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Study on the competitiveness of the European biotechnology industry

The fnancing obiopharmaceuticalproduct developmentin Europe

The Framework Contract of Sectoral

Competitiveness Studies ENTR/06/054

Final report

European CommissionEnterprise and Industry


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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)


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2.1-1

Study on the competitiveness of the Europeanbiotechnology industry

The financing of biopharmaceutical productdevelopment 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


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2.1-5

ECORYS Nederland BV

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ECORYS Macro & Sector Policies

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Table of Contents

1. Executive summary 1

2. Introduction 5

2.1 Background 5

2.2 Objective of the study 6

2.3 Defining the biopharmaceutical industry 6

2.3.1 From biotechnology sector to the biopharmaceutical sector 6

2.3.2 Defining business activities 8

2.3.3 Drug development - defining the different development stages 9

3.

The framework and methodology 11

3.1 The overall conceptual framework 11

3.2 Methodological approach 12

3.2.1 Establishing the inventory of biopharmaceutical enterprises for the survey 12

3.2.2 Implementation of the survey 14

3.2.3 Representativeness of the interviewed enterprises 14

3.2.4 Selection of case studies 16

4. The biopharmaceutical sector 17

4.1 Development of biopharmaceutical products 17

4.2

The biopharmaceutical sector key figures 20

4.3 Business dynamics within the biotechnology sector 23

4.4 R&D cost for developing drug candidates 23

4.5 Conclusion 25

5. The capital base available for the biopharmaceutical sector 27

5.1 Different forms of capital 27

5.1.1 Different sources of capital 27

5.1.2 Venture capital investment strategies 29

5.2 Capital supply in Europe 30

5.3 Comparing the capital supply for life sciences in the US and Europe 33

5.3.1

Financing gaps in biopharmaceutical product development 35

5.3.2 Challenges facing the European venture capital industry 37

5.4 Impact of the financial crisis 37

5.5 Conclusions 39

6. Strategies for product development 41

6.1 The pipeline of the biopharmaceutical sector 41

6.1.1 Number of drug candidates in the pipeline 42

6.1.2 Grouping the biopharmaceutical enterprises 43

6.2 Strategies for bringing the drug candidates to the market 45

6.3 Conclusion 46


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7. Financing strategies 47

7.1 Capital raised for drug development 47

7.2 Access to capital 48

7.3 Need for capital 51

7.4 Impact of financial crisis 52

7.5 Impact of capital shortage 52

7.5.1 External barriers 53

7.5.2 Internal barriers 54

7.6 Exit strategies of investors 54

7.7 Conclusions 56

8. Policy and regulation 57

8.1 Regulatory environment 57

8.1.1 Public policy and regulation related to funding 57

8.1.2 Regulatory measures related to product development and commercialisation 618.2 International markets barriers, distortions and negotiations 64

9. Strategic outlook conclusion and recommendations 67

9.1 SWOT analysis 67

9.2 Strengths 68

9.3 Weaknesses 69

9.4 Opportunities 71

9.5 Threats 71

9.6 Conclusion and recommendations 73

9.6.1

Recommendations addressing early stage drug development 749.6.2 Recommendations focusing on increasing the access to finance for

biopharmaceutical companies 7

9.6.3 Improving framework conditions for the biopharmaceutical sector and

venture capital 77

Bibliography 79

Annex 1: List of interviewed expert 87

Annex 2: Case studies 88

Symphogen A/S, Denmark 89

BioArctic Neuroscience AB, Sweden 95

Apogenix, Germany 101

MolMed, Italy 107

Innate Pharma, France 113

Oryzon Genomics, Spain 119

Arpida, Switzerland 125

Cellzome, United Kingdom 129


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1.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. Within the last 10-15 years, this biopharmaceutical sectorhas become one of

the most research-intensive sectors with a great potential for delivering innovative human

medicines in the future.

The challenge for Europe

The European biopharmaceutical sector faces a huge challenge concerning access to finance.

Developing new biopharmaceutical products is very capital-intensive and it takes up to 10-15

years to bring a new product to the market. In addition, there is a high risk of failure compared

to other sectors. These characteristics make the biopharmaceutical sector less attractive to

investors compared to other sectors. In terms of capital supply, much more capital is invested in

life sciences in the US than in Europe, and the European venture capital market is not

sufficiently developed to support the biopharmaceutical sector. Moreover, the financial crisis

has limited the funding available to investments and made investors more risk-adverse.

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. As a

result, many biopharmaceutical companies especially in the early stages of product

development are struggling to gain access to funding for their R&D activities.

Consequently, the biopharmaceutical sector is facing 1) a structural funding problem relating to

the sectors risk profile, 2) a supply side problem due to the challenges facing the European

venture capital industry, and 3) a historical funding problem due to the financial crisis.

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. In turn, a dedicated effort to support the biopharmaceutical sector in

Europe can promote economic growth and employment in Europe, and improve public health

by ensuring that new innovative medicines are developed.

The biopharmaceutical sector is defined as enterprises focused on discovery and development of

biopharmaceutical products for human healthcare, based on tools and approaches from modern

biotechnology. This also includes firms specialized in the development of research tools for this

objective (platform firms), but excludes bio-manufacturing enterprises, biotechnology

enterprises providing services to biopharmaceutical and pharmaceutical enterprises, and

enterprises involved in the production of biosimilars.

The study is based on desk research of reports and existing studies, new statistical data gatheredthrough a survey of biopharmaceutical companies in Europe (carried out in May 2009 where 87

enterprises participated in the survey ), eight in-depth case studies of European


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biopharmaceutical companies (carried out in May and June 2009) and interviews with experts.

The survey is representative of the European biopharmaceutical sector, but with a bias towards

the smaller and younger enterprises as this has been a key sampling criterion for the European

Commission.

The demand for capital

The survey of biopharmaceutical enterprises in Europe shows that they lack access to capital.

Among the 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 very

much in line with the results of other studies. The need for better access to capital is evident in

all phases of product development, 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-clinicaldevelopment (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, 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. However, late-stage companies are also

struggling to gain access to capital at the moment.

In line with expectations, the survey shows that the financial crisis has had a negative impact on

the access to capital for enterprises in the European biopharmaceutical sector. Approx. 75% ofthe 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.

If the funding situation continues to be critical, the biopharmaceutical enterprises indicate that

they will probably have to postpone new R&D activities or reduce the number of drug

candidates. This may eventually have a negative impact on drug development activities in

Europe, and - in a wider perspective European innovation, economic growth and employment.

Product development strategies in Europe

There is a symbiotic relationship between the biopharmaceutical sector and the pharmaceutical

sector. Biopharmaceutical enterprises, on the one hand, often have only limited resources, and

they may gain access to capital by selling/out-licensing drug candidates or establishing alliances

with pharmaceutical companies. On the other hand, 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.

This symbiotic relationship is reflected in the survey of European biopharmaceutical enterprises.

The dominant product development strategy is aimed at either entering into alliances and/or out-licensing the drug candidates to reach the market, and only few (17%) biopharmaceutical

companies in the survey indicate that they intend to bring products to the market on their own.


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The capital supply in Europe

Comparing the investments in life sciences in the US and Europe, the analysis shows that theUS is the world leader in life sciences investments accounting for two thirds of the total venture

capital investments in life sciences, while the share of the EU Member States is 20%. This gives

the US biopharmaceutical companies a comparative advantage over European

biopharmaceutical companies. Venture capital is the most important capital source for European

biotech companies, and the performance of the European biopharmaceutical drug developing

companies depends on access to capital from venture capital funds or large pharmaceutical

companies.

The supply of capital in different development stages of biopharmaceutical product

development is undergoing several changes. One of the major changes is that venture capitalistshave increased their share of late stage investment, while their share of early-stage investments

has declined thus making early-stage funding a more serious challenge for new

biopharmaceutical companies. The early stage is increasingly dominated by private investors

such as business angels as well as public incubators and state-backed investors.

The European venture capital industry

The amount of capital invested in each biopharmaceutical company largely determines the

companys level of activity and the strategic options available to the company. Data on the

average amount of capital invested in companies suggests that European venture capital funds

support too many companies with insufficient funding.

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. Studies indicate that Europe has 64%

more VC funds than the US. Yet, European funds manage 50% less capital in total. Moreover,

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.

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. For a high-

risk, capital-intensive, sector such as the biopharmaceutical sector, the financial crisis

constitutes a serious threat to the future development of the sector. 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. In

Norway, for instance, the government has launched a package of measures to help the

Norwegian biotechnology industry through the financial crisis, and other initiatives are

currently discussed in other European countries to ensure that the biopharmaceutical sector can

survive the crisis.


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Recommendations

Currently the biotechnology industry has insufficient access to finance. The analysis suggests

that future financing regimes should ensure that the sector has better opportunities to accessfinance in the product development process. In fact, the European Commission should recognise

the unique structural characteristics of the biopharmaceutical sector (capital-intensive, long time

to market, high risk of failure) by considering sector-specific policy measures targeting the

special needs of the biopharmaceutical sector. 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, innovative capacity and competitiveness of

the European biopharmaceutical sector.

Based on the analysis, 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 biopharmaceuticalcompanies is only part of the solution. The effectiveness of biopharmaceutical R&D andcommercialisation needs to be improved to ensure that the sector is competitive and able toattract private funding. New accelerating tech transfer models need to be explored by the

biopharmaceutical sector, public authorities and the investor community.

However, the effects of these different models have not yet been analysed. Consequently,

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).

2) The lack of capital is especially a challenge for biopharmaceutical companies in the earlystages of product development. Consequently, policy makers need to support early-stageinvestments to ensure that innovative companies continue their development activities. Onesolution is to support micro-funds and investments by business angels in early-stage

biopharmaceutical companies through public co-investments and tax incentives.

3) Policy makers should consider increasing the availability of risk capital tobiopharmaceutical companies by establishing a European Biopharmaceutical InnovationFund. The fund should focus on investing in biopharmaceutical companies based on

principles of economies of scale and specialisation to provide sufficient funds and act ashighly qualified and professional fund within biopharmaceuticals. The fund should operateon market conditions to ensure that funding is allocated to biopharmaceutical companies

with a substantial market potential.

4) The establishment of such a fund will increase the public co-investments in the Europeanbiopharmaceutical sector. However, European and national policy makers will also needto consider the geographical reach of the existing funding mechanisms at European andnational level to ensure that global funding opportunities are exploited.

5) Finally, the framework conditions for both biopharmaceutical companies and the venturecapital industry in Europe should be improved to better support the development andcompetitiveness of these two industries. This could include speeding up the centralised

procedure for marketing authorisation (EMEA) and adopting the successful Young

Innovative Companies (YIC) scheme in European countries. However, the scheme doesnot currently consider the structural characteristics of the biopharmaceutical sector, andpolicy makers should therefore consider expanding the current timeframe of the YICscheme from eight to 15 years.


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2.Introduction

This report is part of the framework contract on Sectoral Competitiveness Studies(ENTR/06/054). Danish Technological Institute (DTI) conducted the study in cooperation with

the ECORYS SCS Consortium.

2.1 Background

The European biopharmaceutical sector is an important platform for developing innovative

products and services that may contribute to Europes competitiveness in the world market and

ensure the health and well-being of citizens around the world. Other industrial sectors also use

scientific discoveries in the biopharmaceutical sector to develop novel products and improve

production methods. The potential scientific and socio-economic impacts of the sector are thus

substantial (European Commission 2006; JRC/IPTS, Bio4EU 2008).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.1

The importance of the biopharmaceutical sector in relation to the pharmaceutical industry is

growing. Thus, medicines deriving from biotech innovations (biopharmaceuticals) are estimated

to account for approx. 20% of all marketed medicines and represent around 50% of all new

medicines in the pipeline (Europabio (2009). However, biopharmaceuticals require large

investments. The time to market is relatively long and the risk of failure when developing new

biopharmaceuticals is very high. These characteristics of the biopharmaceutical sector affect thewillingness of external investors to invest in the development of new biopharmaceuticals.

2

European biotech enterprises are unable to raise as much capital as US biotech enterprises.

According to the Europabio 2006 study, European enterprises only have access to a fifth of the

private equity finance that US enterprises have, and US enterprises are able to raise twice as

much venture capital compared to European enterprises.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. 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 sectors global competitiveness.4

The European Commission has addressed the funding problems facing the European biotech

industry on several occasions. In its 2007 Communication on the midterm review of the

Strategy on Life Sciences and Biotechnology, the Commission argued that the growth and

economic sustainability of Europe's biotech enterprises are being held back by three main

11European Parliament website, http://www.europarl.europa.eu/summits/lis1_en.htm

2European 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 1,000 million, 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 early-stage venture capital, Source: Pro Inno Europe (2008): European Innovation Scoreboard 20074

Europeabio press release, 30th May 2006


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constraints: Europe's fragmented patent system, insufficient supply of risk capital and

shortcomings in the cooperation between science and business (European Commission 2007).

The Communication was followed by an analysis of the overall competitive position of theEuropean biotechnology sector in July 2007. In this analysis, 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). On this basis, the Commission suggested that policy

measures could improve framework conditions to make enterprises more attractive for early-

and late-stage investors and increase the overall availability of investment capital for European

biotechnology enterprises.

2.2 Objective of the study

The study aims at analysing the access to finance for European companies developing

biopharmaceutical products.

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. Based on

this data, we analyse the ways that biopharmaceutical enterprises benefit from various funding

sources and what strategies they have adopted to achieve growth and revenue generation.

Furthermore, we analyse and describe the challenges that Europe faces regarding supply of risk

and debt capital. We also provide good practice examples that may provide inspiration to policy

makers and stakeholders at the regional, national and European levels.

2.3 Defining the biopharmaceutical industry

The study's focus on biopharmaceutical product development means that it only deals with

one subsector within the biotechnology industry. In this context, 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. These two

dimensions define the target group of the study and will be discussed in further detail below.

Furthermore, the study only includes small and medium sized biopharmaceutical enterprises.

According to the official EU definition of SMEs, small and medium sized enterprises are

defined as independent enterprises with fewer than 250 employees.5

This size criterion implies that we have excluded large enterprises from the study. However,

even though large enterprises have been excluded from the study, they are still relevant as

partnering companies or as a source of funding together with banks, venture capital funds, etc.

2.3.1 From biotechnology sector to the biopharmaceutical sector

Modern biotechnology - defined as the application of science and technology to living

organisms, as well as parts, products and models thereof, to alter living or nonliving materials

5EU website, http://europa.eu/scadplus/leg/en/lvb/n26026.htm


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for the production of knowledge, goods and services (OECD 2005) - enables the development

of new products and services in a wide range of economic sectors, including agricultural

production, food processing, industrial production and healthcare.

Biotechnology used in the treatment of human beings is often referred to as Red

biotechnology. This includes diagnosis of health risks and the prevention and treatment of

illnesses. Green and White biotechnology, on the other hand, refer to use of biotechnology in

agriculture (e.g., increasing the resistance of plants to specific diseases) or for industrial

purposes (e.g., increasing the efficiency of substances used in industrial production), cf. Exhibit

2.1.

Exhibit 2.1: The biotechnology sector technologies and products

Red biotech can be further divided into three subsectors, namely biopharmaceuticals for human

healthcare including different biotechnology-based therapies and preventives, medical devices,

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.

The specific types of biopharmaceutical products that are relevant to this study include (Rader2005; IPTS 2007):

Recombinant insulins Other recombinant hormones Growth factors (including erythropoietins) Recombinant blood factors Recombinant thrombolytic Interferons and interleukins Monoclonal and engineered antibodies Cell-based therapies (e.g., tissue engineering) Stem cells

Gene therapy Enzymes Recombinant vaccines and therapeutic vaccines

Red biotech

(biomedical)

Green biotech

White biotech

Biopharmaceuticals

Medical devices

Diagnostics


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2.3.2 Defining business activities

The study only focus on enterprises specialised in biopharmaceutical drug discovery andproduct development (referred to as biopharmaceutical enterprises in the following).

There are many definitions of biopharmaceuticals and this complicates the definition and

identification of biopharmaceutical enterprises (Rader 2005). As the study only focuses on

biotech for human healthcare (red biotech), we can use the OECD definition of biotechnology

enterprises as a starting point for defining a biopharmaceutical enterprise.

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). These two OECD definitions are very

broad and may include enterprises that do not carry out research and development of

biopharmaceutical products, cf. Exhibit 2.2.

Exhibit 2.2: 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. 2008). This definition of

drug discovery firms (DDFs) refers to enterprises that do very little else than biotech research

(Valentin et al. 2006). Focusing on research only, however, 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.


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Therefore, we define the target group for this study in line with the OECD definition of a

dedicated biotech enterprise. However, we have excluded bio-manufacturing enterprises,

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. The biopharmaceutical firms will typically develop

new medicines based on a technology platform. This technology platform represents scientific

knowledge and tools for drug development. 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.7 However, 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. 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).

Thus,the target groups of this study are enterprises focused on discovery and development of

biopharmaceutical products for human healthcare, based on tools and approaches from

modern biotechnology including firms specialized in the development of research tools for

this objective (platform firms). The target group thus constitutes an important part of the

category defined by OECD as Dedicated Biotech Firms. 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.

2.3.3 Drug development - defining the different development stages

Drug development is very often understood as a trial and error process from the initialresearch results to the final market introduction of the new product. Such a continuous andstepwise development model typically consists of the following stages:

Development of a technological platform identification of (the technological potentialfor) new drug candidates

Pre-clinical test involving in vitro (test tube) and in vivo (animal) experiments Clinical trial phase 1- testing in a small group of people (20-80) Clinical trial phase 2- testing in a larger group of people (100-300)

Clinical trial phase 3 - test on large groups of people Later stages including authorization, manufacturing and marketing

The access to finance for biopharmaceutical companies largely depends on an assessment of therisks and uncertainties related to these different development stages, and companies will facedifferent financial challenges in the respective stages of the development process. This studyfocuses explicitly on the different development stages to better understand the challenges facingcompanies in the process of developing new drugs and to provide policy recommendations that

6Examples 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 suchas basic research, applied research, development, verification and validation, prototype development, clinical trials,

manufacturing and marketing (Kapeleris, John; Hine, Damian and Barnard, Rose (2004))


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

marketing).


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3.The framework and methodology

The aim of the conceptual framework is to define the key concepts and delimit the scope of the

study. In addition, we will briefly describe key elements of the analytical approach that will

guide the analyses.

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 EUs internal market. 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. The underlying logic is that the

supply situation has an impact on the choice of strategy and thus, in turn, on the performance of

enterprises.

We structure the analysis of the financing of biopharmaceutical enterprises according to the

following analytical model:

Exhibit 3.1: Conceptual framework

Changes in the supply of capital (e.g., decreased risk tolerance among investors) or in the

demand for capital (e.g., progress in the development of new drugs) may result in a mismatch

between demand and supply of capital. 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.

Framework conditions include a wide range of factors that may affect the demand and supply ofcapital as well as enterprise strategies and performance such as regulation and structure of

capital markets, regulation of biotech research and product development, approval procedures as


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well as cultural aspects (e.g., risk attitude in society, attitudes towards entrepreneurs), flexibility

of labour markets, degree of public involvement in R&D, access of enterprises to international

markets (Romain & Pottelsberghe 2004; OECD 2008).

3.2 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, Eurostat, Europabio, EBE, EFPIA etc.).

Survey of 87 European biopharmaceutical enterprises carried out as telephone interviews.

The survey provides mainly quantitative data on the financial situation, strategic choicesand perceptions in the industry. The enterprise were interviewed in May and June 2009

Case studies of eight biopharmaceutical enterprises in Europe. These case studies provide

qualitative information on enterprise strategies and impacts of the capital supply situation

on performance. The case studies are enclosed in Annex 2.

Interviews with experts (venture capital funds, industry representatives, researchers and

government officials). These interviews provide mainly information on key issues related to

the financing of biopharmaceutical product development and help identify good practice

examples. The list of experts interviewed is enclosed in Annex 1.

The survey and case studies constitute the main evidence base for this study. Below, we

describe our approach to preparing and carrying out the survey and case studies.

3.2.1 Establishing the inventory of biopharmaceutical enterprises for the survey

The biopharmaceutical industry does not exist in official statistical industry classifications

(i.e., NACE codes), and much of the basic statistical data on the sector is therefore not available

(European Commission 2007b). In fact, much of the existing data on the sector is based on

surveys carried out among a selection of biopharmaceutical companies.

A key challenge is to identify and select biopharmaceutical enterprises for the survey. The target

group biopharmaceutical enterprises was defined as small and medium sized enterprises

focused on discovery and development of biopharmaceutical products for human healthcare,

based on tools and approaches from modern biotechnology which also includes firms

specialized in the development of research tools for this objective (platform firms).

Unfortunately, there is no official Eurostat data on the sector and there is no public register of

biopharmaceutical enterprises in Europe. Instead, the contact information for the

biopharmaceutical enterprises was collected via the regional and national cluster organisations

in Europe.

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. Moreover, the national and regional biotech organisations have local knowledgeabout enterprises in their region or Member State. In several cases they have been able to


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identify enterprises that are relevant to the study. In some cases the organisations have also been

able to provide detailed contact information for local biopharmaceutical enterprises.

We put together a list of biopharmaceutical/biotech regions and clusters in Europe. The list wasbased on information provided by the European Cluster Observatory8, the Council of European

BioRegions (CEBR), EuropaBio, Europe INNOVA and the European Commission.9

The clusters were then evaluated according to the following criteria:1. A high concentration of small and medium sized enterprises involved in biopharmaceutical

product development,

2. An innovative enterprise environment with focus on research and development activities

and access to capital,

3. An appropriate geographical distribution in order to ensure that the study provides a

representative picture of the state of affairs in Europe.

The ten selected biopharmaceutical regions are shown in Exhibit 3.2 below:

Exhibit 3.2: Selected biopharmaceutical regions

Country Region

1 Denmark/Sweden CopenhagenandtheScania(Skne)Region

2 France Marseille

3 France,SwitzerlandandGermany Alsace,SouthBadenandNorthwestSwitzerland

4 Germany BerlinBrandenburg

5

Germany

MetropolitanRegion

Rhine

Neckar

region

6 Hungary KozepMagyarorszag(Budapest)

7 Italy LombardyMilano

8 Spain Catalonia

9 Sweden Stockholm and Uppsala

10 UK England,Cambridge

Our contact with the regional associations and cluster organisations enabled us to put together a

list of biopharmaceutical enterprises. Finally, we screened the homepage of each of the

companies to ensure that the core activity of the companies was biopharmaceutical product

development. In this way, we identified a list of 429 biopharmaceutical enterprises (SMEs).

However, 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.

8The European Cluster Observatory has identified 36 biotechnology clusters ( Identification of the used NACE codes

has not been possible). This definition of biotechnology contains several industry classifications. As the focus of this

study is limited to biopharmaceutical enterprises only a limited number of the clusters identified in the Observatory arerelevant for this study. www.clusterobservatory.eu9

Competitiveness in Biotechnology: ec.europa.eu/enterprise/phabiocom/comp_biotech_clusters.htm


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3.2.2 Implementation of the survey

The survey data was gathered via telephone interviews with CEOs or CFOs of

biopharmaceutical companies.

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. Whenever possible the interviews were carried out

immediately or else an appointment for an interview was made. The interviews were

carried out by English speaking interviewers.

Unfortunately, the contact information for some 50 enterprises was not up to date or incorrect.

This reduced the number of potential interview cases to 385 enterprises (cf. Exhibit 3.3).

Exhibit 3.3: Implementation of the survey

Thetotalsample Theinterviewedenterprises

Totalnumber

ofenterprises

1

Vertical

percentage

2

Numberof

enterprises

3

Vertical

percentage

4

Response

rate

(percentage)

5=3/1

Denmark 30 8 8 9 27

Belgium

12

3 1 1 8

France 27 7 6 7 22

Germany 51 13 6 7 12

Hungary 12 3 3 3 25

Italy 20 5 4 5 20

Spain 25 6 11 13 44

Sweden 88 23 24 28 27

Switzerland 41 11 9 10 33

TheNetherlands 33 9 12 14 36

UK

46

12 3 3 7

Total 385 100 87 100 23

A total of 87 interviews were carried out with either a CEO or a CFO. This number of

interviews corresponds to a response rate of 23 percent.

3.2.3 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. Studies carried out by business associations have, however, estimated thenumber of biopharmaceutical enterprises in Europe to be approx. 800 (EuropaBio 2006, cf.


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Section 4.2). This suggests that the identified sample of 385 enterprises represents more than

half of the biopharmaceutical enterprises in Europe.

Unfortunately, it is difficult to know whether the country distribution of enterprises isrepresentative for the whole population of European biopharmaceutical enterprises. We do find

that the number of respondents in the UK and to some extent also in Germany is very low.

Sweden, on the other hand, is overrepresented in the survey. However, 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.

Looking deeper into the characteristics of the enterprises that participated in the survey, we find

that the interviewed enterprises are:

Small enterprises (66% of the enterprises have less than 20 employees, cf. Exhibit 3.4); Young enterprises (71 % of the companies are established in year 2000 or later)10; Research oriented (61% of the employees are researchers and 84% of all business

activities are dedicated to product development).

Exhibit 3.4: Number of employees in the interviewed enterprises (N= 87)

In conclusion, we consider the sample to be representative of the European biopharmaceutical

sector, but with a bias towards small and young enterprises as this has been a key sampling

criterion for the European Commission. In other words, the survey largely represents the

segment of young biopharmaceutical enterprises with significant growth potential rather than

the segment of large and more established enterprises. This bias does not erode the value of the

survey, but the reader should keep in mind that the survey only gives a partial picture of the

biopharmaceutical sector, cf. sections 4.2 and 4.3 for a general characteristic of the sector.

In this study, we will refer to the survey as theDTI-biopharmaceutical survey or as theDTI-

biopharmaceutical surveyed enterprises.

10The same goes for the entire sector, cf. section 4.3


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3.2.4 Selection of case studies

The regional/cluster approach was also used to identify and select enterprises for the case

studies. The regional/cluster organisations were asked if they could recommend any localenterprises within the target group. The information provided by the organisations was validated

before the companies were contacted.

Our aim has been to cover different types of enterprises in different regions. The case studies

represent biopharmaceutical enterprises with drug candidates in different phases of product

development and also enterprises with products on the market. Furthermore, the selection of

enterprises in different regions has enabled us to examine the impact of differences in regional

financing conditions and regulatory frameworks.

We have carried out eight case studies of enterprises located in Sweden, Denmark, Switzerland,

Italy, France, Spain, Germany and the UK. 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 are enclosed in Annex 2.


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4.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.

Unfortunately, the sector does not have its own classification in the Eurostat database. Instead,

the biopharmaceutical enterprises are included in the statistics for the pharmaceutical sector, the

chemical sector or simply as research and development. The most reliable data sources for a

quantitative overview of European biopharmaceutical enterprises are OECDs biotechnology

statistics and sector analyses carried out by, e.g., EuropaBio and The European Federation of

Pharmaceutical Industries and Associations. However, 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.

As a result, in most cases the statistical presentation will include other sectors - typically the

entire biotechnology sector - than the defined target group for this study enterprises focused

on discovery and development of biopharmaceutical products for human healthcare, based on

tools and approaches from modern biotechnology which also includes firms specialized in the

development of research tools for this objective (platform firms).

4.1 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. Since then, a range of

scientific and technological breakthroughs in biotechnology and nanotechnology has had a

tremendous impact on product development in the pharmaceutical sector. Today,

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).

The first (modern) biopharmaceutical technologies were introduced about 40 years ago when

the first DNA technology experiment was performed. Some 10 years later, in 1982, recombinant

human insulin was approved and soon after introduced to the market (European Federation ofPharmaceutical Industries and Associations 2008). 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.

Overall, the introduction of modern biotechnology brought a shift from tissue and cell

biochemistry to a focus on molecular structures. This trend also represents a movement towards

an increasing complexity in the development of medicines, cf. Exhibit 4.1. The implication is

that the biopharmaceutical enterprises are not only facing increased challenges when turning

fundamental research into drug development and new medicines, they are also facing an

increasing need for funding research and early drug development (Ernest & Young 2008).


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Exhibit 4.1: A chronology: Research and drug development focus within biopharmaceuticals

Source: European Federation of Pharmaceutical Industries and Associations 2008: The Pharmaceutical

industry in figures.

The development and discoveries in biotechnology (e.g., biopharmaceuticals) at the beginningof the 1990s resulted in a wave of patents. From 1994 the number of biotechnology patents

applications increased significantly in the EU27 countries from 1,315 in 1994 to 2,790 patents

in 2000. However, by 2005 the number of new patents had dropped and seems to have

stabilized at a level of 2,200 to 2,300 patents per year, cf. Exhibit 4.2. In the same period the

number of patents application originating in US was significantly higher, but in recent years a

converging trend in the number of patents applications between EU27 and US has been

observed.

Among all the US biotechnology patents, 65% of US patent applications are within healthcare

(red biotech), while Germany is the only EU Member State to follow the US. In other words,

the total number of healthcare patent applications in EU27 is assumed to be below the number

of patent applications in the US (Eurostat 2007).


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Exhibit 4.2: Number of biotechnology patent applications to the European Patent Office by priority year, EU 27 and US.

Source: Eurostat database 2009.

The number of drug candidates in the pipeline (clinical trials phase 1-3) in the European

biotechnology industry increased in the period 2006-2008. In 2008, the total number of drug

candidates in the pipeline was estimated to exceed 1,000 of which approx. 350 were in clinical

phase 1, more than 600 in phase 2 and about 160 drug candidates in clinical trials phase 3 (Ernst

& Young 2009).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.

The European Medicines Agency assesses applications for marketing authorisation for newmedicines (biopharmaceuticals as well as traditional pharmaceuticals) for human use. The

number of applications for new medical products was rather stable from 1996 to 2005 when the

number of positive evaluations increased dramatically, cf. Exhibit 4.3. Looking at the initial

evaluation applications by type of application, we observe (especially in 2006 and 2007) an

increase in the number of application for new medicinal products, whereas in 2008 almost half

of the applications were for generics, hybrid products, etc. This might indicate a change of focus

in the (bio)pharmaceutical industry from developing new medicines to exploring the potential of

existing medicines. Another interesting point is that Ernest & Young (2009) finds that the

smaller European biotech companies have less success with regard to approvals.

11 Ernst & Young (2009) is applying a definition of biotechnology corresponding to the both red biotech, green biotech

and white biotech (cf. Exhibit 2.1) as well as larger companies is included. However, analysing the pipeline of thebiotechnology companies Ernst & Young (2009) is apparently applying a more narrow definition somewhat equal to the

definition of biopharmaceutical companies.


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Exhibit 4.3: Outcome of initial-evaluation applications for medicines for human use, number of initial-evaluation

applications1995 - 2008

Source: Annual reports of the European Medicines Agency

Since 1996, the accumulated number of biopharmaceuticals on the market increased from

approx. 30 to 85 in 2005 in the EU. In the same period, the EU market for biopharmaceuticals

as a share of all pharmaceuticals increased from approx. 4% to approx. 10% (JRC/IPTS,

Bio4EU 2008).

EU currently holds a comparatively weak position in the development and marketing of

biopharmaceuticals. Of all available products in the world market (154 products), US

companies have developed 54% of the products, while only 15% of the products have been

developed by EU companies. In contrast, Swiss companies have developed 10% of the products

on the world market (JRC/IPTS, Bio4EU 2008).

4.2 The biopharmaceutical sector key figures

The biopharmaceutical industry is not a large industrial sector in terms of number of enterprises

or employees. Nevertheless, the sector is one of the fastest growing sectors and one of the

worlds most wealth-creating industries. Studies covering dedicated biotechnology enterprises12

have identified 2,163 biotechnology enterprises in Europe (excluding large pharmaceuticalenterprises and enterprises in the supplying sectors). According to these studies, the sector

employed over 96,500 people, including 42,500 in R&D, spent about 7.6bn on R&D and

generated a revenue in excess of 21.5bn in 2006 (EuropaBio 2006, European Commission

2006).

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

12 A definition: biotechnology enterprises includes enterprises whose primary commercial activity depends on theapplication of biological organisms, systems or processes, or on the provision of specialist services to facilitate theunderstanding thereof.


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R&D- intensity such as radio, television and communication equipment or medical,

precision and optical instruments with respectively 771,600 and 1,046,800 employees.13

The R&D intensity of the biotechnology sector can be illustrated by the EU industrial R&DInvestment Scoreboard (JRC/IPTS and DG Research 2008) in which an analysis of industrial

research among the worlds top 1402 companies found that 15 sectors constitute 93.3% of the

total R&D. The top three sectors were pharmaceuticals & biotechnology (19.2%), technology

hardware & equipment (18.3) and automobiles & parts (17.0%) The pharmaceutical &

biotechnology sector even exhibited double-digit R&D growth over the last three years. Within

pharmaceuticals & biotechnology, EU companies (including Switzerland) account for 28% of

the investments in R&D, while US companies account for 49%.

The biopharmaceutical sector is considered a driver of innovation in a range of industries, not

least the pharmaceutical industry, and new biopharmaceuticals are likely have a positive impact

on the healthcare sectors and healthcare in general. However, it is not possible to estimate the

economic importance of the sector for other industries due to lack of data (JRC/IPTS, Bio4EU

2008).

The 2,163 dedicated biotechnology enterprises identified in Europe (see above) can be divided

into four sectors: biodiagnostics, agrobio and environment, service, and human healthcare, cf.

Exhibit 4.4.

Exhibit 4.4: European biotechnology industry by subsectors

Source: EuropaBio 2006

13Eurostat

Human

healthcare

37%

Services

34%

Agbioand

environment

11%

Biodiagnostics

18%


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The business activities of the human healthcare sector14 largely represent the definition of the

target group for this study. This sector is the largest group comprising 37% of the total number

of enterprises in the biotechnology sector corresponding to approx. 800 enterprises.

The number of biotechnology enterprises in European countries differs significantly. The

majority of biotechnology enterprises are located in Germany, the UK, France, cf. Exhibit 4.5.

In the new EU Member States data on the biotechnology industry is still sparse and fragmented.

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.

Exhibit 4.5: Number of biotechnology enterprises in 2004

Source: EuropaBio 2006

Looking at the size of the enterprises in relation to number of employees, the leading countries

are the UK, Denmark, Germany and France. Especially Denmark and the UK are characterised

by relatively large enterprises, whereas countries such as Sweden and the Netherlands arecharacterised by small enterprises.

Many countries and regions strive to attract this rich source of taxable wealth and potential in

job creation, innovation and growth, but global competition is fierce. For Europe, the main

global competitor is currently the US biopharmaceutical sector. There are more biotechnology

enterprises in Europe than in the US. However, European biotechnology enterprises produce

fewer products and employ fewer people than their US counterparts. The availability of capital

in Europe is also limited compared to the US (EuropaBio 2006). With countries such as India

and Singapore moving up the global value chain, the competitive pressure on the research-

intensive sectors in Europe, such as the biopharmaceutical sector, will probably increase further.14

Biomaterials, drug delivery, drug discovery, gene therapy or healthcare cell therapy, genomics, vaccines, red biotech


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4.3 Business dynamics within the biotechnology sector

During the mid 1990s the number of biotechnology enterprises doubled in Europe. The newenterprises were mostly small in relation to number of employees. In the years after 2001 the

industry was characterised by consolidation through mergers and acquisitions. This resulted in a

slight decrease in the number of biotechnology enterprises in Europe, and between 2003 and

2004 the number of European biotechnology enterprises decreased by 2% (EuropaBio 2006).

Restructuring activities instituted to gain critical mass have been the main reason for the

mergers and acquisitions, which have mostly occurred in Germany, Scandinavia and the UK.

In Europe, 25% of the biotechnology enterprises are less than 2 years old and they employ just

over 5% of the employees in the sector. In contrast, 10% of the enterprises in Europe were

formed before 1989, they employ almost 50% of the total number of employees and earn aboutfour fifth of the total revenue. This means that even though there is a strong entrepreneurial

spirit and a rapid development of new enterprises in Europe, the majority of the biotechnology

enterprises are small and generate very limited revenues (EuropaBio 2006). 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.

4.4 R&D cost for developing drug candidates

It is costly to discover and develop a new drugs/medicines due to expensive research processes,

costs associated with clinical trials, resource-intensive approval procedures and costs associated

with manufacturing (if the trials are successful).

The total cost of R&D increased significantly from the mid-1990s to 2007 from approx. 8bn to

approx. 27bn reflecting an increase in R&D activities15 (European Federation of

Pharmaceutical Industries and Associations 2008). A recent study estimates the average

capitalized cost per approved biopharmaceutical in 2006 to be approx. 1,000 m. 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.A. and

Gabowski H.G 2007). The increase in R&D costs is resulting in an increased need for funding

(European Federation of Pharmaceutical Industries and Associations 2008).

An additional point is that European R&D costs are higher than in other world regions due to

the fragmented European patent system. The implications of a fragmented patent system in

Europe include high uncertainty, quality drop and prohibitive costs, which are at least four times

higher than in the US, China and South Korea thus constituting a financial burden on especially

small biopharmaceutical enterprises in Europe (van Pottelsberghe 2009).

Furthermore, the risk of failure in biopharmaceutical research and development is extremely

high compared to other research-intensive sectors. Promising new substances often reach an

advanced stage of research before the results of clinical tests demonstrate that they do not

15 Current prices: Harmonized Indices of Consumer Prices (HICPs for EU 27;(index 2005= 100) estimates the prices tohave 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.(source: Eurostat)


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perform as required to have any market value. Of every 500 product candidates entered into the

approval process, only an average of five will progress into the human testing phase. Of those

five product candidates, only one will be approved (DiMasi et al 2003). The cost of every

successful drug includes the cost of all the failures.

Finally, 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, cf. Exhibit 4.6.

Exhibit 4.6: Typical phases from research to the market for a drug candidate

Source: European Federation of Pharmaceutical Industries and Associations2008

Most patents expire after 20 years, and considering the long time it takes to bring a

biopharmaceutical product to the market, the window for generating market revenue can be very

short (5-7 years).

The relationship between the biopharmaceutical sector and the pharmaceutical sector is a

symbiotic relationship. On the one 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. On the other hand, 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.


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4.5 Conclusion

In conclusion, 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 number of biopharmaceuticals patents has increased significantly, but the last few

years the number of patents seems to have stabilised at a level of 2,200 2,300 patent

application per year from European companies. The development in the number of

patents does not seem to have had any impact on the number drug candidates in pipeline

yet.

R&D investment has almost doubled since the mid-1990s and reached a level of more

than 27bn in 2007. So has the average cost of gaining approval for the drug candidate.

More research is carried out, but it has also become costly to take new drug candidatesthrough clinical trials. A recent study estimates the average capitalized cost per

approved biopharmaceutical in 2006 to be approx. 1,000 m.

The number of the new drug candidates in the pipeline has increased to more than 1,000

drug candidates in clinical trial phases 1-3, but on average only 1% will process into

human test and fewer will be approved.

The number of biopharmaceuticals has almost tripled in 10 years and has reached a

market share of all pharmaceuticals of approx. 10%.

All in all, the biopharmaceutical sector is still a minor industrial sector but with a significant

growth potential. 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.


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5.The capital base available for the

biopharmaceutical sector

5.1 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.

This is illustrated below in Exhibit 5.1.

Exhibit 5.1: Key financial actors

Discovery Earlydevelopment

stage

Latedevelopment

stage

Lowlevelof

involvement

Familyandfriends

Government(e.g.,

grants)

Governmentloans Banks(e.g.,loans)

Highlevelof

involvement

Businessangels

VCandCVC

VCandCVC

Note: CVC is an abbreviation for Corporate Venture Capital, e.g., companies investing in

biopharmaceutical companies.

There are different ways of raising capital for drug development such as applying for public

grants (national as well as European, e.g. FP/CIP), forming alliances with (bio)pharmaceutical

companies, attracting venture capital, out-licensing drug candidates, Initial Public Offerings

(IPO) and follow-on offerings, PIPEs (Private Investments in Public Equity), and bank loans.

In a report by Ernst and Young (2007), venture capital is the most important capital source for

European biotech companies. According to the report, more than two thirds of the European

biotech companies participating in the survey also planned o raise capital through grants,

making grants the second most important source of funding for European biotech companies

after venture capital.

5.1.1 Different sources of capital

The composition of capital sources for biopharmaceutical product development tends to vary

with the development stage of a product. In the very early stages of product development - often

before the product ideas turn into a business idea - public funding is often used (grants, etc.).

Exhibit 5.2 shows some of the key sources for funding in the early stages of product

development (and business development). In the later stages we find IPOs (Initial Public

Offerings) and public equity are also important sources of funding.


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Exhibit 5.2: Sources of funding typically for early-stage product development

Source: OECD (2008)

Private equity is an important source of capital in biopharmaceutical product development. The

different types of private equity include venture capital, which usually covers the early

development stages, i.e., from the first concept to the point where the company has developed

its first product, to the point where the company needs capital to expand commercial operations

(EVCA 2009). Other types of private equity include growth or expansion capital. This refers to

investments (often minority stakes held by informal investors such as friends, family, business

angles, etc.) in small and medium sized companies to help with specific growth challenges such

as entering a new market, developing a new product or making strategic acquisitions. Finally,

buyouts typically involve mature businesses and a change of control over the company, for

instance by buying out all or the majority of the shares in a company (EVCA 2009).

Mezzanine funding is a hybrid form of capital combining features of equity financing with

classical debt features. 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. In contrast to traditional bank loans, 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. Mezzanine

financing is thus an opportunity for companies involved in high-risk R&D to raise capital

without diluting existing shareholders rights.16

16EIB website, http://www.eib.org/products/loans/special/rsff/financing-products/mezzanine-financing.htm


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5.1.2 Venture capital investment strategies

Venture capital funds are not a homogenous group of investors. 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. For instance, VC

firms backed by banks and pension funds often invest firms in the late stage of enterprise

activities. VC firms relying on private investors favour early-stage activities. However, there are

country specific variations. According to a comparative analysis of VC funds in four countries,bank-backed VC firms in Israel and the UK invest in late-stage activities compared to other

funding sources, while bank-backed VC firms in Germany and Japan do not differ from other

VC funds (Mayer et al 2001).

The differences in investment strategies may reflect differences between different countries with

regard to financial systems and traditions. One example is Switzerland which is characterised by

a very close and long-standing relationship between the financial sector and the life sciences

sector. 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). However,

differences in the structure and development of national technology sectors are probably also an

important element in explaining national differences in investment strategies.

Typically, VC funds get involved in the management of their portfolio companies, and they may

use their experience and expertise to help them raise further early-stage capital, execute an IPO

or complete a trade sale to a larger company (EVCA 2009). However, the investment strategy of

corporate VC funds (e.g., large pharmaceutical enterprises) may differ from the strategies

pursued by other types of VC funds. In contrast to VC funds that are guided by a financial

investment objective, the CVC funds may pursue financial as well as strategic objectives in their

investment strategies. Specifically, the investor could be interested in acquiring the

technological platform under development in the portfolio company.

Exhibit 5.3: Exhibit: Different types of relationship between CVC and a portfolio company (e.g., start up).

Strategicinvestmentobjective Financialinvestmentobjective

Tightlinktooperational

capabilityofinvestor

Drivingadvancingcurrent

businessstrategy

Emergentexploringpotential

newbusinesses

Looselinktooperational

capabilityofinvestor

Enablingcomplementing

currentbusinessstrategy

Passivefinancialreturnsonly

Source: Chesbrough 2002

Adding to the complexity, investment strategies within CVC funds may differ. One example isNovartiss 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


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earliest stages. In the case of the option fund, the initial equity investment is coupled with an

option to a specific therapeutic programme managed by the portfolio company. This serves as

early validation for the start-up companys technology or programmes which may attract other

investors and provides Novartis with an opportunity to gain access knowledge and technologiesthat may be of strategic interest to Novartis in the future (Ernst and Young 2008).17

Venture capital funds are increasingly moving up in the market and are less inclined to take on

very early-stage companies. As a result, the field of capital providers in the very early product

stage to increasingly consists of small private investors (e.g., business angels), public incubators

and state-backed investors (Vaekstfonden 2006; 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 diseases, orphan diseases) or even personalised

medicines. These types of drugs have a different expected return of investment (ROI) than

traditional blockbuster medicines, and investors may thus be less inclined to invest in them.

Technological developments suggest that the next generation of innovative drugs are not

blockbusters but rather personalised medicines, and if investors continue to focus on the old

blockbuster business model, biopharmaceutical enterprises will face even more difficulties in

the future with regard to gaining access to funding.

5.2 Capital supply in Europe

Private equity investments in Europe have increased considerably in the last decade, cf. Exhibit

5.4.

Exhibit 5.4: Private equity investments in Europe

Source: EVCA 2009

According to Ernst & Young (2009), 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, while venture

financing only experienced an minor backdrop of 15% compared to 2007 (in the US, venture

financing fell 19%).

17Novartis website, http://www.novartis-venturefunds.com


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In terms of private equity investments as percent of GDP, the UK, Sweden, the Netherlands, and

France were all above the average for Europe (0.58% of GDP), cf. Exhibit 5.5.

Exhibit 5.5: Private equity investments in European countries as% of GDP in 2007

Source: EVCA 2009

Overall, venture capital investments in the US generate more value than investments in Europe.

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). In other words, US companies are better at

generating value than European companies.

In terms of the distribution of investments by development stage, the share of late-stage

investments has increased in both the US and Europe. After 2000/2001, however, early-stage

investments have gained more attention among European investors, cf. Exhibit 5.6.


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Exhibit 5.6: Share of early-stage investments in total investments

Source: Vaekstfonden 2006

Countries differ in terms of the composition and activities of venture capital. In a recent

benchmarking of the venture capital industries in the US, Israel and the UK the following

differences were identified (British Private Equity and Venture Capital Association 2009):

In Israel, more than 90% of the funds raised came from foreign funds, while 70% of the

funds raised in the UK came from foreign sources. Pension funds are important players

in the UK and US VC industries, but only play a marginal role in Israel.

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, while the share of early-stage investments in the US and the

UK ranges between 20-30%.

The average amount of capital invested per early-stage company is significantly higher

in the US than in the UK, while Israel is somewhere in between. This suggests that

early-stage companies in the UK receive less VC than early-stage companies in the US

and Israel.

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-stageinvestments.

The UK is currently experiencing a change in composition of types of investors engaging in

early-stage companies. According to NESTA, private funds are moving away from early-stage

companies towards late-stage companies.18 Instead, private investors, such as business angels

and angel syndicates, are becoming more important in early-stage investments. The public

sector involvement is also increasing relative to private investors, but mainly in the form of co-

investments with private investors rather than free-standing investments (NESTA 2008).

18The same trend has been identified in other countries


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5.3 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.

OECD data covering 25 OECD countries shows that the US accounted for 68.3% of totalventure capital investments in life sciences (biotechnology, pharmaceuticals, health services,

and medical devices and equipment), while the EU members of the OECD accounted for 20.8%

(OECD 2009), cf. Exhibit 5.7.

Exhibit 5.7: Total venture capital investments in the life sciences, million PPP$, 2007

Source: OECD (2009)

Note: Venture capital covers investments in seed, start-up, early development, and expansion stages.

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

(0.089%), followed by Denmark and Switzerland. The OECD country average was 0.019%., cf.

Exhibit 5.8


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Exhibit 5.8: Life sciences venture capital investments as a percentage of GDP, 2007

Source: OECD (2009)

Note: Venture capital covers investments in seed, start-up, early development, and expansion stages.

Later stage venture capital investment in replacements and buy-outs are not included.

Sweden also had the highest life sciences share of total venture capital investments (36.9%).

Canada was second (30.7%) followed by the US (29.9%). The OECD country average was

14.7%.

The level of biotech investments in the US and Europe increased until 2001, when the tech

bubble burst caused a substantial drop in total investment activity. In the US, total venture

investments decreased to one fifth of the level before the bubble burst. Since 2004, investment

activity has increased in the US as well as in Europe. However, the current financial crisis has

put an end to this development for the time being (cf. section 5.4 below).

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, but rather seek to enter partnerships with other companies or sell off their products

candidates. This may be a result of the limited availability of capital as these activities are very

capital-intensive. However, interviewees and several case studies (for instance BioarticNeuroscience and Apogenix) also indicate that there is a difference in the culture and mindsets


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of researchers in Europe, where the researchers focus more on conducting research than

developing their research into business opportunities.

5.3.1 Financing gaps in biopharmaceutical product development

European biotech enterprises currently do not have access to as much capital as US biotech

enterprises. According to the Europabio 2006 study, European enterprises have access to only a

fifth of the private equity finance that US enterprises have, and US enterprises are able to raise

twice as much venture capital compared to their European counterparts.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.

Together with the European Investment Bank and the European Investment Fund, the European

Commission has launched several initiatives to ensure access to capital for biopharmaceutical

companies. In 2007, 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.20 By the end of 2008, a total of 2.4bn had been authorised by

the European Investment Bank under the RSFF. 1.5bn has already been allocated to projects

located in 14 European countries and within a range of industry sectors. So far, the main sectors

receiving funding via the facility are renewable energy technologies, engineering and

automotive, life sciences and ICT.21 To date, only few biotech companies have benefited from

the RSFF (examples include Zeltia in Spain and BIA Separations in Austria/Slovenia). This

suggests that biotech companies in particular SMEs - are not well-positioned to obtain funding

from the RSFF. One reason for this could be the low or moderate credit rating of many biotechcompanies because of their lack of income.

The European Investment Fund invests in venture capital funds that support SMEs - particularly

technology-oriented SMEs in the early-stages of development one example is the NEOTEC

fund in Spain, cf. Exhibit 5.9 below.

Exhibit 5.9: The NEOTEC fund in Spain

TheNEOTECFundwasestablishedin2006bytheEuropeanInvestmentFundandCDTI,anentityunder

theSpanishMinistryofIndustry,TourismandCommerce.Thefundaimsatincreasingventurecapital

investmentin

Spain

to

boost

the

Spanish

SME

technology

sector.

Specifically,

the

aim

of

the

initiative

is

tocomplementexistingprogrammestocreate110newcompaniesin2008and130in2010.

TheNEOTECmandatecomprisesafundoffundsandacoinvestmentvehicle.Emphasisisplacedon

technologyorientedfunds,butgeneralistfundsthatinvestincompaniesdevelopingcommercial

applicationsofnewtechnologyordeployingtechnologysupportsarealsoincluded.Throughthe

creationofanactivenetworkfosteredbyEIFandCDTI,theprogrammewillalsoseektoprovide

SpanishandforeigninvestorswithashowcaseofthebestopportunitiesinSpanishtechnology.

19 The 2007 Europe

financing biopharma product dev en

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