Innovation Europe > News > Innovation EU Vol2-1 > Biotech SMEs

Biotech SMEs are the lifeblood of European innovation

Small- and medium-sized enterprises (SMEs) are widely acknowledged to be the driving force behind many significant breakthroughs in biotechnology. They employ some of the most gifted, visionary pioneers in the field and contribute considerably to the EU’s competitiveness in the worldwide marketplace. Biotech SMEs also provide one of the key pillars of the knowledge-based economy, upon which future high-value growth in Europe depends.

However, even before the global financial crisis, accessing funding for biotech SMEs at all stages presented a significant challenge. This reflects the risks that Biotech SMEs face in terms of financing the long and costly product development, since very large investment must be channelled into young pre-profit start-ups before the potential for commercialisation is confirmed. While Europe has fostered more biotech SMEs than the US, far fewer reach a stage of sustainability or where the larger components of potential value are captured in Europe. Many promising biotech SMEs are forced to close their doors or sell the business prematurely due to lack of finance. Unfortunately, the shock waves caused by recent economic instability have only served to compound these problems.

Indeed, as a direct result, the reluctance of institutional investors to embark on high-risk investments is growing. While we see seeds of recovery, the conclusion is clear: Europe is not sustaining a growing pipeline of companies that should be the legacy of Europe’s strong scientific and management base.

Lack of development finance

Biotech SMEs, while having enormous potential for the future of European innovation, continue to face the problem of finance at all stages of development, from start-ups to more mature entrepreneurial biotech SMEs. Venture capital remains the centrepiece of growth finance for biotechnology, but US venture capitalists generate significantly more value with their investments than their European counterparts. This affects the ability to raise risk capital in Europe and the overall funding for promising early stage companies.

Commercial banks, an important source of loans and credits for smaller firms, are increasingly reluctant to provide new money and are generally acknowledged to have tightened lending conditions. Commercial lending has not played a significant role in biotechnology. Lenders, including the European financial institutions, have been extremely reluctant to finance risky biotech SMEs, even before the recent financial crisis.

European grants and financial institutions represent a very large pool of finance to leverage private risk capital through grants and loans, but the effectiveness of existing institutions and programmes remains very limited.

Five measures to help

As a first measure, EuropaBio, which itself represents 1,800 Biotech SMEs, proposes improving access to the Risk Sharing Finance Facility (RSFF) for biotech SMEs. RSFF is an innovative scheme to improve access to debt financing for private companies or public institutions promoting activities in the fields of research, technological development and demonstration, and for other innovation investments. While projects to be financed by the EIB need to be technically, economically, financially and environmentally feasible, according to the Bank’s project evaluation criteria, RSFF loans or guarantees can involve higher risks than are typically accepted by the EIB and many other financial institutions.

The RSFF could well be an important investment instrument for biotech SMEs, and, indeed, RSFF has been explicitly mentioned in the EU’s European Economic Recovery Plan as one of the instruments to stimulate investment in R&D and innovation. However, on the flip side, it has also proved to be very difficult for biotech SMEs to benefit from this instrument. One reason is that the beneficiary needs to demonstrate that his or her regular activity, or the implementation of the RSFF project, will generate sufficient free cashflow in order to cover loan interest payments, capital reimbursements and/or other charges payable under the RSFF financing contract and under its other financial obligations. This is a requirement that many biotech SMEs are, quite simply, unable to do. While biotech SMEs can demonstrate declining risks as products progress through development, the long development times and nature of how returns are realised disqualify even validated projects from RSFF funding.

Second, EuropaBio recommends supporting the venture capital market for biotech. In the shortterm, creation of an investment vehicle at the EIB could generate increased “risk capital” to co-invest with VCs in the field of biotech. Sharing risk can be an essential means for attracting more investment in biotechnology commercialisation.

Third, the member states should make maximum use of the so-called “temporary state aid measures to support access to finance in the current financial and economic crisis”. As a result of the capital-intensive nature of biotech research and development, the recent economic volatility has disproportionately affected the biotech sector. Within these temporary state aid measures, member states may grant - under certain conditions and until the end of 2010 – subsidised loans and loan guarantees at a reduced premium. In addition, direct aids of up to Ä500,000 per company for the next two years could be provided to help ease financial strain through turbulent financial times. Risk capital aid of up to Ä2.5m per SME per year (instead of the current Ä1.5m) could also be an option in cases where at least 30% (instead of the current 50%) of the investment cost comes from private investors.

A fourth measure to help biotech SMEs through the 10-15-year-long drug-development process would be to establish EU grants for trans- lational research and clinical proof-of-concept studies.

To improve the competitiveness of the economy and human health, scientific discoveries must be translated into practical applications. In Europe, public funding often stops at the “pre-competitive” level. In the medical area especially, there is hence a need for “translational research”, where researchers seek to shorten the time-frame to “translate” fundamental research results into practical applications. There is further added value to translational research since, as well as lowering barriers to investment, it improves interaction, communication and coherence of objectives between academics and industry experts.

Finally, biotech SMEs should be facilitated in their access to funding under the European Commission’s Seventh European Framework Programme for Research (FP7). In a recently published report, the European Commission has acknowledged that the EU has fallen short of reaching the 15% target for SME participation. The adjusted overall share of SME’s participation in proposals under the specific programmes “Co-operation” and “Capacities” is around 11% in terms of requested EU contribution.

More flexibility and less stringent criteria or conditions for applying for FP7 grants (such as a minimum number of member states, the participation of large companies and SMEs, and so on.) could help stimulate more biotech SMEs to participate. Furthermore, there is a need for more directed calls towards SMEs with a better level of funding, so that there is no need to include large companies to support the project. This will facilitate consortium negotiations – especially the IPR aspects – and lower the level of bureaucracy which, in itself, is often prohibitively resource intensive for biotech SMEs.

FP7 could also play a valuable role in temporarily filling the gap between “pre-competitive research” and commercialisation of the end product. Biotech SMEs should be able to benefit from specific grants that could take the form of a research project designed to improve existing products or processes, or a demonstration project designed to prove the viability of new technologies in order to prepare commercialisation. To capture the value of the investment and support the development of new businesses, FP7 could also be adapted with a “graduation scheme” to help continue successful projects. In this way, FP7 could provide the launch pad for a series of programmes towards the creation of successful businesses.

To maintain and expand the leadership potential of which European biotech is capable requires urgent action to ensure a climate that supports innovation in healthcare and biotechnology. EuropaBio recommends a programme of maximising utilisation of existing institutions, building a supportive policy framework, and co-ordination of the national initiatives, which can then ensure that Europe remains at the forefront of this economic sector, which is so essential to Europe’s growth and prosperity.