cannot be certain that they will get the needed funding from investors or partners.. More than 40% of the biopharmaceutical enterprises will need to raise capital within the next year to maintain their current activity level. According to the DTI-biopharmaceutical survey. platform companies (16%) and companies with drug candidates in pre-clinical research (approx. However. The findings are similar to the findings from other recent surveys.   Immediate need for capital  Less than 6 months  6‐12 months  12‐24 months  Next 2 years  3 – 5 years  More than 5 years  Total  Frequency (N)    6  9  21  26  9  9  5  85  Percent  7%  11%  25%  31%  10%  10%  6%  100%  Cumulative percent  7%  18%  43%  74%  84%  94%  100%    Source: DTI-biopharmaceutical survey in Europe. Moreover. The companies. cf. The companies were not asked to indicate whether they could expect to get the needed capital (for instance from milestone payments or a new financing round) or not. Exhibit 7. N = 85.e. however.7. and 18% of the enterprises are facing an immediate need for capital or will run out of capital within the next 6 months.

case study of Arpida in Appendix 2). If the biopharmaceutical enterprises do not succeed in getting sufficient funding they might have to sell out of their assets at low prices or even sell the whole company to another enterprise.8. The platform companies all indicate that the financial crisis has made it more difficult to gain access to capital. investors are becoming more reluctant to invest in biopharmaceutical companies. The existing pipeline will also be affected as enterprises may decide to reduce the number of drug candidates. while 24% of the respondents indicated that the financial crisis has had no effect on their access to funding.4 Impact of financial crisis Approx. A relatively high share of the enterprises with candidates in clinical phases 1 or 2 does not think that the financial crisis has had an impact on their access to funding. Exhibit 7. case study of Molmed and Symphogen).8: Impact of financial crisis on access to funding by type of enterprise   Platform  Pre‐clinical  Clinical phase 1  Clinical phase 2  Later‐stage  Product(s) on market    Made it more difficult No effect  Made it more difficult No effect  Made it more difficult No effect  Made it more difficult No effect  Made it more difficult No effect  Made it more difficult No effect  Frequency (N)  6  ‐  26  7  5  3  13  7  7  1  9  3  Percent  100%  ‐  79%  21%  63%  37%  65%  35%  88%  12%  75%  25%  Source: DTI-biopharmaceutical survey in Europe.7. cf. the biopharmaceutical sector is also facing difficulties with delivering the results that their investors have expected (cf. Biopharmaceutical enterprises are focusing their activities on demonstrating good results. 52 . As a result. Exhibit 7. Gaining access to capital is not only determined by the financial crisis. In fact. 75% of the respondents in the DTI-biopharmaceutical survey indicated that the current financial crisis has made it more difficult to gain access to funding. to ensure that they can get the capital they need (cf.5 Impact of capital shortage The DTI-biopharmaceutical survey indicates that one of the main results of capital shortage in biopharmaceutical enterprises is the postponement of new R&D activities. Exhibit 7. May June 2009 7.9. such as achievement of milestones. cf.

Exhibit 7.10.10: External barriers to getting funding by the DTI-biopharmaceutical surveyed enterprises. these different strategic responses may eventually lead to a restructuring of the companies with a subsequent negative impact on employment.5.9: Expected impacts of a capital shortage on the DTI-biopharmaceutical surveyed enterprises. 7.1 External barriers With regard to external barriers to gaining funding. Furthermore.Exhibit 7. N = 87 Total  Percent  (responses)  (N = 87)  New R&D activities will be postponed 66  76%  Ongoing product development project(s) will be postponed   11  13%  The number of drug candidates will be reduced   48  55%  The company might be sold  42  48%  The company might close  11  13%  Other consequences  7  8%  No consequences  3  3%  Do not expect it to happen  2  2%  Do not know/no answer  1  1%  Total  191  ‐  Source: DTI-biopharmaceutical survey in Europe. The increasing shortage of capital is also mentioned as one of the key barriers to gaining sufficient funding (39% of the respondents). May June 2009Note: Data is aggregated due to multiple answers Overall. Exhibit 7. cf. cancellation of R&D activities may have a negative impact on the future level of innovation in the sector and thus the availability of innovative medicines for the public. the DTI-biopharmaceutical surveyed enterprises especially identify the lack of willingness among investors to provide financing to high-risk and long-term projects. N = 87   Increasing shortage of capital   Difficult to get an overview of financing market The investors are reluctant to finance long term drug development Investors have limited interest in high‐risk projects/businesses Investors lack knowledge about the biopharmaceutical sector in general Fragmented internal capital market in EU Barriers to national R&D‐schemes operating across national borders Other  No external barriers  Do not know/no answer  Total  Total  (responses)  Percent (N = 87)  34  39%  8  9%  48  55%  45  52%  16  18%  8  9%  6  7%  5  6%  10  11%  1  1%  181  ‐  Source: DTI-biopharmaceutical survey in Europe. May June 2009Note: Data is aggregated due to multiple answers 53 .

The category ‘Other’ includes ‘lack of basic development knowledge’.g. N= 87   Total  Percent  Present the idea (drug candidates) without disclosing the idea  7  8%  Drug development process comes up with negative data findings  15  17%  Conflict of interest between present owners and potential new owners  6  7%  Reluctant to accept new owners in an active management role   9  10%  Difficult to communicate with investors  11  13%  Other   7  8%  No internal barriers  45  52%  Do not know/no answer  2  2%  Total  102    Source: DTI-biopharmaceutical survey in Europe. 30% of the respondents even expect their investors to stay with the company the next 5 years.2 Internal barriers The DTI-biopharmaceutical surveyed enterprises do not consider internal barriers important. Exhibit 7. will probably seek to help the company pull through the current crisis rather than cutting their losses by liquidating the company (EVCA 2009). Exhibit 7. and ‘problem with intellectual property’.7. lack of interest from investor for early-stage drug development because of high risk investment.5. 52% of the respondents do not think that there are any internal barriers to gaining access to capital. Exhibit 7.6 Exit strategies of investors Private equity investors typically have a long time horizon compared to other types of investors such as. 7. On the other hand. One of the respondents stated that it is very difficult to raise capital without ‘proof of concept’. Approx. May June 2009 Note: Data is aggregated due to multiple answers. cf. EVCA indicates that investors will. e. In fact. The respondents also mentioned the limited resources of small companies to engage in the identification of and negotiations with potential investors. cf. ‘reluctant shareholders’. investors may consider focusing their funding on the best performing segment of their portfolio and exit the remaining portfolio companies. 41% of the respondents indicated that they do not expect their investors to exit the company within the next 2 years. They may not always produce positive results or ‘proof of concept’ that can be used to as leverage when negotiating with existing and potential investors.. hedge funds. Responses concerning the expected time to exit of investors do not suggest that investors are currently fleeing from the biopharmaceutical industry. on the one hand.11: Internal barriers to getting funding by the DTI-biopharmaceutical surveyed enterprises.11. 54 . The main barrier identified in the survey relates to the R&D activities carried out in the enterprises. This suggests some stability for the management of the company for the years to come.13.

Exhibit 7.12: Expectations concerning current investors’ time to exit. N = 87

Number of  enterprises 

Source: DTI-biopharmaceutical survey in Europe, May June 2009

The long time horizon for the involvement of private equity investors does not necessarily imply that they are willing to increase their financial commitment to their portfolio company if the company faces financial constraints. Rather, the investors may opt for a reconstruction of the company if it cannot raise additional funding. With regard to exit strategies, 51% of the respondents expect their investors to exit the company via trade sales28, cf. Exhibit 7.13.
Exhibit 7.13: Expectations concerning exit strategies of investors, N = 53

  Total Percent Exit via stock market (IPO)   17 32% Trade sales  27 51% Buy out  18 34% Other  4 8% Do not know/no answer  2 4% Total  68   Source: DTI-biopharmaceutical survey in Europe, May June 2009 Note: Data is aggregated due the possibility of multiple answers. The category ‘Other’ includes ‘partnerships’, ‘selling the company’ and selling the shares to a big pharmaceutical company’.

With the IPO window closed, investors that are expected to exit via an IPO will need to pursue other exit strategies for the time being. Interviewees say that the limited exit options make the biopharmaceutical sector less attractive to potential investors.


Sale of one company to another company


Interestingly, the low number of DTI-biopharmaceutical surveyed enterprises may also indicate that some companies are uncertain about their investors' exit plans. The choice of exit strategies may influence the activities of the portfolio company. According to the DTI-biopharmaceutical surveyed enterprises, the main impact of the investors' exit strategies is that the most uncertain projects or activities are postponed, cf. Exhibit 7.1. The findings from the survey indicate that buy-outs have less effect on the organisation and activities than other types of exit strategies: More than half of the enterprises that expect their investors to exit via a buy-out suggest that this does not affect the enterprise. Enterprises that expect an IPO or a trade sale indicate that most uncertain projects or activities will probably be postponed as a result of this strategy.


In line with the overall picture of financing biopharmaceutical companies, venture capital is the main source of funding biopharmaceutical drug developing enterprises. Grants and loans are only an important financial source in the early stages of drug development, while IPOs and other types of public funding are mostly relevant in the later stages and for product candidates close to the market. Among the DTI-biopharmaceutical surveyed enterprises, more than 40% of the biopharmaceutical enterprises will need to raise capital within the next year to maintain their current activity level. This result is in line with the results of other recent studies on the biopharmaceutical sector. In case the funding situation continues to be critical, the biopharmaceutical enterprises indicate that they will have to postpone new R&D activities or reduce the number of drug candidates. In the long run this might have a negative impact on drug development activities in Europe and - in a wider perspective – innovation, economic growth and employment in Europe. According to the DTI-biopharmaceutical survey, the financial crisis has had a negative impact on access to capital as 75% of all types of biopharmaceutical enterprises that have drug candidate in early stages as well as in later stages indicate that the current financial crisis has made access to capital more difficult. Furthermore, it has become more difficult to obtain funding from all types of capital, especially for IPO, but also for venture capital. It is important to stress that access to capital is not only determined by the financial crisis. If the biopharmaceutical enterprises face difficulties in delivering the results (R&D result, positive clinical trials or professional development of the company) that investors are expecting, the investors may be become more reluctant to invest. In conclusion, gaining access to capital has become very difficult for biopharmaceutical enterprise, but the solution is not only to increase the capital supply, but to also to ensure that the capital is directed towards competent investors and managers.


8. Policy and regulation
The overall aim of this chapter is to analyse the regulatory environment and other framework conditions. We focus on the issues identified by the European Commission. Two key themes are described and analysed. First, we analyse the impact of the regulatory environment (including public policy and regulation of capital markets) on the access to capital for biopharmaceutical enterprises in Europe. Second, we analyse the extent to which trade barriers and/or distortions affect biopharmaceutical enterprises' ability to attract finance in an international setting. The latter also includes an analysis of the adequacy of the current international regulatory framework. One issue not included in the present analysis is the effect of socio-economic factors on biopharmaceutical companies' access to finance. For example, attitudes towards risk-taking may differ from country to country and depend on other social or economic factors. These factors are, however, excluded from the analysis on the grounds that access to capital for biopharmaceutical enterprises is heavily influenced by the types of framework conditions mentioned above rather than attitudes to risk-taking, etc. In addition, socio-economic factors are not easily affected by policy and an analysis would thus not result in any useful recommendations.


Regulatory environment
Public policy and regulation related to funding This section addresses three key aspects of access to finance in the biopharmaceutical sector: • Public policy towards biotechnology (biopharmaceutical) research, • Public co-funding of biotechnology (biopharmaceutical) research (including tax incentives), and • Framework conditions affecting the market for venture capital. It is important to note that public co-funding of biotechnology research may take several forms, each of which pose different challenges for biotechnology enterprise seeking access to finance. For example, the criteria for obtaining state loans and grants differ significantly from the criteria that private venture capital funds may use to make investment decisions. An analysis of framework conditions affecting access to finance in the biotechnology sector has to take account of this. Biotechnology research is a priority in most EU countries' national R&D and innovation policies. Thus, red biotech (biopharmaceutical) remains the most highly funded area within the biotech area (BioPolis 2007). Efforts to improve policy coordination and foster networks between the knowledge base and firms as well as networks between firms have increased. This includes focus on both schemes providing financial support in the form of grants, loans and equity to R&D as well as support for cluster initiatives. The latter is primarily based on increasing the role of regional governments in biotechnology policy-making. Examples of this include clusters in Cambridge (UK), Copenhagen (Denmark), Stockholm/Uppsala (Sweden) and, outside the EU, in Boston, Massachusetts (the US) (IRIS Group 2009).

Evidence from several countries suggest that companies' chances of obtaining early seed money. An analysis of policy effectiveness (BioPolis 2007) shows that policies that include both generic and biotech-specific public support show higher performance levels than policies that do not. before the implementation of strategic decisions. National support to private biotechnology research often takes form of tax incentives. the funding of research through the allocation of block grants gives autonomy to organisations over the research agenda. By contrast. network establishment and technology transfer between research institutions and private companies. e. However. competitive research funding is not only flexible. and coordination can only be carried out ex post. Previous research suggests that a system where funds are allocated by research councils through a competitive. tax harmonisation remains a politically sensitive issue for many Member 58 .The above has a significant effect on access to finance in the biopharmaceutical sector. the national schemes differ substantially in the different countries and this serves as a barrier for trans-European research collaboration (Ernst & Young 2007). it also appears to be a more effective method than direct control of funds by research institutions in achieving a strong international orientation and higher scientific performance (Reiss et al. As the present biopharmaceutical environment is characterised by increasing cross-border alliances. In addition. especially regarding the provision of seed capital (often loans) to new biotech start-ups. biotechnology companies increasingly need to be aware of the challenges and possibilities offered by significantly different tax regimes in different countries. peer review process allows ex ante coordination. European Commission 2005a). where a broad and up-to-date information base and the inclusion of different perspectives are important prerequisites. To meet these challenges. but rather to the funding of research institutions. Moreover. Having only generic research stimulating instruments in place is less effective than biotech-specific instruments. In addition. Nevertheless. One reason for this is that coordination of simultaneous policy actions apparently pays off..g. Although this does not directly relate to the funding of companies. which is crucial for attracting venture capital in the later stages. although this includes both financial support for biotechnology companies and support for. international sourcing of clinical trials and manufacturing operations. striking a balance is very important. offered to companies or organisations conducting the research. 2003). However. Policies designed to support enterprises may be divided into two main policies: state-backed venture capital funds for early-stage development and/or research activities of companies and various types of tax incentives (Europe Innova 2007). expansions into new markets and launches of new products. the study identifies limitations in the funding systems in many of the New Member States. might be small – perhaps because later-stage companies provide more attractive risk-return profiles (Vinnova 2008. Many Member States have developed new policy instruments to allow easier access to funding. the relative importance of biotech R&D funding in total government R&D funding has increased in most Member States. the findings may still hold validity in the domain of private investment in biotech R&D. particularly with regard to the complex nature of biotechnology innovation processes. A special issue relates to the fact that most biotechnology companies are far from making profits and taxable incomes and may not fully include taxation issues in their current decision-making. the Commission has moved forward to harmonising taxation measures.

g. This has an adverse effect on fundraising and investing within the EU. The result is that funds only invest small amounts at a time. in small or emerging venture capital markets funds are finding it difficult to expand. grow. In markets that are in the early stages of development. This has a negative impact on returns and on the attractiveness of raising funds. Operating across borders is complex and costly and small venture capital funds tend to avoid investing outside their home jurisdictions (European Commission 2007c. Venture capital funds and their managers are authorised and regulated according to national requirements. ‘drip-feed’ firms and often slow down the growth of recipient firms. Furthermore.) cannot be employed. 2007d). increased flow of venture capital and more efficient venture capital markets. five key obstacles have been identified as having a negative impact on access to venture capital in the biotechnology sector (European Commission 2007c. and the challenges of differing taxation regimes can thus be expected to remain in the future (European Commission 2007c). pension funds are not permitted to invest in venture capital funds or face quantitative and geographic restrictions. usually to a small number of chosen private investors). In large Member States with more mature markets. biotechnology companies is limited. As a consequence. better regulatory framework conditions are assumed to contribute to lower operational costs and risk. Specifically. seed money.. even though their business models are actually based on taking calculated risks.. which are paid for by investors).g. Funds that would otherwise expand their portfolio across borders are hindered due to operational and regulatory obstacles as outlined below. Wherever this is the case. In addition. grants. specialise and reach a critical mass of deals (European Commission 2007c). where traditional means of obtaining finance (e. a possible source of capital is absent from or face restrictions in the venture capital market. Facilitating cross-border private equity transactions between 59 .States. the capital base available to. However. All in all. public offerings. European venture capital funds tend to be relatively small because they rarely operate beyond national markets (European Commission 2005a). Current national regimes differ substantially from each other. higher returns. 2007). e. the European venture capital market is fragmented along national lines and the development and maturity of venture capital markets vary (Europe Innova 2006. divergent national policies create significant market fragmentation. Venture capital poses an opportunity for biopharmaceutical companies to gain access to finance at critical stages of their product cycle (typically in the early stages of development. This leads to higher organisational costs of raising money (in particular legal and advisory fees. However. loans. sector funds are becoming more common. 2) Lack of private placement regime Another obstacle hindering cross-border business is the lack of a European private placement regime (a private placement or non-public offering is a funding round of securities that are sold without an initial public offering. they tend to be too risk averse. the catalytic role of statebacked venture capital is beneficial to market growth. etc. 2007d): 1) Restrictions on pension funds In some Member States.

2005b). it is also a global business that competes for both funds and investment opportunities. funds can be established across the EU under a variety of legal forms. The European innovation policy pays special attention to supporting clusters and their cooperation that can also help the venture capital industry and its long-term sustainability by providing a deal flow. thus facilitating entry and exit for venture capitalists as new investment opportunities become readily available within the clusters.. To ensure that cross-border venture capital investments are not impeded. However. ensuring that no VAT is imposed on the fund's management company and abstaining from taxing foreign funds (Nordic Innovation Centre 2007). specialise and diversify their portfolios. Below this ceiling the Commission accepts that a market failure is assumed to exist (European Commission 2007c).g. The state aid promotes risk capital investments in young innovative enterprises in their first years of existence to help them overcome initial cash shortages. relying on close connections between funds and entrepreneurs. The high transaction costs of setting up the structure and the on-going management coupled with the existing legal uncertainty also dissuade venture capital funds from making cross-border investments. in particular growth stock markets that provide liquidity as the fragmentation of European markets extends to the growth stock markets that are small and illiquid. Venture capital thrives around clusters and universities that produce new ideas and entrepreneurs. the interaction of which can lead to unrelieved double taxation. without the necessary support structures (such as investment bankers and lawyers (European Commission 2005a. improve returns. Although venture capital is a local business in many ways. complex fund structures with parallel vehicles should be set up to minimise the tax disadvantages resulting from investing across managers. 60 . making funds established as limited partnerships tax transparent (as is the case in Finland). e. venture capital also needs more liquid exit markets in the EU. The new guidelines also include a light assessment procedure with a number of elements such as a higher investment threshold of €1. Currently.5m per SME over a 12month period. The current European venture capital structures cannot accommodate all types of foreign investors from within and outside the EU. reach economies of scale. 5) Tax obstacles Tax issues are of paramount importance. Thus. regimes.. fund structures should have features that can accommodate the individual legal and fiscal needs of investors. e.g. the conditions for the venture capital market can be improved by.g. 4) Exit strategy A key aspect of any venture capital investment is the exit strategy – the point at which the venture capitalist can sell his shares and release funds for new opportunities. Therefore. intermediaries and investors could lower these costs. and structures. The Commission has taken steps to improve the situation. by specialising in certain sectors or industries such as biotech). by establishing a new framework for state aid for research and development and innovation. increase their efficiency (e.. 3) Regulatory framework Removing administrative obstacles for cross-border investments would make it easier even for minor funds – and funds in small countries – to operate over a wide geographical area.

It includes products that have been derived from human tissue and cells (when intended for use for humans). or blood and blood components. private initiatives have been sparked in the region. Product development Access to capital is a key requisite of product development. Requirements in this area include information required to be given to donors and obtained from them. the network focuses on strategic relationship building between the members and international financial and industrial players. which applies to laboratories involved in the non-clinical testing of all chemicals including pharmaceutical products. The first area is good laboratory practice. the time horizon for finalisation of the product is long and the risk of failure (or non-commercialisation) is high. The Nordic Venture Forum was established to act as a reference group and an advisor for planned projects under the direction of the Nordic Innovation Centre (NICe) within the Nordic private equity market. 61 . organs. The third area concerns human tissue and cells. and distribution conditions for blood and blood components. All three areas can affect biopharmaceutical companies' access to capital by raising the costs and risks associated with developing or improving pharmaceutical products: 1. and quality and safety requirements for blood and blood components.1. Limitations are also imposed on 29 One example is the Nordic Venture Network. The responsibility for verifying and endorsing compliance with good laboratory practice lies with the Member States. storage. and 3. Three main areas of European legislation apply to quality and safety standards for product development. eligibility criteria for donors of whole blood and blood components. measures relating to the protection of Intellectual Property Rights (IPR) of companies developing and marketing the products (European Commission 2006a). scientific experimentation involving animals during product development is covered by EU legislation on animal welfare. 2. The second area concerns human blood and blood components. At this stage.Another initiative that is trying to overcome the shortcomings of the European market for venture capital is the establishment of a common Nordic venture capital market (Nordic Innovation Centre 2006). a Nordic Investment Fund has been proposed in order to drive the development of an integrated Nordic venture capital market forward. established in 1999.29 8. In addition to the above. measures regulating the commercialisation of the products. measures regulating the product development of pharmaceutical products. 2. Because the Nordic countries are not large enough to support a substantial venture capital industry individually.2 Regulatory measures related to product development and commercialisation Three key regulatory measures affecting access to finance in the biotechnology sector can be identified: 1. 3. transport. Partly sponsored by national venture capital funds. In addition. which is a private network consisting of leading technology venture capital firms in the Nordic region. but does not apply to tissue and cells for antilogous graft.

ultimately. Commercialisation The commercialisation of a pharmaceutical product often involves large-scale tests and clinical trials including extensive documentation. quality drop and prohibitive costs compared to. In addition. Systems of patent protection. For example. Applications for market authorisation for pharmaceutical products in the EU are submitted to the European Medicines Agency (EMEA). safety and efficacy of a generic product. With regards to use of genetically modified organisms (GMOs) in laboratories. industrial inventions can be protected by patent rights if certain basic conditions are met. e. This is underlined by the continuing conflict between the research-based biopharmaceutical industry and generics producers as well as the conflict between the companies holding intellectual property rights and the developing countries afflicted with major diseases. the protection extends to material derived from the patented material which possesses 62 . This is a costly process. The WTO agreement on trade-related aspects of intellectual property rights (TRIPS) provides an important framework within which to settle such disputes (OECD 2007). In general. These are generic pharmaceutical products which are essentially similar to. and share properties with. The directive also outlines the extent of the protection of biological material or processes for producing biological material. may result in the product not being allowed onto the market) is present and so is the risk of delays which can significantly diminish profits. Access to risk capital is therefore critical at this stage. EU legislation recognises that making appropriate comparisons with the reference product may go some way towards compliance with the requirement to establish the quality. A special piece of European legislation that specifically deals with biotechnology patents is Directive 98/44/EC on the legal protection of biotechnological inventions (European Parliament and the Council of the European Union 1998). the main legislation of relevance is Framework Directive 90/219/EEC. European Commission 2006a). but unable to afford the relatively high prices of innovative drugs. a reference product that has already received Community marketing authorisation. including protection of biotechnological inventions. exist at Member State. Intellectual Property Rights (IPR) The large investments that are often required to develop innovative biotechnological products and processes combined with the relatively long time horizon mean that the ability to protect intellectual property is a key issue for access to finance. EMEA's opinion is forwarded to the Commission and Member States and then the Commission drafts a decision and forwards it to the Member States and the applicant. the US. If the application is refused the product is banned in all Member States. which has been amended and supplemented by several subsequent directives and decisions (Council of the European Communities 1990. To some extent.research and development of products using human tissue. the European patent system has been characterised as ‘fragmented’ resulting in high uncertainty. China and South Korea (van Pottelsberghe 2009).g.. Authorisations are initially valid for five years and are generally renewable after five years for an indefinite period on re-evaluation by EMEA. If it is accepted it is valid in all Member States. However. the risk of failure (which. Certain regulatory measures relate to biosimilar (or "follow-on biological" in the US) pharmaceutical products. The directive outlines which biotechnological inventions are eligible for patenting and which are not. European and international level.

e. etc. 63 .e.. the barriers to cross border (parallel) trade in biopharmaceuticals are not based on rules regarding intellectual property rights. which may stretch beyond the period of patent protection. but also the possibility of disclosure of confidential information such as information on technical product development.. Copy products are common in countries that have not adopted or do not enforce patent-protection laws. A major threat to companies developing innovative biotechnological products and processes is the reduction of profits resulting from marketing of biosimilar (‘follow-on biological’) products. The possible consequence for businesses that are dependent on external financing is that the risks and expense of litigation may dissuade lenders or investors. where a patent holder's intellectual property rights to a certain product are infringed as well as the legal manufacture of biosimilar products not covered by a patent (or where a patent has expired). To minimise the effect of this.. executive decisions and sales. Prices are often set differently in different countries because of varying approaches to subsidising medicines. products that are essentially similar to the originally authorised product and where new preclinical and clinical studies are therefore not required. expert witnesses. pharmaceutical products benefit from data exclusivity for eight years after having received marketing authorisation (with additional market exclusivity for another two years. It applies when there has been a gap between the patent and the marketing authorisation being granted (which usually happens with pharmaceuticals). marketing.the same. In addition to patent rights. Thus. i. Pharmaceutical products can also be granted commercial protection (supplementary protection certificate). For example. and it gives a maximum of fifteen years of market protection from the time of authorisation. This threat can come from illegal manufacturing and marketing. while no formal recourse exists for the latter. A spin-off cost of the attempts made by biotechnology companies to protect their intellectual property rights is the cost of litigation inflicted on both the petitioner and the defendant (Genetic Engineering & Biotechnology News 2006). in the US. and a possible one-year extension for new formulations). Copy products are defined as goods that were developed while the innovator product was still protected by patents. but rather on health and safety regulations issued by the Food and Drug Administration (FDA) (Love 2001). i. Another factor that can reduce the profitability of biopharmaceutical companies is their pricing systems. there are provisions for compulsory licensing and the need to deposit biological material for patent applications. Biosimilar copies of off-patent products that have not undergone bioequivalence testing are sometimes also called copy products (USAID 2006). Furthermore. in some cases governments restrict attempts at parallel trading and thus protect biopharmaceutical companies' profits. the delays from the point when a patent is awarded until a product hits the market is therefore a critical issue that may reduce profits and thus ultimately make the biopharmaceutical company a less attractive investment object. Copy products are typically developed by illegally obtaining scientific dossiers from research and development (R&D) companies or through reverse engineering.30 The former can of course be remedied (at least to some extent) via judicial means. specific characteristics. This not only includes the (sometimes heavy) cost of lawyers. Restrictions on parallel trade in pharmaceutical drugs are typically enforced though regulatory barriers. 30 A distinction is made between biosimilar products and copy products.

A European company wishing to market its products in the US thus has to file an application with the FDA.g. the costs and risks associated with commercialisation (e. the debate over IPR protection has become a significant global trade issue pitting the developed countries. steps have been taken to ensure fast market access to innovative products without reducing the level of protection of patients. thus making it harder for biopharmaceutical companies to gain access to finance for their products. Asia and Africa (Goldsmith et al. EU and Japan. financial costs from extra trials.2 International markets – barriers. Other important factors that can affect biopharmaceutical companies' access to finance in a global context are: 1. An obvious example is China. attempts are made to create an international regulatory framework that can regulate the international challenges biopharmaceutical companies face. To this end.. whose recommendations is also embodied in the EU regulatory system.Thus. For instance. the challenges posed by copy products. such as the US. 2. Also. even when the products have already been approved for marketing in the EU. pharmaceutical regulators and researchbased industries in Europe. and very importantly. Thus. with legislation forcing companies to obtain individual approvals for marketing and commercialisation in each country. 2001). However. However. Thus. Differing policies towards to use of GMOs Although most restrictions put on the use of GMOs are related to agricultural biotechnology. parallel trading and litigation costs associated with operating in a sector where companies actively seek to protect and enforce their intellectual property rights can reduce the attractiveness of biotechnology companies as investment objects. making it difficult to spread the early stages of product development over several countries. against the developing countries in areas such as Latin America. Lack of enforcement of intellectual property rights Intellectual property is increasingly vulnerable in an international context where trade barriers are shrinking and no judicial institutions exist to secure their enforcement. public policy and legislation related to funding and regulatory measures related to product development and commercialisation can differ enormously from one country to another. distortions and negotiations Access to international markets is a key aspect of both marketing and commercialisation of biotechnology products and of the possibility for biotechnology companies to raise capital globally. where numerous copy products are being manufactured depleting the profits of biopharmaceutical developers (American Chamber of Commerce 2005). The US is a key market for European companies with regard to both aspects. This way. the US and Japan have formed the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH 2000). some may be relevant to biopharmaceutical companies as well because genetic engineering in health has been the main focus for modern biotechnology for a 64 . delays and the possible risk of rejection of the application) increase. 8. legislation applying to quality and safety standards for research may be different. approval practices and criteria often differ. This makes it difficult for biopharmaceutical companies to operate internationally.

important aspects of the international funding and regulatory context can affect biopharmaceutical companies' access to finance.long time (United Nations 2002). This includes early products such as insulin as well as more recent developments such as the Human Genome Project and gene therapy. Thus. lack of enforcement of intellectual property rights and differing policies towards the use of GMOs can make it difficult for biopharmaceutical companies to attract investment. Above all. 65 . In addition. different regulatory measures pose a challenge as companies often have to apply several times for approval of the same product.

66 .

1 SWOT analysis We present an overview of the four dimensions of the SWOT analysis in Exhibit 9. These proposed responses are aimed at improving the sector’s future competitiveness and should thus be taken into account in future policy-making. The SWOT analysis lists sector challenges and provides guidance for targets and priorities for policies. The purpose of the study is to identify and analyse challenges concerning European biopharmaceutical companies' access to finance to ensure that the sector remains competitive and innovative in the years to come. Weaknesses. Opportunities. Strategic outlook– conclusion and recommendations The following strategic outlook concerning access to finance for European biopharmaceutical companies is based on the analyses in the preceding chapters and on interviews with company managers and sector experts. Member State level and EU level.1 and discuss each topic in the following sections. It should be noted that the policy recommendations relevant to access to finance for companies in the biopharmaceutical sector focus on generic solutions to improve their access to capital.9. 9. The first part of the chapter features a SWOT analysis (Strengths. the second part of the chapter presents a list of potential strategic responses for policy makers and stakeholders at European sector level. The SWOT will therefore also address structural issues that may influence the supply of capital for the biopharmaceutical sector. 67 . Based on the SWOT analysis. They do not propose measures for specific countries or regions/clusters. and Threats) of the biopharmaceutical sector focusing on small and medium sized biopharmaceutical companies' access to finance which is largely influenced by the structural characteristics of the sector.

32 The 31 32 ‘Global’ refers to new chemical entities introduced in four or more of the G7 countries Strategic research agenda.e. a recent analysis challenges the common view that US companies are ahead of European companies in pharmaceutical innovation (Light 2009). Furthermore.Exhibit 9. This indicates that Europe is catching up with its main competitor in biopharmaceuticals. http://imi. European initiatives aiming at strengthening biopharmaceutical product development The Innovative Medicines Initiative was launched in 2007 by EFPIA and the European Commission. the data is from 1982-2003 and further analyses are needed to analyse the current position of European biotech research vis-a-vis the US and other competitors.1: SWOT analysis of the European biopharmaceutical sector STRENGTHS WEAKNESSES o o o o Strong research base in Europe European  initiatives  aimed  at  strengthening  biopharmaceutical product development   Strong biopharmaceutical clusters in Europe   Increased number of drug candidates in the  pipeline o o o o o o A risky and resource‐intensive innovation  process  Very few European companies intend to  bring products to the market on their own  Lack of access to capital  Poor performance of the  biopharmaceutical sector  Biopharmaceutical companies lack  business skills  European venture capital industry is not  performing well OPPORTUNITIES THREATS o o o Lack of funding leading to consolidation European VC industry is exploring new paths  to increase performance   Pipelines of large pharmaceutical companies  are drying out o o o o o o Financial crisis turning into innovation  crisis  Risk of negative impact on long‐term  health and healthcare provisions  Lack of exit options  Regulatory barriers  Flow of investors  Capital going to the US 9. However. the US. The analysis suggests that European research is actually performing well compared to both the US and Japan with regard of drug discovery. In fact. It has resulted in the development of a strategic research agenda (SRA) for Europe concerning the development of biopharmaceuticals and other biomedical products. i. the specific data on biotech also shows that Europe is trailing behind the US in the discovery of biotech drugs.2 Strengths Strong research base in Europe Although R&D-investments and the number of biotech patent applications is currently higher in the US than in Europe. Europe dominates the discovery of new chemical entities in general and global new chemical entities31 in particular.europa. Unfortunately.html 68 .eu/sra_en. the number of patent applications in the US and Europe appear to be converging.

would mainly help small groups of patients with rare diseases may not be developed due to their limited market potential. These sector characteristics may keep many potential investors from investing in biopharmaceutical companies. the lack of interest in bringing products to the market could reflect a strategic choice by the companies to focus on their research activities. The clustering of companies promotes innovation and economic growth.3 Weaknesses A risky and resource demanding innovation process The development of biopharmaceutical products takes a lot of time. This implies that the political ambition of creating a strong European biopharmaceutical industry in its own right may not Unfortunately. for instance. An increasing number of drug candidates in the pipeline A strong pipeline is a precondition for attracting investors to the biopharmaceutical industry. the process of developing biopharmaceutical products is very expensive and very risky compared to other sectors. but a 2008 survey carried out by The Pharmaceutical Research and Manufacturers of America (PhRMA) found that a total of 633 biotechnology medicines were in development (human clinical trials or under review by the Food and Drug Administration). Medicon Valley in Denmark/Sweden and Biovalley in France/Germany/Switzerland. Very few European companies intend to bring products to the market on their own Very few biopharmaceutical companies in the survey indicate that they intend to bring products to the market on their own (only 17% of the companies). in 2008 there were more than 1. Thus.strategy is intended to strengthen the competitiveness of biopharmaceutical research and product development in Europe by reducing or removing bottlenecks in the product development process. A potential problem with leaving drug development decisions completely to the market is that innovative products that. the dominant strategy of the companies is to enter into an alliance and/or out-license its drug candidates to another (bio)pharmaceutical company. 33 69 . Clustering and the establishment of formal cluster organisations may also help to attract potential investors to regions that are not currently in focus in investor communities. Strong biopharmaceutical clusters in Europe There are strong biopharmaceutical clusters in Europe – these include Cambridge in the UK. On the one hand.33 9. In such cases.000 product candidates in the pipeline (clinical trials phase 1-3). 2007 and 2008) the number of European drug candidates in the pipeline (clinical trials phase 1-3) has increased for several years. there is no comparable data on the US biotech pipeline. attracts innovative companies from other European or non-European countries and increases the visibility and credibility of the biopharmaceutical companies located in these clusters. Reducing the time to market and the costs of product development may make it easier for biopharmaceutical companies to attract investors. policy makers would need to consider financing the development and manufacture of the drugs through public funding. and the time for developing new drugs seems to be increasing. Furthermore. According to data from Ernst & Young (2006. Thus.

Moreover. Poor performance of European venture capital industry The European venture capital industry has not been able to provide the expected returns and investors are becoming more reluctant to invest in the European venture capital industry. The survey and the case studies indicate that many new biopharmaceutical companies are trapped by high R&D costs or academic ambition and hesitate to accumulate managerial or business skills. companies do not pay sufficient attention to business development and establishing networks or business relations with (potential) investors or other (bio)pharmaceutical companies. The biopharmaceutical sector is not performing well Investors and venture capital funds have been disappointed with the results of the clinical trials achieved by biopharmaceutical companies. the survey indicates that the main result of the lack of access to capital is postponement of new R&D activities and a reduction in the number of drug candidates in the pipeline. companies may be forced to restructure and reduce the number of employees. In line with expectations. clean tech. sales. etc. Consequently. Instead. Biopharmaceutical companies lack business skills Good researchers are not necessarily good managers. the average size of VC investments in Europe is lower than in the US suggesting that too little capital is invested in too many companies. Furthermore.materialise. the DTI survey of European biopharmaceutical companies shows that the financial crisis has made it increasingly difficult to gain access to funding. It is vital for biopharmaceutical innovation as well as economic growth and public health in Europe to address this lack of access to capital. On the other hand. distribution and marketing.). In addition. the financial crisis has reduced the financial basis of many venture capital funds. Venture capital industry in Europe is not able to keep up with the US OECD data indicates that the US is a global leader with regard to the amount of capital invested in life sciences (OECD 2009). Research on the sector's access to funding has identified three major funding gaps faced by biopharmaceutical companies in the process of developing new products. This has made it more difficult for biopharmaceutical companies to raise capital. Lack of access to capital Recent studies and the DTI survey of European biopharmaceutical companies suggest that the biopharmaceutical companies find it very difficult to gain access to sufficient funding. Companies must also have a managerial reputation and credibility to be able to attract investors. the strategy could also be the result of lack of business competencies or financial resources to carry out capital-intensive activities such as later-stage clinical trials. manufacturing. 70 . Consequently. the European biopharmaceutical enterprises will mainly contribute to the development of the pharmaceutical industry by filling up the pipelines of leading US or European pharmaceutical companies with biopharmaceutical product candidates. As a result. the capital base of the European venture capital industry is eroding and the venture capital industry's lack of market credibility makes it difficult for the funds to attract additional capital from investors. In the long term. they are moving towards the less risky late stages or investing in other less risky sectors (medical devices.

g. consolidation could also create larger and stronger European biopharmaceutical companies that could perform better than small companies and be more attractive to investors. this is good news as there will be a downward pressure on the price of compounds and companies. the European venture capital funds are not as specialised and competent in relation to biopharmaceuticals as their US counterparts are. 9. through funds-of-funds strategies where venture capital funds invest in other funds. However. As a reduce the number of biopharmaceutical companies in their portfolios or even exit the sector completely. including the relatively small size of the funds and limited specialised knowledge of high-tech sectors such as the biopharmaceutical sector. As a result. medical technology. The lack of access to capital could force biopharmaceutical companies to postpone or even abandon risky R&D projects in favour of less 71 .The performance problem of the European venture capital industry can be attributed to several factors. 9. This could increase the performance of the venture capital industry.. biopharmaceutical companies are struggling to gain access to funding and their bargaining power vis-a-vis potential buyers of compounds or the company itself may be limited. However.4 Opportunities Lack of funding leading to consolidation The financial crisis is putting a lot of financial pressure on many investors and they may decide – or due to regulation of. VC industry in Europe is exploring new paths to increase performance European venture capital funds are exploring new paths to achieving higher diversification and maximising their returns – for instance. and pharmaceutical companies are – according to industry – desperate to get new compounds into their own pipelines. e. Pipelines of big pharmaceutical companies are drying out The pipelines of many leading pharmaceutical companies are drying out. From the perspective of potential buyers.. which could result in a reduced number of biopharmaceutical enterprises in Europe.g. we expect to see more M&A activities and strategic partnerships in the near future. according to interviewees. the European venture capital funds may not be able to assess the biopharmaceutical companies or support their development to the same extent as specialised US venture capital funds. As a result. clean tech). pension funds be forced . In fact. pharmaceutical companies are increasingly moving into earlier phases of the development process to buy up compounds or engage in a strategic partnership with biopharmaceutical companies before their compounds become too expensive. As the price of biopharmaceutical compounds tends to increase with their stage of development and with competition among potential buyers intensifying in later stages. the pooling of resources in specialised life sciences VC funds will also benefit the European biopharmaceutical sector due to improved access to funding and support for business development.5 Threats Financial crisis turning into innovation crisis The financial crisis has made investors more risk-adverse and many investors are therefore focusing on biopharmaceutical companies in late-stages of product development or even abandoning the biopharmaceutical sector to the benefit of sectors perceived to be less risky (e.

In general. In the early stages. 72 . investors are often unable to raise the capital needed in later stages. it is very difficult to exit the biopharmaceutical sector. Many of the large pharmaceutical companies are currently located in the US and European drug developing companies may therefore end up becoming US owned. Flow of investors The current financial model that finances biopharmaceutical companies in rounds causes a lot of uncertainty about investors. One way to help biopharmaceutical companies to gain access to capital and investors is to strengthen their investor networks and improve the coordination between early-stage investors and late-stage investors.risky projects. Moreover. but it may have a negative effect on economic growth and employment in Europe. and the financial crisis has shut the IPO window in the foreseeable future. Therefore. in the early phases of the company’s development as well as the continuous financial commitment of Novo Nordisk to the company. pharmaceutical companies that are capable of raising sufficient money to negotiate and complete transactions. The lack of access to capital could mean that biopharmaceutical companies will be unable to develop new innovative medicines to conquer diseases and emerging threats to public health such as pandemics and bioterrorism.e. in particular. additional investors with financial pull are needed to provide sufficient capital to the company throughout the different development stages. which will make early-stage investments more attractive to the investor community. trade sales and buy-outs need buyers. the case study in Appendix 2) has been the collaboration with Novo Nordisk.. Negative impact on long-term public health and healthcare provision The lack of access to capital not only constitutes a threat to biopharmaceutical innovation and economic growth – it is also a threat to public health. policy makers will need to provide incentives for investors to provide capital to the biopharmaceutical sector or set up public funding mechanisms in accordance with European regulation on state aid. Such coordination could also provide an exit opportunity for earlystage investors. i. which will place the public sector and. a leading pharmaceutical company. public healthcare provision under considerable financial pressure. Biopharmaceutical products may also help policy makers in their efforts to deal with socioeconomic challenges such as the ageing European population. Regulatory barriers making the sector less attractive to investors Regulation and approval procedures increase the time to market for biopharmaceutical products. US ownership of European assets may not pose a problem for individual companies. IPOs are more difficult in Europe than in the US. One of the success factors for the company Innate Pharma (cf. Lack of exit options For the time being. This is making the sector less attractive to investors. Policy makers at national and European level thus need to consider improving the regulatory framework to reduce the time to market for biopharmaceutical products. capital flow and privileges. This could have a negative effect on the level of innovation in the sector and therefore economic growth in Europe. To address this threat to biopharmaceutical innovation.

they may become increasingly attracted to the advantages of the US market and this may lead them to deemphasize their local engagement. understanding the business logic of the opposite part. The financial challenges have been accentuated by the current financial crisis. Many biopharmaceutical companies have performed poorly and policy makers should be careful to invest in companies that the financial market has abandoned. The structural problems relate to the performance of the companies (R&D and management skills and capacity). However. we conclude that an increased capital supply could meet some of the immediate funding problems in the biopharmaceutical sector. Some observers even claim that having too much capital in the market for funding drug development could very easily become a “waste of money” because too many drug candidates with insufficient market potential would be funded.Our ambition is to address the financial challenges identified in this study by providing recommendations on how to improve access to finance for biopharmaceutical companies. there is also an element of ‘creative destruction’ that needs to be considered when deciding to support an industry on the ‘other side of the biotech hype’. The long-term consequences could be that biopharmaceutical companies will be forced to give up their drug development activities with a subsequent negative impact on innovation.6 Conclusion and recommendations The European biopharmaceutical sector faces considerable challenges in connection with gaining access to funding.2 below. In line with the SWOT analysis. our recommendations will focus on the impact of the financial crisis and the structural problems facing biopharmaceutical companies. The EU and the Member States have launched a long list of different initiatives and measures in this connection . The policy recommendations target the different challenges in the specific stages of the biopharmaceutical product development process as well as the overall framework conditions affecting the sector’s development. and this would drain the financial market for capital for other and more promising drug candidates. cf.Capital going to the US As VC in the few relatively successful European clusters grows more experienced and specialised. Financing biopharmaceutical drug development is a complex matter that goes beyond having access to sufficient funding. sharing information. etc. as well as the relationship between the company and the provider of capital illustrated by mutual trust. the capital market (VC. In recent years. Exhibit 9. the access to risk capital for high-tech entrepreneurs such as biopharmaceutical companies has been on the European political agenda. In the following. 73 . economic growth and employment in Europe.

the cases studies also suggest that there is a weak link between research and the early stage of drug and business development because researchers hesitate to move from research to business development. 9.6. innovative capacity and competitiveness of the European biopharmaceutical sector. long time to market. have established partnerships with other (bio)pharmaceutical companies.1 Recommendations addressing early stage drug development Exploring the effectiveness of accelerating tech transfer models and commercialization strategies – good practice Reducing the time to market and the cost of development are essential for companies in the biopharmaceutical sector if they wish to increase their attractiveness in investor communities. case studies in Annex 2). In fact. There are many different approaches to developing biopharmaceutical products. These partnerships give the biopharmaceutical companies access to R&D resources and business-relevant skills and provide revenue. Such sector specific measures would constitute a new approach in European industrial policy (compared to the current horizontal approach) that could successfully support the future development. a prominent model is for university-based researchers to spin out from universities and form their own companies expecting one day to become a large manufacturing biopharmaceutical company. Some of the case companies (cf.2: Intervention areas and related policy recommendations Early stage – first funding gap • Accelerating tech transfer models  and commercialisation strategies Supporting micro funds and  business angels • Mid and late stage – second and third funding  gap Increasing the volume  of venture  capital investments in Europe – The European  Biopharmaceutical  Innovation Fund • Framework conditions Attracting venture capital to Europe Improve framework conditions  for biopharmaceutical sector and venture cap ital industry in Europe • • Our analysis of access to finance shows that it is necessary to focus more on the challenges that biopharmaceutical companies are facing in the product development process.Exhibit 9. the European Commission should recognise the unique structural characteristics of the biopharmaceutical sector (capital-intensive. high risk of failure) by considering sector-specific policy measures that target the special needs of the biopharmaceutical sector. In Europe. There appears to be a need for speeding up and encouraging 74 . However. Solutions may include tech transfer and engaging in new ways to commercialise products.

Yet.6. Accelerating tech transfer models extend the traditional scope of tech transfer activities that focus on licensing also to include business support. and business incubator approaches in the biopharmaceutical sector. analysis and dissemination of good practice for accelerating tech transfer models. Recommendation Provide incentives to micro-funds and business angels to invest in early-stage biopharmaceutical companies See also EIF report from 2005 on Technology Transfer Accelerator. the Leuwen tech transfer and the Karolinska Institute in Sweden.pdf and report on the US bioscience industry and recent bioscience initiatives published by the Biotechnology Industry Organisation in 2008. the effectiveness of the different accelerating tech transfer models. Means • Identification.pdf 35 NESTA (2009) defines micro-funds as ‘small venture capital funds worth £30 million in total or less. commercialisation strategies and business incubator approaches in the biopharmaceutical sector to ensure the adoption of good practice in Europe. http://www. have adopted this model. Recommendation Analyse and promote good practice accelerating tech transfer models. http://www. commercialisation strategies or business incubator approaches has not been investigated systematically. The analysis should focus on documenting the effects of the various models. Instead. an early commercial assessment of research will ensure that the research activities and early drug development are based on a viable business/commercial platform. Thus.. investing less than £2m in total (including follow-up investments) in each of their portfolio companies. 34 75 . conditions for micro-funds35 and involvement of business angels could be improved to increase their involvement in early-stage companies in the biopharmaceutical sector. commercialisation strategies. the close collaboration between universities and big pharmaceutical companies is considered vital for the successful commercialisation of (biopharmaceutical) research in the US.eif.the presence of business skills in the early stages of drug and business development.2 Recommendations focusing on increasing the access to finance for biopharmaceutical companies Making investments in early-stage biopharmaceutical companies more attractive for micro-funds and business angels Interviewees suggest that venture capital funds may not be the most appropriate source of funding for early-stage e. venture capital and committed For instance. and the returns of investment for investors in early stage are considered low.34 The case studies of Bioartic Neuroscience and MolMed also illustrate the importance of business incubators for the development of biopharmaceutical companies. Various university institutions and cluster organisations in clinical and market expertise. strategies and approaches (European Commission) 9.

This has made the biopharmaceutical sector less attractive to the investor community. The Norwegian government-owned investment company “Argentum” and the Danish state-backed VC fund “Vækstfonden” (cf. This will allow the fund managers to carry out qualified assessments of business projects and support the management of the portfolio companies in their decision-making processes. the DTI survey of biopharmaceutical enterprises indicates that the companies find it more difficult to gain access to funding in the early development stages than companies in other stages of product development. Increasing the volume of venture capital investments in the European biopharmaceutical sector The analysis suggests that biopharmaceutical enterprises face several funding gaps when developing new products. o Economic size will also allow the fund (or the venture capital funds supported by the fund) to build up world class expertise and a high level of specialisation in biopharmaceuticals. the financial crisis has put many biopharmaceutical companies in Europe under financial pressure and reduced exit opportunities via public markets for investors ..   Recommendation Increase the availability of venture capital to biopharmaceutical companies Means • Establish a European biopharmaceutical innovation fund to invest in biopharmaceutical product development. case study of Symphogen) have.Means • Reform tax systems (e. 76 . All in all. economic size and expertise will attract additional private investors so that the total funds under management will increase. In addition. tax concessions) to favour investments in biopharmaceutical companies by business angels and micro-funds (Member States) • Public co-investments in micro-funds (Member States and European Commission) These initiatives may increase the availability of capital for biopharmaceutical companies. The later development stages are more capital-intensive and require large amounts of capital that micro-funds and business angels often cannot raise on their own. Some European countries have already launched strategic initiatives focused on boosting investments in national life sciences sectors (including biopharmaceuticals). Furthermore.g.g. The fund should be guided by the following principles: o Economic size will allow the fund to provide sufficient means to support biopharmaceutical product development in portfolio companies from the earliest research to the late stages of drug development. but investors and companies still face the challenge of finding the capital needed for the companies to grow. o Finally. There is a significant risk that these developments will lead to a reduction in R&D activities in the biopharmaceutical sector with negative consequences for innovation and economic growth. e. the study stresses that it is important to maintain the momentum of the product development process in the European biopharmaceutical sector. geared their initial capital and supported the establishment of specialised private life-science funds. It could be set up as a fund that invest directly in biopharmaceutical companies or as a fund-of-funds that invest in other venture funds..

Alternatively.g. large pharmaceutical companies) are located in the US. However.A range of issues must be considered before setting up a fund or a fund-of-funds. Mezzanine funding provides an interesting alternative to bank loans and venture capital. and this may pose a problem in the biopharmaceutical sector because many potential private investors in life sciences (e. debt financing is also a potential source of financing of innovation. the diversification strategy of the fund should be discussed.6. Means • Reform of existing European and national financial instruments to ensure global focus of activities (national and European policy makers) • Remove regulatory barriers to cross-border operations of venture capital funds (national and European policy makers) 77 . Moreover.. The EIF is co-investing together with private investors in VC funds that focus on underfinanced sectors such as the life sciences to attract other private investors. Policy makers should consider the merits of mezzanine funds with regard to high-risk investments and consider providing capital to the biopharmaceutical sector via such funds (Member States and European Commission). the European Commission could decide to establish a fund-of-funds to avoid policy interference with investment decisions. This means keeping interference with the fund to a minimum and letting professional fund managers make investments decisions. Will the fund only invest in biopharmaceuticals or should it spread the risks and invest in the biopharmaceutical sector as well as other sectors? The proposed fund should be fully integrated with the existing institutional framework consisting of the EIF and EIB to ensure that their activities are coordinated and synergies are exploited.3 Improving framework conditions for the biopharmaceutical sector and venture capital Attracting venture capital to Europe The European venture capital industry has not performed well and investors are becoming increasingly reluctant to invest in venture capital funds. One key issue is that private investors may be concerned about the risk of political interference in the investment decisions of the fund. Finally. Recommendation Extend the geographical reach of national and European financial instruments to ensure full exploitation of global financing opportunities. 9. traditional bank loans are ill suited for biopharmaceutical companies due to the high risks involved in biopharmaceutical product development and the limited revenues in the sector. the instruments often focus on European investors located. European policy makers will need to provide a formal guarantee for the independence of the fund. Such a fund-of-funds could support the current venture capital funds in investing in biopharmaceuticals without interfering with investment decisions. However. To ensure the fund’s credibility in the venture capital market.

Improving the framework conditions for biopharmaceutical companies and private equity
According to industry representatives, the regulation of biopharmaceutical companies as well as the European venture capital industry could be improved to better support the development and competitiveness of the two industries. The biopharmaceutical sector is subject to extensive sector-specific regulation due to the potential risks to human health and the environment as well as ethical concerns. Among the key issues we find: ‐ Reduce the burden on biopharmaceutical companies ‐ Speed up the procedures for drug approval The European regulation of the venture capital industry is currently under scrutiny following the financial crisis. One of the key issues is increased transparency with regard to the operation of venture capital funds. Moreover, the regulation of private equity does not take the characteristics of different forms of capital into account. Recommendation Improve the framework conditions for European biopharmaceutical companies and venture capital industry. Means • Adopt the Young Innovative Enterprises scheme in all European countries (adjusted to the national contexts) (EU Member States) and extend the current 8-year limit in the EU State Aid rules to 15 years. • Speed up the centralised procedure for marketing authorisation (EMEA) o A 2007 study analysing approval times for the EMEA and FDA in 2000-2005 concluded that approval times were nearly identical (15.8 months for EMEA vs. 15.7 months for FDA). However, the FDA approved a larger number of products (47) faster than the EMEA.36 EMEA has taken steps to reduce the approval time, but there is a need to continue to explore other options in order to reduce the approval time further. o Good practice examples: The Swiss drug licensing authority, SwissMedic, has set up a task force to speed up the approval procedure. The aim is to ensure that by the end of 2010 drug registration will take just three months instead of the current eight months (Swiss Biotech Report 2009). • Operation of venture capital funds in Europe. Continue the policy dialogue between policy makers and the private equity industry to ensure that new legislation aimed at regulating and monitoring financial operations does not serve as a barrier to venture capital funds and other investors to operate in Europe and invest in innovation activities



  Acs Z.J. and C. Armington (2004): “The impact of geographic differences in human capital on  service formation rates”, Discussion paper on entrepreneurship, growth and public policy n°  1504, Max Planck Institute, Jena, 48p.  Acs, Z.J., W. Parsons & S. Tracy (2008): “High‐Impact Firms: Gazelles Revisited” Corporate  Research Board, LLC, Washington, DC 20037    Afonso, A., W. Ebert, L. Schuknecht and M. Thöne (2005): “Quality of public finances and  growth”, ECB working paper    American Chamber of Commerce (2005): “American Corporate Experience in a Changing  China–Insights from AmCham Business Climate Survey, 1999–2005”  Audretsch, David B (2001): The Role of Small Firms in U.S. Biotechnology Clusters. Small  Business Economics 17[1‐2], 3‐15.   Baker, Ann and Gill, Jasween (2005): Rethinking innovation in pharmaceutical R&D. Journal of  Commercial Biotechnology 12[1], 45‐49.   Baum, Joel A. C and Silverman, Brian S. (2004): Picking winners or building them? Alliance,  intellectual, and human capital as selection criteria in venture financing and performance of  biotechnology startups. Journal of Business Venturing 19[3], 411‐436. 1‐5.   BioPolis (2007): Inventory and analysis of national public policies that stimulate biotechnology  research, its exploitation and commercialisation by industry in Europe in the period 2002–2005,  June 2007‐finalreport_en.pdf   Biopolo (2009): Italian Biotechnology Parks Directed by Italian Biotechnology Directory.  Blossom and Company Assobiotec Report (2009): Biotechnology in Italy – The financial  perspective.  British Private Equity and Venture Capital Association (2009): Benchmarking UK venture capital  to the US and Israel. What lessons can be learned?  Carrin et al (2004): Science‐Technology‐Industry network. The competitiveness of Swiss  biotechnology: A case study of innovation,  Champenois, Claire, Engel, Dirk, and Heneric Oliver (2006): What kind of German  biotechnology start‐ups do venture capital companies and corporate investors prefer for equity  investments? Applied Economics 38[5], 505‐518.   Cook, Philip (2007): European asymmetries: a comparative analysis of German and UK  biotechnology clusters. Science and Public Policy 37[7], 454‐474.  

  Council of the European Communities (1990): “Council Directive 90/219/EEC of 23 April 1990  on the contained use of genetically modified micro‐organisms”  DiMasi, J.A; Hansen, R.W; Gabowski H.G.(2003): The price of innovation: new estimates of drug  development cost. Tufts center for the Study of Drug Development. Journal of Health  Economics, 22, 151‐185.  DiMasi J.A. and Gabowski H.G (2007): The cost of biopharmaceutical R&D: Is Biotech different?  Managerial and decision economics, 28, 469 – 479.   Daniele, Mascia, Mats, G. Magnusson, and Americo, Cicchetti (2005): Network Prominence and  Innovation: An Empirical Analysis of Corporate‐Backed Biotech Spin‐Offs. Innovation:  Management, Policy & Practice 7[1], 7‐22.   Deeds, David L., Decarolis, Donna Marie, and Coombs, Joseph E: The Impact of Firm Specific  Capabilities on the Amount of Capital Raised in an Initial Public Offering: Evidence from the  Biotechnology Industry. Journal of Business Venturing 12,  Ernst & Young (2007): Beyond borders – Global biotechnology report, _Full/$file/BeyondBorders2007.pdf   Ernst & Young (2008): Beyond borders – Global biotechnology report,  Ernst & Young (2008b): Biotech in Denmark 2008 – Growing stronger.,1033)/Biotech_in_Denmark_2008_‐ _E&%3BY.pdf  Ernst & Young (2009): Beyond borders – Global biotechnology report 2009,  Ernst & Young (2009b): Swiss Biotech Report 2009,  EuropaBio (2006): Biotechnology in Europe, 2006 comparative study,   Europabio (2009): Healthcare Manifesto 2009‐2010,  European Biopharmaceutical Enterprises (2009): Assessment of the global crisis impact on  small biopharmaceutical companies in Europe  European Commission (2005a): Best practices of public support for early‐stage equity finance,‐ stage_equity_finance.pdf    European Commission (2005b): Improving opportunities for Initial Public Offerings on growth  stock markets in Europe.  European Commission (2006a): Users guide to European Regulation in Biotechnology,  

 September. (KS‐NS‐06‐010‐FR‐N)  European Commission (2007): Commission Communication on the mid term review of the  Strategy on Life Sciences and Biotechnology  –175 of 10/04/2007.     European Parliament and the Council of the European Union (1998): “Directive 98/44/EC of  the European Parliament and of the Council of 6 July 1998 on the legal protection of  biotechnological inventions”  Eurostat  (2006):  Statistics  in  focus.europa.  http://ec. Innovation and Clusters NetBioCluE. AFIBIO Access to  finance in the Biotech Sector  Europe Innova (2007): Access to finance in The Biotechnology  http://ec.   European Commission (2007e): Financing small businesses: recommendations for action.pdf  European Commission (2006): European Competitiveness Report 2006 53_F_EN_ACTE.pdf  European Commission (2007d): Innovation clusters in Europe ‐ a statistical analysis and  overview of current policy support.europa.  http://ec.jsp?type=page&lg=en&cid=6090   Europa Innova (2006): Overview of the Biotech –Health sector in Europe. June   Europe Innova (2006): An analysis of Access to finance for European Biotechnology Firms.   81 .pdf   European Commission (2007c): Removing Obstacles to Cross‐border Investments by Venture  Capital Funds.  Patent  applications  to  the  European  Patent  Office  at  regional level ‐ High tech patenting concentrated in 36 regions.   Europe Innova (2008): Do’s and do not for biotech cluster development: the results of the Commission (2006): European Industry : A sectoral  European Federation of Pharmaceutical Industries and Associations (2008): Pharmaceutical  Industry in Exhibits   www.europe‐innova. Enterprise and Industry Directorate‐General.europa.europa.   www.europa.  http://ec.efpia.  http://ec. Synthesis report on  Biotech National and EU 2007. Technical update –  2006. Europa Innova.europa.pdf  European Commission (2006) : Statistiques en bref 10/   European Commission (2007b): Analysis of the competitiveness of the European biotechnology  industry.

  Gulati. Pursuing Licensing with Alleged Infringer Might Be Best Option”    Goldsmith. Prepared for Danish Biotek. (2004): Organizational Scope and Investment: Evidence from  the Drug Development Strategies and Performance of Biopharmaceutical Fims.cfm?abstract_id=482322     ICH (2000): “The Value and Benefits of ICH to Industry”  IRIS Group (2009): Vejen til en stærk biotek klynge i Hovedstadsregionen [The path to a strong  biotechnology cluster in the Capital Region in Denmark].  http://www. Journal of Business Venturing 22[1]. Monica C. Life Sciences Report [May]. J.  2003. (2001): “Intellectual Property Protection and the International  Marketing of Agricultural Biotechnology: Firm and Host Country Impacts”  Guedj. and Zipkin. opportunities and challenges of modern biotechnology  for Europe (Bio4EU) Final report‐Task%201‐final_26_04_06.  http://papers..   Hand.pdf   JRC/IPTS. 127‐ Determinants of the round‐to‐round returns to pre‐IPO venture capital  investments in U. Leveraging  Pharma's Need for Products. Peter et al.  Hege. 2009.   Grabenwarter (2006): Future Prerequisites for Investments in the Nordic Region Nordic    Genetic Engineering & Biotechnology News (2006): “Patent Litigation: Is it Worth the Expense?  If Rights Are Uncertain. M. A. Biotechnology in Europe. Patens and R&D investment     EVCA (2009): Global trends in venture capital 2009 global report. David.pdf  Evnin. Ulrich. Strategic Management Journal 24[2].   Hand. Ilan and inal_web. I (2003): Biotechnology Venture Capital.unu. Cambridge.S. biotechnology companies. M. Frédéric Palomino & Armin Schwienbacher (2008): Venture Capital Performance:  the Disparity Between Europe and the United States. NBER Working Paper.ssrn.merit.pdf  82 . (2003): Which ties matter when? The contingent effects of  interorganizational partnerships on IPO success.  2004. (2005): The Value Relevance of Financial Statements in the Venture Capital  Market. [w10933]. Ledbetter. L.Eurostat (2007): Statistics in focus.   JRC/IPTS (2007): Analysis Report ‐ Contributions of modern biotechnology to European policy  objectives   http://bio4eu. The  Capital Region and the Danish Association of the Pharmaceutical Industry. MA.. 1‐1‐ 1‐28. Ranjai and Higgins. NBER.europa. The Accounting Review 80[2]. John R. R. io4EU (2008): Consequences. 613‐648.

pdf  Kapeleris. Jesper (2006): Growth Dynamics of Dedicated Biotechnology Firms in  Transition Economies ‐ Evidence from the Baltic Countries and Poland  www.  Nature Biotechnology (2006): Private biotech 2004 – the numbers. James (2001): “Policies that ensure access to medicine.pdf   Moran. Nature Biotechnology  6/2006   www. (2009): “Global Drug Discovery: Europe is Ahead” in Health Affairs 28. and promote innovation. Maunula (2007): 'Coaching' small biotech companies into success. Rose (2004): Towards definition of the gobal  biotechnology value chain using the cases from Australin biotechnology SMEs. The Cambridge Cluster Report  2007. Donald W.   Library House (2007): Looking Inwards.‐2006. 1460‐‐625. Reaching Outwards. no.  Globalisation and Small Business.  Kessel.   Lanza. WHO/WTO  position paper  Luukkonen.  and a trade framework to support global R&D on new healthcare inventions”.biotechbusiness. Frederick (2007): A better prescription for drug‐development  financing. The changing nature of the early stage venture capital market in  the UK  83 .  Number 8. Nuala (2006): Danish biotech outperforms its European counterparts. John. 1 no. 79‐91. 548‐568.html)  Nature Biotechnology (2006): Public biotechnology 2005 – the numbers. International Journal of Biotechnology 5[1]. with  special attention to issues concerning the impact of parallel trade on the competitive‐625. Stéphane.   Krauss. Gerhard (2000): New Biotechnology Firms in Germany: Heidelberg and the BioRegion  Rhine‐Neckar Triangle. Int. Nature Biotechnology 25[8].ec. 5. Nature Biotechnology  6/2006   www. Nature  Biotechnology 24[12]. Norus. 1 2004. 859‐866. Christian and Fujiwara.nature.   Muller. Volume 27. 2003. Takao (2003): The entrepreneurial environment for biotech  start‐ups in Germany and Japan. 143‐153.JRC/IPTS and DG Research.   Malo.  International Journal of Biotechnology 9[6].(2008): Monitoring industrial research: The 2008 EU Industrial R&D  Investment Scoreboard. Damian and Barnard.europa.nature. Small Business Economics 17[1‐2]. Terttu and Mari. Vol. http://iri. Nature Biotechnology. Hine.  Light.html)  NESTA (2008): Shifting sands. Mark and Frank. Guido (2009): Building today’s platform company. 76‐94.  w969‐w977.

 University Presses of  California.NESTA (2009): Start‐up finance. OECD (2008)  International Future Project on “The Bioeconomy to 2030: Designing a Policy Agenda” Health  Biotechnology: Emerging Business Models and Institutional Drivers. http://www.  http://www. April 2008. 1132. The role of Micro‐funds in the financing of new technology  based firms.oecd.. The American Journal of Sociology 110[4]. Business angel investing – promising outcomes and  effective strategies. (2000):Biotechnology Firms in Sweden.. January 2008. Promoting a common Nordic  venture capital market  Nordic Innovation Center (2006a):Promoting a common Nordic venture capital market. and Nelson. (2002): Technological  innovation and economic performance. Small Business Economics 17[1‐]. 347‐366. 343‐357. White. Gary P.     Nordic Innovation Center (2006): Nordic Investment Fund. Walter W..   84 .nesta. Oslo. Columbia and Princeton.   OECD (2008b): Science. Kenneth W. David G.  http://www. [14]. Anna. Benn. Development  and status 2003‐2005. Jason (2005):  Network Dynamics and Field Evolution: The Growth of Interorganizational Collaboration in the  Life Sciences. Douglas R. 2005. Marc (2005): The evolution and performance of biotechnology regional  systems of innovation. Koput. Jorge and Banik. 2007.  OECD (2005): A Framework for Biotechnology Statistics.pdf  Pisano.  Niosi. Richard R.  2000. An Overview of Regulatory Tools and Frameworks for Modern Biotechnology: A Focus  on Agro‐Food  OECD (2008): International Future Project on “The Bioeconomy to 2030: Designing a Policy  Agenda” Biotechnology regulation in the Health     OECD (2007): International Futures Project on the Bioeconomy to 2030: Designing a Policy  Agenda.pdf  OECD (2009): Biotechnology Statistics 2009. 2006  Nordic Innovation Center (2007): Obstacles to Nordic Private Equity Funds.   Powell.. 93‐103.  2006  Nordic Innovation Center (2006b) Nordic Private Equity – an industry analysis. and Owen‐Smith.oecd.pdf  NESTA (2009b): Siding with the Angels. 2002. technology and industry outlook  Nilsson.  http://www. Victor. Cambridge Journal of Economics 29[3].uk/assets/Uploads/pdf/Research‐Report/micro‐funds‐ report.oecd. New Jersey.

 Henrik (2007): Alliances of Scandinavian Biotech Start‐ups and their  Effect on Financial Performance. Koput. Rasmus Lund (2006): Structure. Finn. James I (2002): The Spatial Clustering of  Science and Capital: Accounting for Biotech Firm–Venture Capital Relationships. (2006): Management Practices and Strategies to Accelerate  the Innovation Cycle in the Biotechnology‐2007.     Reiss. Walter W.pdf   Swiss Biotech Report (2009): Update 2009 – talents for success.    United Nations (2002): Key Issues in Biotechnology. Gabriel Bas and Jorge. The Potential Contribution of Manufacturers of Generic and Biosimilar  Drugs.pdf   Valentin.  www.  http://ec. Technovation 26[5/6]. Regional  Studies 36[3]. and Morgan.europa. 545‐552.europa. Rasmus Lund & Dahlgren Henrik (2008): How Venture Capital Shapes  Emerging Bio‐clusters – A Cross‐country Comparison   85 . Niosi (2007): The issue of asymmetrical growth in Specialised  Biotechnology Firms in the USA and the UK. Henrik. Jensen. et  Valentin.  http://ec. (2006): Improving Hormonal  Contraceptive Supply. 87‐ 100. Finn and Jensen. M. Copenhagen Business School.pdf   Valentin.  Valentin.    UNU‐Merit (2006): Monitoring and analysis of policies and public financing instruments  conducive to higher levels of R&D investments. employment and  performance in Biotech firms: Comparison of Danish and Swedish drug discovery firms  www.biotechbusiness. .Powell.  [2007‐02].10. Kenneth W.    United States Agency for International Development. John P. Jensen.pdf   SEC (2006): Commission Communication “Technical Update – 2006”  http://ec. icy_‐_final_report_april_2005.   Terziovski. Country Review Spain.   Tomas. International Journal of Biotechnology 9[1]. 2007.biotechbusiness. T. Dahlgren. Dahlgren. Rasmus Lund (2007): The Imprint of Founders on Biotech Firms. 291‐305. Research Centre on Biotech Business.europa.. 1‐1‐2007. (2003): “Efficiency of innovation policies in high technology sectors in Europe  (EPOHITE)”  Reiss.pdf   SEC (2005): Commission Communication “European Industry: A Sectoral Overview” ‐ 1216 final  of‐in‐research/pdf/download_en/spain. and Bowie. Thomas (2005): Benchmarking of public biotechnology policy ‐ Final report  http://ec. Biotech  Business Working‐2006.

   Zika.europa. Linda.‐08‐   Vinnova (2007): Internationellt jämförande studie av innovationssystem inom läkemedel. Eleni et al (2007): Consequences.vinnova. Bruno (2009): Lost property: The European patent system and why it  doesn’t work.   http://bio4eu.van Beuzekom.pdf    Vækstfonden (2007): Venturekapital og bioteknologi i Danmark – perspektiver for fremtiden. Marius (2006): Development and switching  of business models in Dutch Dedicated Biotechnology firms: simultanous resource development  or a fixed sequence of resource development. and Meeus.pdf   86 . opportunities and challenges of Modern Biotechnology  for Europe. Brigitte and Arundel. %20report%20Life%20Science%20Benchmarking%20080531%20Swedish.pdf  Vinnova (2008): Why is Danish life science thriving? –a case study of the life science industry in   Willemstein.pdf   Van Pottelsbergh. Anthony (2006): OECD biotechnology statistics – 2006  www. The Biotechnology for Europe study. The European Techno‐Economic Policy  Support  bioteknik och medicinteknik  www. Bruegel Blueprint series. van der Valk.

Thomas Meyer Ulrich Grabenwater Alan Barrell Isabel Garcia Organisation Vækstfonden. Denmark Novartis Venture Funds. Switzerland San Raffaele Science Park.Annex 1: List of interviewed expert Name and position Rolf Hauge Kjærgaard Florent Gros Daniela Bellomo Erno Duda Dr. Milan Hungarian Biotech Association EVCA EIF Business Angel ASEBIO 87 .

Medicon Valley Sweden Germany. BioCat Switzerland. BioValley UK 88 . BioRN Italy France Spain.Annex 2: Case studies Overview of the case studies: Name of the company Symphogen BioArctic Neuroscience Apogenix MolMed Innate Pharma Oryzon Genomics Arpida CellZome Location Denmark.

prove (test) their effectiveness and develop production system for a wide range of different drugs. In other words. Europe and North America. Overall. the company claims to be the leading company in developing recombinant polyclonal antibodies (rbAb). d. John Haurum (CSO) and Thomas Feldthus (CFO). USA 37 89 . The number of employees peaked in 2008 with 87 employees but has been reduced while the company adapted to more focused activities. the key to Symphogen's success will be the originality of its technological platform and a competent symbiosis between the executive management and board of directors (investors). The company's main business strategy is to develop new drug candidates and bring the drug candidates to the market in partnership with leading biopharmaceutical companies.novo. The key strategic challenges for Symphogen are primarily to keep very high scientific standards and present promising research and clinical results. Since 39 Novo A/S .symphogen.has since 1999 established itself as an international venture capital partner in the life science area and has invested in over 50 companies in Denmark. Symphogen is based on the fundamental research idea40 that the human body produces antibodies to overcome many different diseases. 70. but more a means than the solution The case is mainly based on an interview with the CEO Kirsten Drejer. the number of employees has increased to approx. www.owned by the Novo Nordisk Foundation . Symphogen invested considerable amounts of money in R&D to develop its own antibody technology platform.(www. and Symphogen (2009): The Annual Report 2008.novonordisk. 60% of them hold a Ph. allocation and dedication to R&D has a very high 40 The first invention recognising this technology platform originally was done at Boston University. Capital is crucial. the company may also become more active in initiating production (possibly by using subcontractors) as well as sale and marketing. This platform has now been patented. and two thirds of them work within drug discovery and pre-clinical tests. or master's degrees. In its first year in business. However. Denmark Company characteristics37 Symphogen A/S was founded in 2000 by the three co-founders Kirsten Drejer (CEO). This is the backbone of the company in its efforts to become the leading company in its area of business. a new class of biopharmaceuticals for treatment of serious human diseases.e. However. Through their insight they will also become patient investors (have a long investment horizons). such a dedicated focus can only be achieved if access to capital is plentiful and when the “capital” (the venture capitalist) is competent (profound insight and knowledge about the technological platform of the company). 38 http://www. i. The CEO and the CFO have considerable industrial experience from the pharmaceutical industry and have worked with R&D and management of R&D in Novo Nordisk A/S (one of the world's leading pharmaceutical companies within diabetes38) and as an investment manager in Novo A/S respectively.39 The third founder is a researcher with extensive international research experience within molecular immunology and biochemistry.Symphogen A/S. The researchers will be able to develop drugs if they can copy and/or clone these antibodies..

The Danish State Investment Fund has invested indirectly in some 60 companies. Several of the large pharmaceutical companies have been in business for decades and hold a significant position in the international market. € 150 million to approx. the capital market also seems to be well developed.mva. Sunstone Capital43 is an example of a venture capital 90 . these venture capital funds will be able to attract further capital and invest in more companies. the average venture capital investment per inhabitant is very high in the region where many clinical studies are also carried out. the last few years the Danish State Investment Fund has faced increasing problems with finding sufficient capital to continue investing in the increasing number of biopharmaceutical companies with an ever increasing need for capital to bring drug candidates from research to a new medicine. the region also appears to be highly attractive to international investors. The Danish State Investment Fund (Vækstfonden42) has played a significant role in financing biotech companies (different forms of loans as well as equity) for about 15 years by filling the financial gap between research funding and the traditional private venture capital. Through its indirect investments. university hospitals and a number of very large and globally oriented (bio)pharmaceutical companies. The fund recently changed its investment strategy from direct investment (an actual portfolio of nine companies) to indirect investment. Medico Valley Alliance. 41 42 Medico Valley Alliance (MVA) (http://www. a cluster organisation.sunstonecapital. which is also called the “Medico Valley Region”.Regional and national financing conditions Symphogen is located in Copenhagen in the Danish-Swedish cross-border Øresund Region. The overall impression is that the region is characterised by high skills and competencies in the research and business sector as well as the venture capital are dedicated to the biopharmaceutical market. the Danish State Investment Fund invests in other venture capital funds (at present seven venture capital funds). 43 Sunstone Capital (http://www. the regional venture market is also characterized by very competent cooperate venture capital funds as well as funds established by institutional investors with less knowledge about biopharmaceutical market. Apart from the state-backed venture capital.vaekstfonden.41 Finally. has been established to encourage collaboration and joint activities and profile (market) the region internationally. In a European context. € 800 million (IRIS Group 2009) However. The biotech sector took off in the years 1999-2002 when 10 new biotech companies were established every year. Vækstfonden (http://www. This region is characterised by a huge health care sector with several universities. In addition to the above research and industrial platform. which is a spin off from the Danish State Investment Fund. The institutional investors to some extent rely on the competence and expertise of the venture capital funds dedicated to the biopharmaceutical market. and the capital managed by venture capital funds increased from approx.

a € 0. Symphogen stresses that venture capital is the only possible way of funding new drug discovery companies as the need for capital is huge and the investors' ability to handle the risk management requires profound insight and knowledge about biopharmaceuticals. LD Pensions (DK). Symphogen has addressed the most competent international investors. In the start-up phase. Its success is based on a. Gilde Healthcare Partners (Netherlands). Competent investors have much more patience and do not panic if some of the research or test results turn out to negative as they have understand how to evaluate the results and consider a strategy to continue the drug development process. about € 17 million in additional equity was raised from venture capital funds. Symphogen raised seed capital from Novo A/S (€ 0. Novo A/S (DK). technology. determined and persistent focus on: • High-quality research and a technology platform with great market potential • Establishing personal relationships with investors followed by a clear and open communication • Dedicated process to attract the most competent international venture capital The financing strategy of Symphogen is based on the philosophy of being dedicated to R&D in order to obtain the best research results as a way to attract the most competent international investors. Since the initial funding. This not only resulted in seed capital from Novo A/S. In addition to equity. loans and capital raised in the private venture capital market. Personal relationships appear to be essential. Until it can break even. the company will need an additional capital injection of € 130 million. these partnerships generate an 44 Essex Woodlands Health Ventures (USA). Symphogen had the advantage of having close relations with Novo A/S. during several funding rounds.Financing situation of the company So far. 44 2009 has seen a new funding round where the company raised an additional equity investment of € 33 million. Danske Bank (DK). In 2002. Symphogen has been successful in raising capital. Tri-Takeda (Japan) and Genentech (USA) 91 . Symphogen has carefully screened the venture capital market for competent venture capital funds and the management's personal networks have been dedicated to establishing personal relationships with potential investors. Symphogen had raised a total of €108 million in equity capital through its international investor syndicate over several funding rounds. The capital was spent on intensive research. approval by the authorities and access to the market.86 million as equity). The advantage of having competent investors is that they understand the challenges in connection with developing new drugs with regard to research. This combination of capital and insight is difficult to find in other parts of the capital market . In 2000.66 million loan from the Danish State Investment Fund and a start-up grant of € 0. Symphogen has not generated any profit from its business activities. Symphogen expects to be financially sustainable in 5 years.including the stock market. the current pipeline of drug candidates (cf. The investors – mainly venture capitalist – have almost remained the same since 2000. Until 2008. It has recommended Symphogen to potential investors. which has been essential for getting the opportunity to present Symphogen's business plan. the company has also played an important role in proposing potential venture capital funds. figure below) has also opened up for co-development and marketing partnerships with other biotechnology and pharmaceutical companies. Depending on the progress of the drug development.1 million. In other word. Sunstone Capital (DK). but has relied on grants. Generally.

The main challenge is to establish a clear agreement that defines collaboration. If successfully commercialized. Symphogen received an upfront technology access fee. and may receive milestone payments based on progress • Meiji Holding Co. Pipeline of Symphogen   Symphogen currently has partnerships with Biovitrum.S. Symphogen will receive royalties on net sales of the product. and Genentech: • Biovitrum . . and Symphogen is entitled to receive milestone payments upon successful product development achievements. Symphogen considers these partnerships a necessary path to reaching the market for the mainstream products) as the partners contribute with competence and knowledge while Symphogen offers its technology and manufacturing platform. National Institute of Allergy and Infectious Disease (NIAID) for the full preclinical development of an anti-vaccine product for the adverse reactions associated with smallpox vaccination The total value of these agreements cannot be estimated. Japan). • Genentech . as well as an equity investment in Symphogen.6 million grant by the U. Ltd. Ltd. Symphogen received an initial technology access fee from Biovitrum. Exhibit 1. Furthermore. (Tokyo. Genentech would make an undisclosed upfront payment to Symphogen. The total value of the agreement had the potential to exceed $ 330 million and Genentech would obtain an exclusive worldwide license to candidates developed through this agreement. 92 .a worldwide co-development and commercialization agreement signed in 2006.. Symphogen was eligible to receive milestone payments upon the success of certain research and development milestones.. but presumably they not only have an economic value but also marketing 2008 Symphogen entered into a global strategic collaboration agreement with 2006. in 2006 Symphogen was awarded a $4. as well as royalties on any products developed and commercialized by Genentech as a result of the collaboration. In addition. Meiji Holding Co. Symphogen entered into a development and license agreement with Meji Holding Co.income to the company even before the drug candidates have reached the market. Meiji will fund all discovery and development activities. According to the agreement. funding and shared risk. and would fund associated research and development costs.

Except for business start-ups. and they continue to refuse offers from potential investors. The managers must have very profound knowledge about biopharmaceuticals and political agendas and complicated administrative legislation should be avoided. The impression is that they have made a positive evaluation of the company's market potential. The general impression of the venture capital market is that there is still available capital. Nevertheless. business eagles) with a short investment time horizon since early exit is a disadvantage for long-term drug development Policy priorities and recommendations Symphogen knows that sufficient access to venture capital is crucial for the biopharmaceutical industry in order to develop new drug candidates.g. but the market has become more hesitant to invest. All the investors have accepted the need for further investments without letting other major investors enter the group of shareholders.or EU-backed venture capital should be to invest in projects/companies with the best qualifications. However. Challenges with exit strategies of investors The current group of investors have kept their investment in Symphogen for a long time. Symphogen is very satisfied with the current situation as the company's competent and patience investors enable the company to focus on R&D and drug development. which eventually will give a good return on their investments. The company tries to avoid investors (e.. loans and grants are not considered relevant instruments to meet the financial requirements of drug development candidates. the changing market situation has not had any impact on Symphogen yet. This gives the company a good opportunity to focus on drug development without being forced to spend a lot of time on raising additional capital. the company thinks that the main rule for the managers of state.Impact of the funding situation on strategy  Symphogen has sufficient capital to continue its drug development programme until 2011. 93 . None of the investors seems to have any exit plans for the time being.

94 .

As a consequence. Lars Lannfelt still works as scientist doing research projects within the technological platform of BioArctic.g. BioArctic Neuroscience AB was established in 2003 as a spin-off company from Uppsala University. Sweden Company characteristics45 BioArctic's overall business focus is to discover and develop new treatment opportunities and diagnostic tools for diseases of the central nervous system. The overall ambition is to develop new drugs as well as doing sale and marketing (in some geographic markets).. The other founder. Their first years in business were challenging because the main business activity was research without generating any commercial income. At the time. The economic performance of the company has developed 95 . At the beginning of 2002. Astra and Pharmacia). i. the one of the founders. Until 2006. the region was dominated by a number of very large pharmaceutical companies (e. the company's development is largely contingent on the founders' individual financial resources. In 2006. the company was located at the Uppsala University and at the founders' private residences. In 2009. a key strategic challenge has been their ability to generate income. This scientific breakthrough could eventually enable treatment of these neurodegenerative diseases for which there have not been any treatment until now.bioarctic. This can be illustrated by the very long start-up period when it took several years before the company moved to its own premises and employed its own staff. Regional and national financing conditions BioArctic is situated in the Stockholm/Uppsala biotech-region (IRIS Group 2009). BioArctic has 17 employees of which the main part is graduates with PhD working with research and drug development. Manufacturing is not a prioritized business activity because the investment to establish production facilities is considered to be too high. originally started his career in 1980s as a researcher. So far. The CEO stresses that highly skilled researchers and promising research results is BioArctic's main success factor. BioArctic has had a dedicated focus on Alzheimer's and Parkinson's disease in order to develop immunotherapy for these two neurodegenerative diseases. Thus. income has mainly been generated from research collaborations. Prof. partnerships and out-licensing agreements with other companies. had been doing neurodegenerative research for more than 10 years. This growth strategy is a deliberate decision by the founders and it emphasises that they want to have full control of the company and will not let other investors gain a controlling position as shareholders. CEO Pär Gellerfors. The two men met for the first time in the 1980s. the Swedish mutation (discovered in 1992) and Arctic mutation (US patent application in 2000) that clarify the central role of protein misfolding in the Alzheimer's disease process. The foundation of the company was based on two breakthrough discoveries. the two founders met again and decided to merge their scientific and industrial experiences to establish a drug discovery company based on Lars Lannfelt's research results. BioArctic moved to its own premises and staffs was employed. In recent years. In the 1990s. Professor Lars Lannfelt. Pär Gellerfors continued his career within the pharmaceutical industry in Denmark and Sweden.BioArctic Neuroscience AB. but international mergers have gradually eroded their position in the region (and in 45 This case study is mainly based on an interview with CEO Pär Gellerförs and http://www.

se/Templates/Page. Almi Fôretagspartner(government owned business and information centers .managers from the biotech industry. business development (business plan). Industrifonden (independent foundation founded by the Swedish state in 1979 http://www.46 Large and very competent universities and university hospitals are still a unique asset as huge investments in research are a source for starts-ups of in new research-based biotech companies.industrifonden. the region is also characterised by a very good facilities for clinical trials. loan and equity. Valentin also stresses that many companies are established by researcher without sufficient business competence to persuade venture capitalist to see the commercial potential of 46 47 http://www. Since 2000. Parallel to this change in the industrial structure of the biotech 48 http://www. Furthermore.Sweden). Different programmes were launched and cluster organisations were established. An example of such a cluster organisation is Uppsala Bio.karolinskadevelopment.karolinskainnovations.vinnova. These regional initiatives some extent . a strong research http://www. loan and equity.51 Each of these initiatives can typically offer companies up to approx. the regional business start-ups also have access to government backed risk capital mainly financing the early-stages of development such as proof of concept. Today the region is a very strong and attractive region for biotech offering grants for proof of 49 http://www. Besides these regional initiatives. start-ups and offering capital for the first stages of business development. and .uppsalasciencepark.aspx?id=1356 51 VINNOVA (national agency for innovation .000. Innovationsbron (http://www. which may cover a minor part of the cost of developing a new drug candidate. the Stockholm/Uppsala region and the government took several initiatives to encourage the development of a biotech cluster.http://www. among offering business advise. However. There have also been policy initiatives aimed at commercialising research and encouraging business Both units offer consulting and can finance proof of concepts and seed funding.asp) offering equity and loans to companies with the potential to grow in an international market 96 .se/) offers grant. Karolinska Innovation AB47 and Uppsala Innovation Center. However.uppsalabio.48 They are two tech-trans units that commercialise research within life science. Karolinska Development AB49 and Uppsala Universitet Utveckling AB50 also act as minor venture capitalist by holding shares in new companies.almi. Approximately 200 biotech companies are located in the region.http://www. This problem is related to lack of risk capital to take over from the early-stage funding from the regional and state 50 http://www. Karolinska Innovation AB has signed 30 licence agreements and been involved in 40 spinoff companies while Uppsala Innovation Center has been involved in 14 spinoff life science companies. The point of departure for a revitalisation of the biotech-sector has been a large pool of qualified researchers. the weakness of the region is that many companies have severe problems with raising sufficient capital to carry out a long and efficient drug discovery programmes as well as having several drug candidates in their portfolio (Valentin 2008). € 200. commercialisation and business start-ups.

find subsequent funding and. at this stage of development it was crucial for BioArctic to obtain the intellectual property rights (IPR) for their research results. 52 VINN NU is a competition for new companies that base their operations on R&D results. CEO Pär Gellerfors also had to work as a lecturer at Uppsala University. which will force the drug development process and increase the risk of failure • Cannot contribute with knowledge about drugs and drug development • Will limit the possibilities of developing other new drug candidates or following interesting research results • Might squeeze the founders out the management of the company due to a conflict of interests since the ambition of the founders is to control and develop the company into becoming an attractive drug development company. Karolinska Innovation AB and Uppsala Utveckling AB hold a small number of shares. In this pre-start-up period the university research activities were funded by R&D-programmes. Karolinska Development AB and Uppsala Universitet Utveckling AB are aware of this weakness and encourage new companies to enlarge the management group with a manager with professional experience from the biotech industry. who the founders believe can contribute to the development of BioArctic by their experiences and knowledge. The funding resulted in Ph. access to capital was a serious problem for BioArctic and as the company did not generate much income. The aim of VINN NU is to make it easier for new R&D-based companies to prepare and clarify commercially-interesting development projects at an early-stage so that they can progress. http://www. consisting of personally appointed individuals. theses which helped develop the technological platform of the company. http://www. and in 2004 Karolinska Innovation AB and in 2005 Uppsala Utveckling AB became shareholders. The founders have made a strategic decision not to invite venture capitalists to invest in their company because the CEO finds that venture capital: • Has a too short investment horizon and is impatient to see results. in its first years in business.vinnova. the founders are not enthusiastic about sharing the ownership of the company with others. the founders hold the majority of the shares while a number of students. As mentioned the board of directors (and a scientific board). This initiative has not proven its effect yet. Thus. As a consequence of this attitude towards venture capitalist. become successful Swedish 53 Teknikbrostiftelsen: Encouraging technology transfer from university to business. Today.000) organized by VINNOVA52 • A loan from Teknikbrostiftelsen53 in Uppsala • A scholarship from Handelsbanken Some minor investments – but with a high branding value – were made by two regional venture funds. in the long term.htm 97 . However. The first capital that the company was able to raise came from: • 2003 VINN NU award (SEK 300.D.adconmac. Financing situation of the company BioArctic was based on considerable research efforts before the establishment of the company.their drug candidates. but due to lack of capital they had to issue shares to be able to pay for the licence agreements and this way even some students become shareholders.

e. Impact of the funding situation on strategy Looking at BioArctic as a company. BioArctic focuses at opportunities to generate income through research collaboration and partnerships.g.Instead of venture capital. The project is carried out by a mutual steering group. BioArtic is developing a device which in combination with a growth factor. gain control of the company. BioArctic is also involved in some minor commercial activities such as: • Selling monoclonal antibodies and kits for the Alzheimer research market (AbetaN™) together with Mabtech (Stockholm. these activities have only generated a small additional income.54 This is of a great commercial and strategic importance. In order to generate some – and so far a small . which has brought BioArctic into even closer collaboration with Eisai to develop the most advanced project in the BioArctic portfolio. The main barrier to raising additional capital – equity – is internal as the founders want to keep control of the company and not let others. that can promote spinal cord repair in a rodent animal model of severe spinal cord injury • BioArctic is collaborating with GE-healthcare to develop brain imaging markers ("tracers") to monitor disease progression and to follow treatment effects in Alzheimer’s disease with positron emission tomography (PET). BioArtic does not consider the venture capital market to be of any importance to the company. and not as embedded research at the university.. Eisai has developed the world leading drug (Aricept®) for the treatment of Alzheimer’s disease. Eisai and BioArctic signed an “evaluation agreement” for the period 2004-2007 where BioArctic was paid to evaluate and develop their main drug candidates BAN2401. BioArctic is trying to increase its technological platform through new research in collaboration with universities and research institutes. etc. The consequence of this funding strategy is that BioArctic largely depends on the progress and success of its project partnership with Eisai.additional cash flow. The major risk is that clinical trials fail. the agreement with Eisai is so far the most important access to capital and the main road to reaching the market. In 2007. as well as by marketing other R&D reagents.. To minimize the risk of failure and its impact on the company. 54 Eisai is Japanese based international oriented company among others with an interest of developing drugs addressing Alzheimer's disease. BioArctic and Eisai entered a long-lasting partnership agreement (including an exclusive licensing agreement with milestone payments linked to the progress of the project). venture capitalist. Sweden) • BioArctic has developed new proprietary transgenic mouse model for evaluation of Alzheimer drugs (The APPArcSwe) • In-licensed from Swenora Biotech 98 . as well as having other drug candidates in pipeline.eisai. BioArctic was paid according to agreed milestones. So far. indicating that the basic research idea was a feasible technological platform for developing new drugs. In other words. (http://www. BioArctic has established close research collaboration with the Japanese company Eisai.

keeping the funding strategy of BioArctic in mind. grant schemes (R&D programmes. the major big challenge will be: • To establish partnerships with big biopharmaceutical companies • To move the company from even more scientific orientation into the clinical test area • To become a attractive drug development company Policy priorities and recommendations BioArctic has moved ahead from being very research oriented. However. He also calls for special tax incentive schemes that would reduce the taxation of R&D companies. etc. to becoming more oriented towards drug development. but seems to have established a promising partnership with Eisai. 99 . BioArctic has discovered that it is difficult to involve big biopharmaceutical companies in the early-stages of clinical trials.In accordance with the development strategy of BioArctic. The company has developed at a moderate speed. One the one hand. On the other hand.) are mainly dedicated to R&D. the CEO would welcome industrial development programmes with grants for clinical trials (early-stage drug development). BioArtic recognizes the financial gap which could be filled by venture capital.

100 .

org. The main investor in Apogenix GmbH is the Dietmar Hopp Foundation. USA.4 applications in 2001-2005 and biotech venture capital investments. one of the SAP founders and a known biotech investor in Heidelberg. Since its foundation in 2005 the company has raised € 43 million in two financing rounds and has been awarded € 5. as well as information available at their homepage www. Henning Walczak in 2000. BioRN was nominated as one out of five most significant high-tech clusters in Germany in the Top Cluster This case study is mainly based on an interview with CEO Thomas Höger. The region ranks second in Germany with regard to biotech patent applications with 71. technology parks. 55 101 . Further shareholders are the German Cancer Research Center (DKFZ). but relies fully on venture capital and grants. The company was rebuilt from scratch and the management was taken over by Thomas Höger and Harald Fricke. Apogenix may opt to continue clinical development and commercialization of an orphan compound on its own. Apogenix was originally founded by Prof. In 2008.5 million in public grants. Australia. In 2005. and Japan) and has been granted numerous patents.biorn. €253 million were invested in the period 2003-2007. Apogenix re-started as a limited liability company (GmbH). Germany Company characteristics55 Apogenix GmbH is a biopharmaceutical company developing novel drugs for malignant and inflammatory and an interview with managing director of Bioregion Rheine-Neckar Christian Tidona.Apogenix. biotech companies and service providers. Heidelberg as well as its scientific founders and its executive management. The company was a spin-off from the German Cancer Research Centre and was established as Apogenix Biotechnology AG. Currently Apogenix has 26 employees. who both have profound scientific and business experience within the pharmaceutical and biotechnological industries. invested €15 million in the company. However. Currently. BioRN covers eight cities and consists of several universities. This happened as Dietmar Hopp (Dietmar Hopp Foundation). Alternatively. 20 hold an academic degree and work exclusively with research and development of their drug candidates. Apogenix owns nine patent families protecting different drug candidates. The most advanced product is about to enter clinical phase 2. Peter Krammer and Prof. Krammer and Prof. Apogenix has already filed patent applications in several important pharmaceutical markets (EU. and after that full or partial commercial rights to the respective drug candidates may be out-licensed to other companies. Regional and national financing conditions Apogenix is located in the Heidelberg technology park BioRegion Rheine-Neckar (BioRN) in Germany. Walczak) still work as scientific advisors to the company. The company has not yet generated any capital surplus. The product development strategy of Apogenix GmbH is to develop drug candidates up to proof-of-concept.apogenix. information available at www. in late 2004 the company became insolvent and had to close. The scientific founders of Apogenix (Prof. Canada. At present Apogenix has three products in the pipeline.

Contest. The BioRN cluster received € 40 million out of the €200 million federal grants allocated to the five selected clusters. In charge of the development of the cluster is the BioRN cluster management, which is a publicprivate partnership between Rhine-Neckar BioRegion, Heidelberg Technology Park, the RhineNeckar Chamber of Commerce and the Rhine-Neckar Metropolitan Region. The overall aim is to strengthen and brand the region to attract venture capital and large pharmaceutical companies. Large pharmaceutical companies such as Roche, Merck Serono and Abbott already participate in BioRN activities. With the help of grants, the aim of the BioRN Cluster is to develop 70 new drugs, diagnostic products and technology platforms, as well as about 20 innovative services in the field of cellbased and molecular medicine by the year 2013 in the Rhine-Neckar metropolitan region. Furthermore, the ambition of the BioRN cluster is to create 4,000 new jobs within the next ten years. To reach this goal the BioRN Cluster will: • educate highly qualified entrepreneurs and managers, i.e. by establishing a MBA education • attract venture capital • attract big pharmaceutical companies • extend R&D infrastructure To attract experienced management to SMEs, working with biopharmaceuticals, can be a great challenge, and the cluster management has therefore established a new MBA (Master of Business Administration) programme at the Troy University in Heidelberg. The aim is to attract competent students and people with a scientific and technological background to obtain knowledge for working in management positions. The cluster management also aims at creating increased networking and cooperation with biopharmaceutical companies based in the region. The aim is to share the burden of development and marketing costs and thus help to drive innovations in biotechnology towards industrial maturity. One main explanation for the leading position of BioRN is the Dietmar Hopp Foundation. Dietmar Hopp is a well-known biotech investor in the Heidelberg region. He supports biotech companies as a strategic investor, and his biotechnology portfolio is managed by Dievini Hopp BioTech holding GmbH & Co. Dietmar Hopp was one of the co-founders of the leading software company SAP, and he has allocated large sums to setting up foundations that benefit the society which enabled his success. The Rhine-Neckar region currently benefits considerably from the Dietmar Hopp Foundation, which is one of the largest private foundations in Europe. Over the last few years he has invested more than €300 million in German biotech companies, out of which €42.5 million has been invested in Apogenix GmbH.

Financing situation of the company
Apogenix was initially established as a spin-off from the German Cancer Research Center (DKFZ), and there is still considerable cooperation between the two. Due to lack of capital in the start-up phase of Apogenix the Research Center acquired equity stakes in the company in return for financing research and the IPR. Since the re-start of the company in 2005 as a limited liability company, Apogenix GmbH has undergone two financing rounds, an initial €15 million capital injection from the Dietmar Hopp Foundation in 2005 and additional €28 million capital injection was raised in 2008 consisting of €27.5 million from the Dietmar Hopp Foundation and € 0.5 million from the German Cancer Research Institute.

The research plan agreed with Dietmar Hopp was based on a milestone structure which meant, that Apogenix was guaranteed a second financing round if they reached the planned milestone results. The milestones were reached by the end of 2007, and April 2008 saw the second financing round of €27, 5 million from the Dietmar Hopp Foundation. With the existing capital the company expects to have financing until the end of 2010. The additional financing from the research centre was not so much a capital gain as sign of acknowledgement. It was an important sign to send that the research centre was prepared to participate in the project – not least for the main investor, i.e., the Dietmar Hopp Foundation. In addition, Apogenix GmbH has received public grants of about € 5.5 million, mainly from the German Federal Ministry of Education and Research (BMBF). Out of these € 2.6 million are grants from the 2008 Top Cluster Contest.

Product development strategy
Apogenix has three drugs in pipeline, of which one is in the discovery phase, one is in preclinical phase, and the last successfully completed its clinical phase one in May 2009. All of the products are supported by public grants from German Federal Ministry of Education and Research (BMBF). A requirement for receiving public grants is that the company co-funds with working hours, see Exhibit 1 below.
Exhibit 1. Pipeline of Apogenix

Currently all employees in Apogenix participate in public programmes and it is therefore not possible for them to add further financing to the company with these types of grants. The programmes finish at the end of 2009, and at that time they will be able to initiate new partnerships. The strategy is to go into further collaborations with research institutions, ideally with joint applications for public grants. The core business of Apogenix is drug discovery and development. The first option for the company is therefore not to take the products all the way to the market, but to develop the drug candidates up to proof of concept and then fully or partly out-license commercial rights to the drug candidates to other companies to be able to finance the company. However, if they cannot find a company that is interested in licensing their products they may opt to continue clinical development and commercialization of an orphan compound on its own. However, Thomas

Höger, CEO of Apogenix, stresses that research and development are the main interests of the company, and they therefore prefer to focus on research and development of new and innovative drugs. If they should need to commercialize a product on their own, they would have to change the business model, hire new staff and move to another and larger location. Consequently, the business strategy of Apogenix relies to a great deal on the fact that they can enter into partnerships with other companies. Currently, the goal for Apogenix is (while they still have financing) to make a licensing deal with another company within the next 18 months. Thomas Höger describes this as an ambitious, though still realistic plan. If they do not succeed the strategy is to go ahead with one of the following possibilities: • a third financing round (Dietmar Hopp Foundation or other investors). • to merge or acquire, or • to sell the company Apogenix does not have financing to have too many products in pipeline. Therefore, they will need to out-license one or more of their products. However, at the same time it is not considered a reliable business strategy to have too many products, or a pipeline that is too diverse. The reason for out-licensing products is therefore not only of lack of money, it is also considered a strategic solution to out-license drug candidates without having to enter clinical phase I. Outlicensing drug candidates will give revenues, which will enable the company to continue development on the core drug candidate APG101. So far, Apogenix has no partnerships or license agreements with other biopharmaceutical companies. However, they collaborate with research divisions at the German Cancer Research Center to evaluate and broaden the therapeutic potential of their pipeline drug candidates. Moreover, they have a comprehensive licensing agreement with the German Cancer Research Center covering exclusive worldwide rights to develop and market APG101.56

Policy priorities and recommendations
So far Apogenix has shown good research results within a short period. The main reason for the success of Apogenix is estimated to be the combination of: • excellent basic research yielding promising drug candidates • experienced management replacing the research oriented founders and • access to capital with one majority stake-holder. However, it is emphasized that a solid business plan is essential for all of the above factors. The set-up of Apogenix with the founders participating in the company as scientific advisors and leaving the management to an experienced management board seems to have been a great advantage. The fact that the company had the Dietmar Hopp Foundation as its main investor made it attractive to people like Thomas Höger and Harald Fricke to take on the management of the company. As also stressed by the BioRN it is often difficult for biotech SMEs to attract competent and experienced management, which is an important precondition for a high-quality business development.
APG101 is a drug developed for prevention of graft versus host disease (GVHD), which is a common complication of allogeneic bone marrow transplantation, in which functional immune cells in the transplanted marrow recognize the recipient as ‘foreign’, and mount an immunologic attack. The surgery is associated with high mortality and requires highly sophisticated equipment at the hospitals. For that reason only few hospitals perform these transplantations. The procedure is very costly, and a drug that can reduce the mortality is very attractive. Thus, the market for APG101 is limited, but highly cost-effective. The limited market makes it manageable to introduce the products on the market should it be necessary for Apogenix to launch it on their own.


The complexity of the clinical phases is high and very costly. there is not time or economy to participate in research programmes that are structured by academics who work within other and longer timeframes. Regional initiatives like BioRN are therefore very helpful for the biotech SMEs in the region. In Germany public grants are available for research and preclinical studies. Thomas Höger emphasizes that increased possibilities for financial support for the clinical phases would be particularly helpful for companies like Apogenix as well as improved tax benefits for “young innovative companies”. and the grants are targeted especially at the biotech SMEs so they have insight knowledge about the potentials and challenges that SMEs are facing.Moreover. but when the products reach the clinical phases there is no more support. In contrast to the large national and European programmes. CEO of Apogenix. Especially EU grants and research programmes are unsuited for biotech SMEs because the application procedures are too complex and the grants are too low in relation to the workload to be delivered for a successful application and subsequent reporting. stresses that grants from the regional BioRN cluster are easier to access for small companies like Apogenix. In general. Thomas Höger. and requirements are getting still higher. there is a certain amount of bureaucracy and it is time consuming to apply for public grants. it is emphasized that public grants are nice to have. Opportunities to achieve support for these stages would therefore be very encouraging. which is driven by milestones that have to be reached within a certain timeframe. 105 . but grants are an add-on to the core financing. For a company like Apogenix. The cluster BioRN administration is located close to the companies.

106 .

and the information from MolMed’s homepage. Director Business Development.MolMed. In 1999. and is also in charge of the technology transfer activities. and the first biopharmaceutical spin-off company from an academic research institute to be listed on the Italian stock exchange. In 2000. Professor Claudio Bordignon58 led the spin-off and still heads the company as its chairman and chief executive officer. Currently. It mainly focuses on research. 59 In 1996 Boehringer Mannheim was the second largest diagnostics company in the world.61 2008 was a landmark in MolMed’s history.15 per share. MolMed has been formally authorised for the production and release of medicinal products for human use. at a price of €2.116. the quarterly report 2008. however. MolMed was established in 1996 as a spin-off of the San Raffaele Scientific Institute. 60 Science Park Raf is the management company of the San Raffaele Biomedical Science Park in Milan. The gross financial resources raised amounted to € 56. www. It was based on the knowledge of a group of scientists in the field of gene and cell therapy. MolMed’s GMP activities include: production of own cell-based therapeutics. he was appointed one of the 22 members of the Scientific Council of the European Research Council (ERC). In 2005. when the Swiss pharmaceutical company Roche took over Boeheringer Mannheim. 58 107 . Today MolMed has 91 employees. Claudio Bordignon was Scientific Director of the San Raffaele Scientific Institute until the end of 2006. 61 Since July 2003. The listing was achieved through a global offer of 26.952 shares with no nominal value.molmed. Italy Company characteristics57 MolMed is a biopharmaceutical company operating in the field of medical biotechnology. The company is located in the San Raffaele Biomedical Science Park in Milan in the Lombardy region. They have an in-house GMP facility that meets both EMEA and FDA requirements for the production of clinical-grade bulk drug substances. (http://findarticles. They studied the existing pipeline and the relevant market and bought the necessary intellectual property rights to be able to create the pipeline. On 5 March 2008 MolMed was listed on the Milan Stock Exchange. MolMed went from being a biopharmaceutical service company to a biopharmaceutical research and development company. The increase in staff was necessary to 57 The case is mainly based on an interview with Holger Neecke. As a consequence of the increased activity following the IPO. bringing up $3 billion in 1996 sales. clinical-grade cell manipulation services. Science Park Raf and the Arain venture capital fund are the main investors in MolMed. The company was incorporated as a venture between Boehringer Mannheim59 and Science Park Raf60 to provide cell therapy services. the body that will recommend strategic research investment guidelines to Europe in the next few years. Thereby. MolMed took on 14 new employees in 2008. It In 1997 it was bought by Swiss drug maker Roche Holding Ltd. representing 25% of post-IPO corporate capitalisation. the MolMed management decided to take the company a step further and develop a product development pipeline. MolMed thus became one of only three worldwide IPOs of biotech companies in 2008. development and clinical validation of innovative therapies for the treatment of cancer.2 million. the equity shares of MolMed were sold to the venture capital fund EDCP (now named Airain). development & manufacturing services for investigational gene therapies for rare diseases. to provide GMP services.

The focus on research and development is shown in the company's workforce combination. the science park has a professional tech-transfer team that manages international intellectual property rights. 80% hold a university degree and more than 40% hold a postgraduate degree. Lazio. Out of the 91 employees. More than 50% of the biotech SMEs are located in science park incubators established in the seven biotech regions. and they especially benefit from these hubs which constitute an important social capital of scientific. primarily. includes the San Raffaele Scientific Institute. The Italian biotech sector is characterized by a strong geographical concentration with almost 80% of Italian biotech companies located in seven Italian regions62 and with a strong concentration in northern Italy. MolMed’s management board consists of 11 persons representing academic. Regional and national financing conditions The Italian biotech industry is growing rapidly as in the rest of Europe. In 2008. MolMed appreciates the advantages of being located in a science park.IRCCS). The management of MolMed’s indicates that the experience and good reputation of the management board are very important for the reliability of the company and have improved the company's access to capital. To be able to attract investors it is therefore of utmost importance for companies to have a strong network of scientist and within the financial sector which is easier to access when located in a science park. Furthermore. Scientific and technological parks are very active in the life science area. The strong and continuous relationship with the San Raffaele Scientific Institute represents a major resource for MolMed. the largest private Italian hospital. Piedmont. allows the company to carry out the clinical 62 The regions are Lombardy. 108 . The importance of the Italian science parks can be connected to the limited number of private equity and venture capital funds in Italy. Friuli Venezia Giulia. Tuscany. out of which 190 were exclusively concerned with the healthcare sector (Blossom and Company 2009). MolMed is one of three spin-offs from the scientific institute. the largest Italian scientific research institute. a clinical centre with status of Research Hospital of National Interest (Istituto di Ricovero e Cura a Carattere Scientifico. and a private university which helps companies gain access to qualified students in medicine and biotechnology. which runs 250 clinical trials per year. Emilia and Sardinia. 260 companies invested in biotechnological R&D in Italy. The few specialised financial operators in the life science business area tend to be more interested in the later stages of product development than in the earlier more venture-like phases (Blossom and Company 2009). MolMed's proximity to the San Raffaele Hospital. through an option to research projects conducted by the Institute in the field of molecular therapies for cancer and AIDS. Moreover. The San Raffaele Biomedical Science Park. pharmaceutical. and clinical management expertise. technological and organizational skills (Biopolo 2009). where MolMed is located.strengthen the operating areas following the increase in development activities related to MolMed’s investigational new therapies and implement the necessary structural upgrade implied by becoming a public company. MolMed enjoys preferential access to the technology and clinical resources of the San Raffaele Scientific Institute through a number of research and license agreements and.

i. there is a significant unmet medical need and the price is potentially high. as the number of high-risk leukaemia patients is limited. liver cancer. MolMed is seeking co-development or out-licensing partnerships to take NGR-hTNF through its full clinical programme to product commercialization. As opposed to the TK cell therapy. and thus represent two different development strategies: • TK is a cell therapy enabling haematopoietic stem cell transplantation (HSCT) also from partially compatible donors. Apart from these two investigational therapies.validation of its products at primary level in a very cost-effective way. This also allows the company to manage trial monitoring and permits close interaction with clinical investigators. The current two investigational therapies are fundamentally different. In June 2008. Avecia will optimise the drug manufacturing process and scale-up and conduct cGMP manufacture of NGR-hTNF for the planned phase III clinical trials. and not the tumour tissue itself. targets the newly formed tumour blood vessels feeding the tumour mass. liver carcinoma. one of the leading developers and cGMP manufacturers of microbial-based biopharmaceuticals. the market potential for NGR-hTNF is therefore larger than TK. Product development strategy MolMed’s product development pipeline currently consists of two biotech therapeutics: TK and NGR-hTNF (ARENEGYR) in clinical trials III and II respectively. • Exhibit 1 below illustrates the two different development strategies: 109 . which are showing continuous progress. from research to clinical development and partly marketing. NGR-hTNF (ARENEGYR) is a vascular targeting agent (VTA) currently undergoing phase II clinical trials for colorectal carcinoma. therefore. etc). MolMed entered into the first drug development and manufacturing agreement for the production of the investigational drug NGR-hTNF with Avecia Biologics. its potential is not limited to one single tumour type. The Asian market will be approached through a partnership with the company's Japanese partner Takara Bio Inc. the company decided to discontinue the development of a project for a cancer therapeutic vaccine that was in clinical stage I/II. In 2008. With respect to the NGR-hTNF product. small-cell lung carcinoma.e. MolMed’s strategy is to focus on TK and NGR-hTNF products. the NGR peptide. This product is currently undergoing a phase III clinical trial for adult patients affected by high-risk leukaemia. MolMed is developing potential therapeutic products including other tumour VTAs. and manufacturing. The market for TK is small. mesothelioma and ovarian cancer. MolMed intends to keep most of the development in-house. NGR-hTNF is a recombinant fusion protein: its targeting moiety. but can have many different applications in oncology (lung cancer. However.

co-marketing or out-licensing partnerships. However. and start phase III clinical tests in 2010. Due to the current financial situation. the goal is to keep achieving good phase II results. the Japanese markets are very difficult to enter without a local partner. including 10-15 key clinical centres. MolMed's key strategic challenge is to find the right partners for co-development or out-licensing partners.Exhibit 1. Presently. the aim is that post-2010 110 . a potential future challenge is to obtain further capital for the company. Product development strategies of MolMed TK NGR- TaKaRa Bio I San Raffaele Scientific Institute Avecia Biologics (partnership covers pharmaceutical development and manufacturing of NGR hTNF) Potential new partner MolMed’s business strategy generally relies on establishing strategic alliances with major biotech and pharmaceutical companies to advance the development of its products through codevelopment. the company's most important markets are the European markets and then the Japanese market due to the partnership with Takara. However. Moreover. and in 2003 the company signed an out-licensing and development agreement to conduct clinical studies and to market MolMed’s TK in Asia. Due to very complicated regulatory processes. it is still a challenge for MolMed to gain a successful foothold in the market. As early as 2001. MolMed plans to make clinical trials in the US. It is therefore a great advantage that the collaboration with Takara Bio started as early as 2003. MolMed signed a non-exclusive in-licensing agreement for Takara Bio’s RetroNectin for the EU and US. The agenda is to do clinical trials in the US to be able to go gain access to the US market. Takara Bio has expertise in the field of gene and cell therapy and is the largest public Japanese biotech company (by market capitalisation) listed on the Tokyo Stock Exchange. The strategic outlook for MolMed with regard to TK is to expand phase III trials in Europe. Moreover. and then expansion of phase III trials in the US With regard to NGR-hTNF.

63 Due to the IPO. the MolMed management considered going for an IPO. and the reason for deciding for an IPO was mostly lack of alternatives. 63 Boggs. € 40 million per year.19% of the shares. but plans had to be postponed due to the burst of the ICT-bubble in the second half of 2001. This generated a €20 million capital increase. No. and Arner Bank with 2. Italian biotech companies have been very active in various EU programmes .14% and 21. 111. SICAR with 8. The aim of MolMed is to become self-financing by the end of 2010 to avoid having to make another financial round on the stock market. The offer was priced at the low end of its anticipated €2. MolMed succeeded in becoming listed on the Milan Stock Exchange. The MolMed's success can be attributed to the promising data from its products and technology.66% of the shares. US Study Next. MolMed managed to raise an IPO of 25% of shares.àr. Moreover.. Fininvest. Other investors are Delfin S. which means that MolMed is financed until the end of 2010.A.12% of the shares in the company respectively.5 million in cash (quarterly result May 2009). or € 80 million if the investments from not-for-profit organisations for health care in general are included. in 2001 it was not unusual for biopharmaceutical companies to aim for an IPO. all the investors invested in the company before it was listed on the Milan Stock Exchange. and Delfin S. H-Equity S. Moreover.àr. The financing possibilities were limited. In addition to Science Park Raf and the investment fund Airain. MolMed now has €30.àr.l. and the experience of its management and staff. Thus. it has gone through several financing rounds.15 to €2. namely H-Equity S. € 1500 million per year.l. public support for biopharmaceutical companies has been very limited.l. the fact that other companies were withdrawing their share offers from the market is likely to have given MolMed an advantage (Boggs 2008). Apart from Arner Bank. MolMed gained support from three large Italian investors in 2004.75 per share range. Italy has the third highest number of project proposals in Europe in the EU’s 6th framework Programme (Biopolo 2009). Special Reprint.l. the reputation of its investors.MolMed will be able to finance further research and development activities through partnerships. In 2000. and public investment is approx. Private biotech investment is estimated to approx.àr. BioWorld Today. The main shareholders of MolMed are currently (2009) Science Park Raf and the private investment fund Airain Lda which hold 21.33% of the shares. They are closely followed by Fininvest S. many companies are avoiding the IPO market due to the current unfavourable market conditions. resulting in sales of shares for €56 million. and that they will not have to go back to the capital market. 111 . Volume 19. As opposed to today. Public grants and reliefs Biotech has not been a main priority for the Italian government.. Therefore. with 8. In 2008.for instance. Jennifer (2008): MolMed’s Cell Therapy in Pivotal European Trial.p. Additional financing rounds took place in 2006 and 2007 when the shareholders added a further capital increase of a total of €16 million and €10 million respectively. Financing of the company Since the company went from being a service company to a product development company. which owns 17.01%.

in 2004 the Regional Authority of Lombardy awarded MolMed a non-refundable grant. MolMed has participated in projects under the EU Research and Development Framework Programme (FP-6). they are currently not that vulnerable in connection with the financial crisis. • Consolidating R&D grants: funding of R&D schemes should be made “structural”. Indirectly. Policy priorities and recommendations  In Italy. First of all. development and innovation activities implying entrepreneurial and financial risks. The company benefits from tax credits related to the cost of research and development activities. Therefore. MolMed is currently waiting for final approval of funding that will involve a low-interest loan of 90% of admissible costs. € 1 million). 112 . public support plays a major driving and aggregating role. • Consolidating the tax credit for R&D costs. where MolMed received non-refundable grants for two 3-year projects. the financial situation still affects the company. and related calls should not be subject to uncertainty in terms of timelines and allocated resources. However. making it a permanent and automatic measure. representing an uncommonly strong pole of attraction for innovation-based bio-businesses. According to Holger Neecke. devoted to and reserved for real innovative areas like biotechnology. MolMed has also taken part in applications for funding from the Italian Ministry of Research under the National Research Programme (PNR). the most important common trait that should be shared by any specific measure is the fact of being constant and permanent. the best way for Italy to preserve its biotech patrimony from being killed off by the short-term cash shortage determined by the global crisis is to put in place effective measures to adopt consolidated best practices in favour of innovation. they might have to sell out of their assets at low prices. and as the management is very aware that if many biopharmaceutical companies cannot find financing.Grants played a significant role for Molmed in the start-up phase with about one third of its revenue coming from grants (approx. Furthermore. Impact of the financial crisis Because of MolMed’s recent entry on the stock market. For example. it must be clearly perceived as a steady commitment by individuals and/or institutions willing to undertake research. successfully implemented in EU Member States where the life science-based industry has grown stronger. This is putting pressure on the company's performance. Moreover. stock prices took a negative turn even though there was no bad news from MolMed and it was expected that prices would remain steady. in other words. any policy aimed at promoting innovation should be clearly expressed in order to be fruitful. the financial situation puts pressure on the company. the financial crisis affects MolMed in the way that it could become very difficult to go for a second round of financing should it become necessary. Director Business Development. Based on these assumptions Holger Neecke believes that the Italian biotech industry could take great advantage in particular from a prompt and steady implementation of three provisions: • Awarding the status of “young innovative enterprise” to companies devoted to R&D and established for less than 8 years. This will create higher risk aversion and price pressure.

The founders have established the scientific basis for the research activities at Innate Pharma through licensing. In 2001. 113 . and François Romagné. the company developed its first drug candidate on the Tγδ platform. the company acquired the rights to IPH 2101 from Novo Nordisk A/S through an asset transfer agreement. inflammation or infectious diseases. primarily for cancer indications. the current Chairman of the Executive Board. Before joining Innate Pharma. a large pharmaceutical company. research and collaboration agreements with academic institutions. Mr Boissel joined Innate Pharma in September 2002 as CFO. Innate Pharma intends to become an integrated player and thus keep some marketing rights on some of its products. The company has 89 employees (2008) of which 75% are involved in R&D. Two other programs are out-licensed to Novo Nordisk A/S. The company acquired assets from the US pharmaceutical group Schering-Plough Corporation in the TLR field in 2006 and in licensed Toll-like 7 receptor agonist compounds from Cancer Research Technology Limited (IPH 3201). The company currently manages seven proprietary programs. Boissel held several positions within the Lazard Group (1995-2002) in France and other countries (Singapore and Hong Kong) focusing on venture capital and mergers and acquisitions. a subsidiary of Innate Pharma located in the USA. France. Innate Pharma was listed on NYSE-Euronext Paris in 2006.. 64 Based on interview with Stéphane Boissel. Mr. the company established Innate Pharma Inc. including Hervé Brailly. France Company characteristics64 Innate Pharma is an immunology biopharmaceutical company aiming at developing first-inclass drugs. The products developed by Innate Pharma belong to two classes: immunomodulators targeting innate immunity receptors and cytotoxic antibodies targeting specific tumoral antigens. This was followed by the launch of a Phase II clinical trial in 2006 (IPH 1101). The therapeutic approaches could have an application in several therapeutic areas such as cancer. of which two are tested in clinics. In 2008. In the short term. It is based in Marseilles.Innate Pharma. In 2008. and in 2002 the first clinical trial was launched. In the long run. the Company intends to sign partnerships with players in the pharmaceutical and biotech industry with the financial capacity and the expertise to run advanced clinical trials as well as a selling network and experience. The company was founded 1999 by six immunologists. a member of the Executive Board and Chief Scientific Officer. Executive Vice President and Chief Financial Officer of Innate Pharma.

a tax credit focusing on stimulating business R&D. The company’s ambition is to become a major player in the emerging field of anti-cancer immunotherapy. YIC embodies a range of measures targeting the creation and growth of young research intensive companies in France. scientific expertise and its intellectual property rights portfolio are considered by the company to be very important for its ability to attract investors and continue growing. Pipeline of Innate Pharma The company’s good track record. One example is CIR (Crédit d’impôt recherché). To obtain YIC status. For instance. they are exempt from social costs for all employees in R&D-related activities (approximately 25% of gross salary costs). notably viral infections and chronic inflammation related to autoimmune pathologies. the potential market for the company’s product may be substantial. YIC companies are also relieved from corporate income tax for the first three years and pay 50% of normal taxes for the 114 . Regional and national financing conditions The region in which Innate Pharma is located is not at biotechnology-intensive region. The Young Innovative Companies (Jeune Entreprises Innovantes) programme is a supplementary programme that was introduced in 2004. Businesses that qualify for YIC status profit from a wide range of different support measures. It is also possible to envisage other indications for the company’s current drug candidates. However. according to the company.Exhibit 1. several initiatives have been launched at national level to promote the development of small and research-intensive companies. The CIR was launched in the 1980s and focuses on companies of any size and in any industry. companies must be maximum 8 years old and must be investing at least 15% of their expenditure in R&D. Thus.

Moreover. Reform the research tax credit to distribute the credit more evenly between small and medium sized biotechnology companies and larger companies. Investment in listed companies fell 98 percent to just €12 million. Based on these figures.69 These funds are an opportunity for taxpayers (having their tax residence in France) to benefit from a reduction in their income tax equal to 25% of the cash subscriptions. the French Government is making investments in small and innovative enterprises more attractive to individual investors with high incomes to invest their money in FCPI funds (Fonds Communs de Placement dans l'Innovation). France Biotech has put forward several recommendations on how to support the national biotech EUR in support. innovative companies. http://www. According to France Biotech. Designate half of the government's Strategic Investment Fund to innovative French small and medium sized biotechnology companies so that they may acquire undervalued foreign companies and technologies Removal of the caps on tax-efficient investments in young.hsbcprivatebankfrance.67 • • • Double OSEO Innovation's budget for 2009 and a tripling for 2010 (OSEO is a fund that provides financial assistance to small French companies).washingtonpost.66 The financial crisis has hit France's biotech companies two years. and Extend the "young innovative company" fiscal status from 8 to 15 years Reform of the savings system in order to better channel life assurance and pension funds towards financing for young. France has experienced capital flight and brain drain due to relatively heavy taxation of high incomes.pdf EuropaBio website. http://www.65 One concern related to the programme is that the programme does not take into account the longer business cycles in the biotech industry.70 Financing situation of the company Innate Pharma has mainly received capital from venture funds and though collaboration and licensing 70 Website.aurgalys. http://www.bionity. provided that the FCPI units are held for at least 5 years from the subscription They can also be relieved from local taxes related to the value of properties and buildings. http://www.yicstatus. life science funding fell by 79 percent in 2008 relative to 2007 (€143 million in 2008 versus €694 million in 2007).com/news/e/96425/ 68 Washington Post website. http://www. while venture capital investments fell 27 percent to €132 million in 2008. up to a maximum of 100. The capital gains are also exempted from capital gains tax and are only subjected to social security contributions. All in all. http://www.html 69 Website. • • • Finally.europabio.pdf 67 Website. This would suggest that biotech companies should be able to benefit from the programme for more than 8 years. innovative companies. a total of 85 M Euros have been raised since 1999 with grants 65 66 Website.68 The French Government has therefore launched a reform of the French wealth tax to make it more attractive for people with high incomes to stay in France.asp#I0002f575 115 .

not currently an option for the company. Also. However. the venture capital market in the US is more attractive to the company than the European venture capital market. the companies with good projects will be able to find interested investors – even in time of crisis. access to capital (and US investors) for the company is getting easier due to the NYSE-Euronext stock exchange. The financial situation of Innate Pharma is very good. For instance. Overall. • 2006: Second collaboration and licensing agreement with Novo Nordisk A/S comprising all of the drug candidates in the NK platform and including a reserved capital increase (10 million euros). Some of the usual sources of capital are.and soft loans from the French government constituting only a small part of the total capital raised (ca. • 2003: First collaboration and licensing deal with the Danish biopharmaceutical group Novo Nordisk A/S for the development of an immuno-modulator targeting a NK cell receptor (IPH 2101). makes is possible for the investors to understand the value of Innate Pharma’s approach and to contribute to the development of the company. US biotech companies are also in a better position to attract capital as they are more mature and thus considered to be less risky to invest in. the collaboration agreement has enabled the company to benefit from the knowledge and networks of Novo Nordisk. • 2002: Second financing round (20 million euros) led by Alta Partners. Boissel estimates that the company has raised enough capital to continue its activities for at least two years. Impact of the financial crisis The companies that suffer most from the financial crisis are the companies with projects that are not ‘good’. One of the health care areas that a experiencing much interest from investors following the financial crisis is medical technology which is considered to be less risky and less time consuming than biotech. 3 M Euros). Furthermore. The financial history of the company is as follows: • 2000: First financing round (4. and Mr. Furthermore. the stock market is difficult at the moment as investors are avoiding high risk business areas such as biotech. the French Government has made it attractive to private investors to invest in high tech (the FCPI funds). • 2004: Third financing round (15 million euros) led by Novo Nordisk A/S. Boisel this may be a result of the close collaboration with Novo Nordisk which has provided Innate Pharma with a high level of credibility among investors. European investors seem to be more risk adverse than their US counterparts. This.7 million euros.5 million euros) led by Sofinnova Partners. According to Mr. Boissel. As a result. the venture capital market in Europe/France is improving. according to Mr Boissel. In 2006 the company was listed on the NYSE-Euronext market in Paris which raised 33. 116 . however. The IPO was very successful and according to Mr. For instance. The collaboration with Novo Nordisk has ensured that the company both receives venture capital as well as capital for specific R&D projects. the financial crisis could pose a threat to the company in the medium term. There are substantial differences between the US and Europe with regard to the venture capital market and the bioindustry: There is a larger capital base in the US and the investors are more specialised in the biotech business.

the amount of paper work associated with participating in such programmes is too much considering the relatively limited amounts of money available. The transformation from a drug development company to a service provider is. the company will have to restructure its operations and slow down the development (or even sell) candidates.. Boissel suggests that a Center of Excellence for clinical trials in Europe could be established. there will be redundancies. there are also many biotech companies interested in ‘selling’ and Innate Pharma is therefore competing with other biotech companies for the available funding. If the company does not succeed in getting the needed funding.Instead of focusing on the stock market. Challenges with exit strategies of investors There is a very positive relationship between the members of the board – investors take active part in the business decisions. However. however. Mr.. clinical research is faster in the US than in Europe. Boissel thinks that incentives to carry out research in Europe are needed – this would make it easier to attract talent and R&D activities of foreign companies and it would also make it less likely that European companies relocate to other world regions. the collaboration between the public health care sector and the sector could be strengthened. The company may also be sold to a pharmaceutical company in Europe or the US. Making exit more easy is also a strategic priority. not easy. so that mature innovative companies such as Innate Pharma are also able to benefit from the support measures. Entering the services sector is often considered a strategic option for biopharmaceutical companies. In general. Such incentives could channel more money into sector. mainly interested in making money and the current investors are always open towards selling the company. Exiting via the stock market is for the time being not possible and therefore the investors may consider selling the company to an interested pharmaceutical company. In the worst case scenario. and according to Mr. Finally. One example to extend the YIC initiative. the company is trying to establish partnerships with other pharmaceutical or biotech companies. Innate Pharma has considered participating in European research programmes. Also. Investors are. Policy priorities and recommendations There are several initiatives that could support the future development of Innate Pharma. In terms of capital supply. the biotechnology sector should be made more attractive to asset managers if investments in high tech investments were associated with substantial tax reductions. Mr.) are mainly located in the US. The pharmaceutical sector is desperate to find new projects and have a strong interest in projects. This would allow the industry to benefit from the expertise of public hospitals and hospitals could sell their clinical services to supplement the government’s funding of activities. Boissel this option is not really an option for Innate Pharma. This could be done by increasing the liquidity in the capital markets. The parties that could be interested in buying the company (and who have the financial strength to do so. 117 . however. However.

118 .

The company is currently focusing on extending its activities from diagnostics to therapy through biologics. The drug developing strategy for the company is to get involved in international partnerships (companies/academy) and to co-develop new targets oriented to product development or inlicense IP (targets in oncology / CNS / Technology). The company is based in Barcelona. Carlos Buesa.Oryzon Genomics. is CEO and chairman of the board. Dr. In 2008. the company’s revenues were € 6. around 120. The company is backed by Najeti SCR. Furthermore. Of the 60 biotechnological companies in the cluster. a privately-owned investment company headquartered in France. The further development of the company’s therapeutic programme will dominate the strategic agenda of the company in the time to come.approximately 60 of the companies are dedicated biotechnology companies and 60 of them are traditional pharmaceutical companies. The rest of the companies. He is currently member of the board for Neurotech Pharma and Oncnosis Pharma. 25. are providing services to biotechnology and pharmaceutical companies. Spain. In Catalonia there are around 250 companies involved in biotechnological R&D . a biopharmaceutical company specialized in the development of new therapeutic molecules for treating cancer. the number of biotechnology companies created in the cluster is higher than any other Spanish region. especially to drugs’ development (70%) and to diagnosis (25%). and has an IPO oriented funding strategy. Buesa holds a PhD in Biochemistry from the University of Barcelona and has been actively involved in several biotechnology organisations (ASEBIO (Associación Española de Bioempreses). The founder of the company. Spain and was established in 2001 as a spin-off from the Spanish National Research Council (CSIC) and the University of Barcelona. Oryzon Genomics currently has close to 80 employees and is economically sound with net profits in five consecutive years.5 M. the biotechnology cluster in Catalonia is the third largest biopharmaceutical cluster in Europe in terms of the number of employees (ca. As part of this strategy. Carlos Buesa ASEBIO. over 65% are dedicated to red biotechnology. Spain Company characteristics71 Oryzon Genomics is a biopharmaceutical company specialised in functional genomics. According to the European Cluster Observatory.000). The BioCat cluster Orizon Genomics is part of a biotechnology cluster in the region of Catalonia. Dr. the company has acquired Crystax.72 71 72 The case study is based on desk research and an interviw with Dr. CataloniaBio). Annual report 2007 119 . ASEBIO estimates that 27% of all new Spanish biotechnology companies created in 2007 was located in Catalonia. Oryzon Genomics develops biomarkers in oncology and neurodegeneration.

000 euros in aid to hire international experts for specific projects. http://www. has been weak. http://www. an organisation established by the Government of Catalonia and the Barcelona City Council to promote and coordinate biotechnology and biomedicine in 74 Ingenio website. including soft loans to innovative business development. In addition.asp 75 Governmental website. and the Spanish Government has therefore reduced the R&D tax credit by making the rate proportional to the general corporate tax level until it is phased out by 2011 (subject to government evaluation). Uptake. public research organisations and centres./02_instrumentos/02_Caracteristicas/02_ CENIT 120 .The activities in the cluster are planned and coordinated by BIOCAT.php The initiative was launched in June 2009 by BIOCAT and the Ministry of Economy and Finance of the Government of Catalonia. Talent for Competitiveness programme The ‘Talent for Competitiveness’ programme makes it possible for biotech SMEs to receive up to € 20. http://www. In 2005. Source: Biocat website. universities. Furthermore.73 National financing conditions At the national http://www. Exhibit 1 below: Exhibit 1. A recent initiative in the region is the launch of the ‘Talent for Competitiveness’ programme. Companies will be able to hire experts in the following areas: intellectual property. which has earmarked € 200.75 The CENIT programme also includes a venture capital fund of funds (NEOTEC) to create and consolidate technological businesses. management and research. science and technology parks and technological centres. the Spanish government is providing different financial support measures.ingenio2010. the Government has created a new scheme that offsets 40% of the labour and social charges of R&D workers (OECD 2008b). All professionals must be hired on a temporary basis. however. non-executive directors or strategic international advisors on the Board of Advisors. The NEOTEC Fund was established in 2006 by the 73 BioCat website.000 to fund this program. either as independent members of the Advisory Board. The CENIT Programme seeks to stimulate cooperation in R&D and innovation between the private sector. Spain has a generous R&D tax credit. the use of soft loans as opposed to grants has steadily increased (UNU-MERIT 2006). cf. the Spanish Government launched INGENIO 2010 in response to the re-launch of the Lisbon Strategy. According to data from This plan intends to increase the allocation of resources to R&D and innovation in general and also contains several strategic actions of which the CENIT Programme is of must interest for the biopharmaceutical sector. CENIT projects are 50% co-funded by the public and private sectors. The programme is intended to boost the long term competitiveness and internationalization of Catalan biotech companies.asp?menu1=3&menu2=0&menu3=&dir=.

Under this business model.europa.77 The NEOTEC initiative specifically addresses this challenge of increasing the venture capital available to Spanish technology-based Investment Fund and CDTI. they are still almost half the European average.proinno-europe.measures&page=detail&ID=6925 121 . an entity of the Spanish Ministry of Industry.76 The venture capital market in Spain is considered to be under developed: Although venture capital investment in Spain has been rising for the past few years.eif. Oryzon Genomics has run an in-house programme that has dramatically expanded the company’s technological platform allowing it to carry out advanced product development. In 2003 the company started licensing out candidates and engaging in co-development projects in partnership with third parties. almost 60 % of venture capital in Spain is invested in nontechnology enterprises. The technological platform and a strong financial position of the company have resulted in a 76 EIF website. Moreover.cfm?fuseaction=wiw. http://www. This enabled the company to establish a good track record and demonstrate its financial viability to attract further funding.-known-asneotec. Pipeline of Oryzon Genomics Source: Oryzon Genomics website. http://www.oryzon. http://www. The Fund aims at increasing venture capital investment in Spain in order to boost the Spanish SME technology sector. Exhibit 2. three collaboration agreements were signed in 2004 and 2005 with other companies (one agreement with Oncnosis Pharma received funding from the CENIT programme). Tourism and Business model Oryzon Genomics started out as a services company as this is less capital demanding than biopharmaceutical R&D.htm 77 ProInno Europe Since 2006.

the company’s initial capital base consisted of contributions from “friends. the European research programmes are very bureaucratic and characterised by a long implementation of the projects: It takes 1 – 2 years before the work actually begins. However. The company has some experience with European Framework programmes for research. and the Nordic countries. but the long term sustainability of the company may be in question if the funding ‘dries out’ as a result of the financial crisis. fools and family” and a range of small loans. If possible.decision to transform the company into a full blown biopharmaceutical company focusing on developing new therapies. According to Dr. Furthermore. IPOs are currently not an option when it comes to biotechnology 122 . Another problem is that venture capital funds in Spain have only limited knowledge of biotech business. this strategy is not sound in the long term. even up to regulatory approval. In 2008. Some companies have adopted a mixed business model in which they sell their services for a fee as a means to provide funding for the company’s research activities. A total of 1 M € was raised in this first round. the impression is that many of the participating research organisations are mainly interested in the money to carry out their own research. Rather. Financing situation of the company With regard to financing history. however. Spain has experienced 14 years with non-stop economic growth and massive investments in innovation. However. This makes it difficult to assess the projects and it also reduces the capability of venture funds to provide strategic input to their portfolio companies. the company received 9 M € in venture capital and 11 M € in soft loans and grants. For example. Among the challenges for attracting capital is that Spain is not considered a ‘biotech country’ by international investors. The economic situation of the company is currently good. is not good and the government may reduce its support for innovation. The economic outlook. The ambition is to pursue projects at least up to the start of clinical stages and. the company could go public via an IPO when the company’s compounds are ready for phase 1 of the clinical trials. the research programmes in the US are more attractive than European research programmes as companies in the US do not need partners to receive grants. as it slows down research activities while at the same time making the services of the company more expensive than CROs on the market. according to Carlos Buesa. the company received 1 M € in venture capital. if warranted by the market and the product. venture capital funds are focusing on the UK. In 2003. One suggestion for European research programmes could be to let companies find their own partners among European/international research organisations as the companies would then be in a position to choose the research organisations that they considered to be the best to deliver the needed results. Policy priorities and recommendations The biggest problem for investors is that there are currently only limited exit options available to investors. Buesa. Benelux. Cluster initiatives such as the establishment of BIOCAT are a way of getting attention among international venture capital funds. including a soft loan from the a government fund dedicated to start-up companies in high-tech fields as well as loans from regional funds and other funds. Germany.

is to support investors who are interested in entering the biopharma sector – for instance through tax incentives to private investors for investing in this specific sector. Buesa. Another possible policy action. 123 . according to Dr.companies. Increasing the liquidity in the market could make it easier for venture capital funds to exit their portfolio companies. This makes the biotechnology sector less attractive to investors.

124 .

Arpida reported the completion of the Phase III programme in complicated skin and skin structure infections.80  The merger is subject to definitive agreement and shareholder approval. Arpida also received start-up financing from a venture capital fund sponsored by Roche.79 The Company went public in 2005 on the Swiss Stock Exchange.evolva. As a result. Arpida has an antifungal therapy (TLT) which is in Phase III clinical trials in Europe. After a period of trying to sell of its other compounds and identifying potential companies for a ‘reverse merger’ (when a public company acquires a private company with a viable business creating an entirely new public entity). Arpida also stopped further patient enrolment into the trial for its antifungal therapy due to financial constraints. This cluster brings together Alsace in France. Iclaprim is an antibiotic that targets severe infections requiring hospital treatment. but holds no opt-in rights. a large pharmaceutical 81 Arpida press release. and it one of the 78 Based on interview with Harry Welten.php?MenuID=0&UserID=1&ContentID=213 125 . the company in September 2009 announced that it was planning to merge with Evolva. and it is listed at the SIX Swiss Exchange Main Segment. Senior CP and CFO. and in 2008 the company submitted applications for approval to the US Food and Drug Administration (FDA) and to the European Medicines Agency (EMEA).swissinfo. from Roche. Switzerland Company characteristics78 Arpida is a biopharmaceutical company headquartered near Basel in Switzerland and with operations primarily in Switzerland. In July 2007. http://www. BioValley is one of the first European initiatives for the promotion and the development of life sciences.html?siteSect=883&sid=5679104&ty=st 80 Evolva website. the management and board of Arpida decided to close down all research activities and reduce the burn rate. He joined Arpida in August 2001 as Chief Financial Officer. 79 Swissinfo website. http://www. The main focus of the company used to be on novel drugs that address the growing problem of microbial resistance. Before joining UBS. In the beginning of 2009 the company was informed that the US FDA had not approved the application for iclaprim and that additional clinical data was required to demonstrate the product’s efficacy. Evolva will also need to raise sufficient funds for the transaction. The agreement with Roche gave Arpida all rights to the intellectual property. he was a director at UBS Warburg in New York following various senior positions within the UBS Group. Apart from the antibiotic programmes. Welten has more than 19 years of international experience in finance.arpida. Prior to joining a privately-held Swiss biosynthetic company developing small molecule drugs and other compounds. Roche is entitled to a share of royalties of between one and nine percent.Arpida. iclaprim.81  The BioValley Cluster Arpida is located in the Swiss part of the BioValley cluster. South Baden in Germany and Northwest Switzerland. he was with ABB and DaimlerChrysler. http://www. The company was established in 1997 when Arpida’s founders bought the molecule behind the company’s key product candidate. but so far Evolva has received positive feedback from existing and new investors.

which includes Actelion. 84 Swiss Biotech website.82 Exhibit 1. Johnson & Johnson.000 employees. 40 scientific institutions and 4 universities with about 280 research groups.biovalley.84 According to the development of the biotech industry in Switzerland has been market driven rather than driven by government (one example of a government driven approach is Germany where the government has been heavily involved in the funding and development of the national biotech industry).83 According to the Swiss Biotech Report 2009. including major global players (pharma and agro). Roche. National financing conditions Switzerland is considered a ‘hot spot’ for private financings and it has a strong biotech industry. and over 2.pdf Actelion was founded in 1997 and now has a robust pipeline. http://www. Syngenta and Pfizer. three approved products. a biopharmaceutical company that has moved from biotech start-up to becoming a global leader in the biopharmaceutical sector within a decade. Among the major biotech and pharma players located in the region are Novartis. the industry consists of 159 biotech companies and 70 biotech suppliers. This concentration of biotech companies means that Switzerland has the highest per capita biotech density in the world.swissbiotech. commercial operations in more than 25 countries.largest biotech regions in Europe with approximately 600 life sciences and medtech companies.biovalley.pdf 126 . Transgene. The Swiss approach has left many start-ups in Switzerland 82 83 Biovalley website. http://www. Lilly. The Bio Valley Cluster Source: Biovalley website.

According to Mr. Around 45% of the capital was raised before the IPO and around 55% following the IPO.has been raised to date. 3i Group plc (UK) and HBM BioVentures.2 million before expenses. • Second financing round: The company raised CHF 40 million in September 2000. Instead. The compounds in the pipeline are too far away from the market to enable the company to raise more money for continuing research. 206 M Euro . • In March 2007.9 million (before expenses) by issuing 1. In terms of access to funding. • On May 4th 2005. the sector has benefited from the closeness of large pharmaceutical companies such as Roche and Novartis. A total of 309 M Swiss Francs (CHF) – ca. as well as universities with strong traditions in science and chemistry producing a steady stream of new biotech companies (Carrin et al 2004). the sector is able to benefit from a strong financial ecosystem consisting of analysts. raising CHF 19. Arpida successfully raised an additional CHF 51.3 million from international investors.scrambling for money in the marketplace. Welten. There are many factors explaining the success of the Swiss biopharmaceutical sector. • First financing round: In July 1998 the company raised CHF 15. Transforming the company into a service company is not considered an option – the company neither has the competences needed nor a good reputation in the biotech industry due to the negative opinion from FDA.8 million as well as CHF 21. HealthCap (Sweden). The same year. Arpida managed to raise a further CHF 12. but it has also meant that only the companies with promising candidates in the pipeline are able to stay in business. Partners Group (Switzerland) and UBS. the biotech industry in Switzerland is now facing big problems and thus needs to improve its performance to better attract investors.6 million in relation to the acquisition of the Danish biotechnology company Combio.6 million shares. Arpida successfully completed its Initial Public Offering (IPO) in connection with its listing on the SWX Swiss Exchange and received gross proceeds of approximately CHF97. the management considers a reverse merger to be the best viable strategy. the Company has restructured it operations and shut down all research activities.7 million shares out of the authorised share capital • In March 2008 Arpida strengthened its financial position by issuing 1. CDC IXIS Innovation (France). As a result. and investors are getting more reluctant to invest in the sector. new investors were FTQ (Canada).7 million (after expenses and taxes). and investors specialised in biotechnology.   127 . Also. The financing history of the company is as follows: • Seed funding was provided by New Medical Technologies (now: HBM BioVentures) in 1997. there is a lot of knowhow and resources available to the companies. Along with all earlier investors. In recent years. The four venture capital companies that invested were Alta Berkeley (UK). Following the FDA opinion. however. the Swiss biotech industry has not been able to demonstrate good results.3 million. • Third financing round: In May 2004. banks. Financing situation of the company The management of Arpida has been very successful in raising capital. the company raised CHF51.

But according to Mr. Swiss Biotech Report 2009 Naturally. the Swiss biotech industry was only able to collect capital in the amount of CHF 228 million. investors would still be reluctant to invest in Arpida even if the financial crisis had not materialised simply because the company currently has no market potential. There was almost no seed financing taking place and the negotiation terms were clearly dictated by the investors Ernst & Young 2009b). Welten the financial problems are not always related to the crisis. cf. For instance.    Exhibit 2. which is a decrease of approximately 75 % compared with the record year 2007. 128 . the biopharmaceutical companies should focus more on increasing their performance to better be able to attract investors. Private and Public Swiss Biotech Companies Capital Investments   Source: Ernst & Young. In 2008. but rather to the poor performance of the companies. Therefore.Impact of the financial crisis The financial crisis has made it more difficult for biopharmaceutical companies in Switzerland to raise money. many of the Swiss biotech companies are currently blaming the crisis for their inability to raise more capital. Exhibit 2 below.

however. Exhibit 1 below: Exhibit 1. In terms of business development strategy. a Cambridge Angel and a Sophia Business Angel 87 This definition does not cover all types of companies in the cluster. and it is backed by experienced biotech investors such as Advent International. Edwards is also appointed to the Board of the UK's BioIndustry Association. cf. Mr. The company employs about 90 people at its two laboratories in Cambridge. Based on interview with CEO Tim Edwards. is located in the US.Cellzome. 86 Based on desk research and interview with Mr. 85 129 . Its holding company. while most other programs are in early preclinical testing. the company intends to commercialize its technology and assets by building a small molecule pipeline in inflammation and by collaborating with large pharmaceutical companies. Cellzome’s most advanced program is anticipated to enter clinical trials in 2010. The management team of Cellzome has a scientific and commercial background. United Kingdom Company characteristics85 Cellzome is a privately-owned drug discovery and development company identifying a new generation of kinase targeted drugs to treat inflammatory diseases. Alan Barrell. Pipeline of Cellzome National financial supply86 Cellzome UK is located in the Cambridge cluster. Atlas Venture and Sofinnova Partners. Germany. UK and Heidelberg. The cluster is host to 108 publicly disclosed active venture backed companies87 within different high-tech sectors – the Healthcare & Life Science sector is the largest sector (36% of the venture backed companies in the cluster) followed by Information Technology (24%) and Communications (16%). and therefore the actual number of high tech companies is probably higher.

The importance of business 130 . Their counterparts in the US. Reaching Outwards. the level of investments in the Healthcare & Life Sciences sector has declined in recent years (2005-2007). Information Technology and Communications sectors (Library House 2007). However. Cambridge is extremely important to the whole UK venture capital market. about 50% of private equity in the UK is now invested by business angels. cf. the Cambridge Cluster attracted 18% of all venture capital investment in the UK.In terms of investment. Exhibit 2 below: Exhibit 2. If successful. During the first half of 2007. this development shows that companies in the Healthcare & Life Sciences sector are raising smaller amounts than usual in later rounds and a trend towards raising smaller multiple funding rounds. receive much larger funding rounds earlier and can then concentrate on expanding the business (Library House 2007). Looking Inwards. and according to Alan Barrell. the companies do not need to attract further external investors and biotech entrepreneurs can concentrate fully on developing their businesses rather than spend their time raising funds (Library House 2007). according to the report a common complaint of entrepreneurs in the UK is that they have to spend a lot of time and effort continually trying to raise funds to keep the company going. In fact. a business angel from Cambridge. Amount invested into the Cambridge Cluster by sector Source: Library House (2007). and clear majority of investment in the Cambridge Cluster is pumped into the Healthcare & Life Sciences. The Cambridge Cluster Report 2007 According to the cluster report. thus eliminating the need to shop around for new external investors at each funding round. One of the important sources for capital for early stage biopharmaceutical companies in the UK are business angels. on the other hand. However. even though the number of deals in the Healthcare & Life Sciences is higher than in other sectors. The decrease in deal size in the Healthcare & Life Sciences sector could reflect that Cambridge life science companies are having problems in raising funds. the cluster report also suggests that the reduction in deal size could reflect that a new model for investment has emerged: Companies are increasingly looking for syndicates that have the resources to provide capital to the company at every stage in its lifecycle.

net/ Business angel groups are also becoming stronger and more organised at the European level. Today EBAN represents more than 250 business angel networks in Europe. EBAN is a non-profit association representing the interests of business angels. It is thus important to increase the bargaining power of the business angels and provide them with an opportunity to exit the companies with a profit. business angels networks (BANs). however. http://cambridgeangels. The involvement of venture capital. http://www. the company bought GSK's CellMap Unit leading to the establishment of Cellzome UK.000. because these policies provide the tax incentives that encourage or discourage business angel investing within a country as well as across borders. a strong bargaining position vis-a-vis business angels. Source: Cambridge Angel’s website. venture capital has. but also elsewhere in the south of England. The members invest in and mentor high quality start-up and early-stage companies in these sectors. but several of the portfolio companies have in fact received more than £1m in funding from the member over several funding rounds.angelgroups. Business angels are increasingly getting organised in networks. Germany.angels for new and nascent businesses has grown over the last decade as venture capital investors are “not able to accommodate a large number of small deals with their attendant due diligence and oversight needs” (NESTA 2009b).88 One of the key challenges for business angels are the fiscal policies of the member states. and the Cambridge Angels are among the prominent business angel networks in the UK (see Exhibit 3 below). In 1999. says Alan Barrell. Furthermore. Funding situation of the company Cellzome was established in 2000 as a spin out of the European Molecular Biology Laboratory (EMBL) in In addition to providing funding for early-stage companies. mostly in the Cambridge area. and they need additional funding (for instance via public coinvestments or venture capital) to continue their involvement and to be able to support the development of the company. may dilute the influence of business angels because venture capital wants influence on board decisions. Another challenge is that business angels most often can only afford to invest in the very early development stages which are less capital demanding than later stages.000 to £500. contacts and directly relevant experience in establishing and growing entrepreneurial businesses successfully.html 131 . the Cambridge Angels also offer startups the benefit of a wide range of expertise. In 2001. Cambridge Angels The Cambridge Angels are a group of high-net worth investors who have been successful entrepreneurs in technology and biotechnology. seed funds and other entities involved in bridging the equity gap in Europe. which means that business angels runs the risk of getting sidelined in the process and not getting a fair return on their investments. EBAN was established by a group of pioneer business angel networks and the European Association of Development Agencies.eban. 88 EBAN website. The typical funding requirements that the Cambridge Angels meet are in the range of £50. Exhibit 3.

132 . Edwards.85m grant from Germany's High-Tech Initiative to Fund Top Regional Clusters. while core biotech operations a kept in the UK and Germany due to the risk of losing IPRs. but India is a good candidate. Edwards. Instead. € 3. According to Mr. had bad experiences with biotech investments. However. This has reduced the attractiveness of biopharmaceutical companies to early stage investors. Mr. says Mr.2m grant from the German Ministry of Research and Education for the discovery of novel treatments for disorders of the immune system. and Cellzome is also part of a major strategic alliance with GlaxoSmithKline. the other biotech companies that are currently trying to get funding are creating a lot of ‘noise’ which is distracting the big pharmaceutical companies. Cellzome has only outsourced basic biotech operations. Cellzome and Graffinity Pharmaceuticals were awarded a € 2. and Switzerland and Belgium were also considered as location for the company Head office to get better access to stock markets. Many investors have. moving the company to another country for strictly financial reasons feels a bit too artificial for the company management. Cellzome was awarded two grants. In particular. Biopharmaceutical companies neither have the resources nor the competences for bringing products to the market on their own. so the company is keeping its activities in the UK and Germany for the time being. The company has a history of collaborating with large pharmaceutical companies such as Johnson & Johnson and Novartis. Still. Impact of financial crisis The financial crisis has not had a significant impact on the financial situation of Cellzome.Cellzome has raised money from both private investors and public grants: • In 2001. some operations may be moved outside Europe. To date. However. and business angels get diluted out when venture capital or big pharmaceutical companies enter a biopharmaceutical company. the ‘’old” biotech business model focusing on outlicensing drug candidates to raise money for in-house drug development is not credible. one for Translational medicine from the MRC. the company raised € 34 million • In 2003. Impact of funding situation on the company’s strategies The company management has considered building up a presence in other countries to get better access to capital markets and new technologies. China is currently not an option due the country’s specialisation in cheap rather than innovative goods. So far Boston in the US has been considered. • In 2005. Cellzome is – unlike many other biotech companies following a strategy of getting funding via partnerships with large pharmaceutical companies rather than trying to approach potential investors or going for an IPO. and according to Mr. and a second. the company raised € 30 million. • In 2008. Edwards it now takes more time to get funding. Edwards considers India’s IPR laws to be very good. biopharmaceutical companies should recognise that they are primarily suppliers of innovative drug candidates to the big pharmaceutical companies.

Another issue to be considered is that Governments in Europe could facilitate the testing of innovative medicines by allowing trials in their national public healthcare system. These examples may be of interest to other countries when considering different approaches to supporting the biotech industry. In terms of national framework conditions.Policy recommendations The regulatory approach to handling risks is very important for biopharmaceutical companies. but to some people ‘risky’ medicines are the only alternative to dying. The existing regulatory framework in Europe is focusing on protecting citizens. in the UK academia can get commercial funding for research and laboratories. 133 . Also. According to Mr. but so far haven’t had much success. and European regulators need to develop a greater tolerance for risks so that citizens can decide for themselves if they want to run a risk in order to get better or prolong their lifetime. The UK government has tried to implement this idea in the national healthcare system. In contrast. Edwards European regulators are too risk adverse. Edwards considers the tax credit for companies in the UK to be very beneficial for young biotech companies. and this promotes collaboration between academia and industry. academia in Germany is not allowed to get commercial funding. Mr.

Study on the competitiveness of the European biotechnology industry The financing of biopharmaceutical product development in Europe The Framework Contract of Sectoral Competitiveness Studies – ENTR/06/054 .Final report .