Courtesy of Jupiter Images

European biotech companies are more likely than their American counterparts to fail at the 3- to 5-year stage, according to a UK-based think tank. Part of the problem is that the European Union's financing institution is putting money into biotech startups without making sure they can attract international backing when the seed money runs out.

"They're not thriving because after the first honeymoon period, when they are able to attract seed capital from various sources, they don't grow fast enough," says John Hodgson, a director of Critical I, which is based in Cambridge and Oxford, England. "So by the time they're 3 to 5 years old, they're no longer attractive to the international investment community, and it's at that point where you see a huge shift in investment to the US."

At the end of 2003, Europe had 1,976 biotechnology companies and 132 startups, compared with...


The European Investment Fund (EIF) is the main source of early-stage financing for high-tech startup ventures in Europe, according to Arango. Created in 1994, the EIF has been focusing on small and medium enterprises (SMEs) since the year 2000. The EIF has committed about €2.9 billion in venture capital, of which €332 million or close to 12% is allocated for biotech funds, according to Arango.

<p>US and European VCs Invest Similar Amounts</p>

Hodgson says the EIF hasn't spent much of the funds. "And what little it has spent it has invested in regional seed funds for companies in different regions of Europe. These seed funds give small amounts of money to startups that are simply the best propositions in that region," he says. "We think that is OK as long as the company can become globally competitive, ... meaning that they are able to attract further investment from international investors when the seed money runs out. In most cases, that will not be the case."

Such local schemes can work if the "initial investment is made with a view of what the company will actually have to achieve over its first few years in order to attract the attention of investors and business partners." says Hodgson.


Source: Critical I Limited

<p>Other Private and Public Equity Investors Top Up the Pot</p>

Source: Critical I comparative study for EuropaBio

<p>Debt Provision Helps US Firms</p>

Source: Critical I comparative study for EuropaBio

The EIF is trying to help develop the professional skills of fund managers in the different specialty areas and make them available throughout the European Union, says Arango "The attempt is to overcome a bottleneck in terms of scarcity of these professional skills, and risk capital to support innovation in high-tech development." However he notes that "the European Investment Fund is still on the steep part of the learning curve."

A Europe-wide seed fund, which would be backed by an international validating organization that could vouch for a company's ability to compete globally, would help solve the problem, according to Hodgson. The fund would gather several pieces of intellectual property together, "so you would get a substantial intellectual core." The issue is currently being discussed as part of the European Union presidency, which is due to shift to the United Kingdom in July for six months. "The discussion was started by the Dutch in December of last year," says Hodgson. "Hopefully, it will move forward towards some action."


Philippe Pouletty, chairman of France Biotech and vice chairman of EuropaBio, says that instead of a Europe-wide seed fund, he favors tax breaks for promising high-tech and biotech companies. "European pension funds devote much less of their investments into high-tech, so what works are tax incentives to shift a fraction of savings and pension funds into small- and mid-sized companies," says Pouletty.

Pouletty says France now has about 1,000 high-tech companies, including 150 biotechs benefiting from its year-and-a-half-old tax incentive program called Jeunes Entreprises Innovantes (Young Innovative Companies). The program grants special tax status to small companies before their initial public offering (IPO), so they can spend at least 15% of their budget on R&D. The program also offers tax breaks for their investors.

"We are pushing for other European governments to implement it. Portugal, Germany, and Belgium are seriously looking at it, but it may take a few years," Pouletty says. "It can't be a Europe-wide incentive. It has to be approved by each government, because anything having to do with taxes is ruled by individual governments." A similar French proposal to help young companies after an IPO, called Jeunes Entreprises Cotees, is seeking government approval.

Hans Nyctelius, president of SwedenBIO, the Swedish industry trade organization, says that the European market is "too fragmented. There are too many limitations on financing, and US investors go in with more money. So in many ways, the market is working more efficiently in the US."

The European Investment Bank and the European Investment Fund should reconsider how they stimulate the market and invest in innovation, according to Johan Vanhemelrijck, secretary general of EuropaBio, the Brussels-based European biotech trade organization.

"The fact that we have the same number of startups and SMEs, shows that Europeans are entrepreneurs just as much as Americans. It is not in our genes that we are not entrepreneurs," says Vanhemelrijck. "However, conditions in Europe are tougher."

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